Amol Bahuguna, Head of Payments and Cash Management at Commercial Bank of Dubai says cash management products off a major opportunity to streamline accounts receivable and improve operational efficiency
Accounts receivables (AR) is perhaps one of the most critical processes and of the most challenging operational activity for any corporate, as evidenced through various studies. One of the main reasons for this is due to the fact that, improper AR management could lead to unhealthy cash inflows, severely impacting the day-to-day operations and even leading to possible closures in some drastic cases.
Treasurers understand that they are less in control of cash receivables as compared to cash payouts, and with the increasing risk management challenges in handling AR, treasurers are therefore looking for long-term solutions to create efficiency within their processes and overcome operational challenges. Corporates with multiple banking relationships and multiple accounts across different banks due to financing obligations, are now negotiating with their banking partners on a need to rationalise complex accounting structures and possibly offer an efficient AR solution.
Post the 2008 financial crisis, local banks have realised the benefits of offering cash management products and services to their clients, enticing them to invest in sophisticated technology related solutions. Virtual accounts management is one such solution. It helps a corporate treasurer create, manage and monitor their receivables from various counter parties into a single concentrated account, allowing 100 per cent identification of the payer, lowering day sales outstanding, reducing operational challenges and many more. Virtual account management also offers a bespoke dashboard to view account information, statements and reporting modules, and is generally part of an integrated receivables management solution offered by banks.
To put it in simple terms, virtual accounts are a series of dummy accounts mapped to a real current account of a corporate, which can be used by treasurers to manage their day-to-day working capital cycle. Virtual accounts offer most of the capabilities of a real bank account, except for the associated administrative workload and costs of a real current account.
The implementation of this solution does require significant time and effort from both banks and corporates, but it offers immediate benefits. Treasurers have started to create value for the company’s shareholders by eliminating the need for several bank accounts and in turn reducing counterparty risk, external bank charges and the administrative effort required to manage several accounts. Furthermore, leveraging a virtual account solution can help automate the process of reconciliation, thereby enabling corporates to credit customer accounts promptly in its enterprise resource planning (ERP) or treasury management system (TMS).
To properly implement a virtual account solution, treasurers must first thoroughly review the business case and float a detailed request for proposal (RFP) to prospective banks, with clearly defined scope and expectations. It has also been suggested that it is best to involve their existing lending banks, even if they may not have the capabilities. This is to avoid any misunderstanding which may impact future financing requirements for the corporate. Some of the key decision factors must include domestic capabilities, virtual IBAN for inward remittances, outward cheque clearing, intra-day visibility of balances, account reconciliation facilities and more. Virtual account management is suited for businesses of all sizes.
There are immense benefits and quick impact from having full visibility and control on customer payments. Some of the key positive impacts of virtual account management include:
- Recognition of payer(s);
- Improved days sales outstanding (DSO) and control over cash;
- Reduced operational costs;
- Improved visibility on cash forecast;
- Prudent credit risk monitoring; and
- Reconciliation of accounts.
Many banks offering virtual accounts are unlikely to let the concept rest without further developing next generation capabilities to add into the overall value proposition. An inter-company loan is a concept that banks have started work on to help customers optimise their current cash resources.