How corporate treasurers can optimize cashflow | BNY

This article was first published on Finextra and is reprinted here with permission.

Digitalization continues to impact all aspects of our lives. From ordering a taxi or scheduling a haircut, to shopping for clothes online, we increasingly demand – and have come to expect – these services to be instant. This phenomenon is no longer unique to the consumer-facing world either. As consumer service standards have improved, so has the expectation for parallel improvements in the professional sphere. This, in turn, is driving a fundamental shift in business models across the board.

To the end customer – whether it is a consumer paying for lunch, or a large corporate paying a supplier – receiving a quick and seamless experience is paramount, while from a business perspective the focus is on providing solutions that help ensure current and future needs of these customers are met. Because of this, treasurers have the unenviable task of making sure their function is able to meet these dual demands. Under the surface this requires a huge amount of effort – and treasurers face a raft of challenges as they attempt to extract value with the tools they have available.

One such challenge is persistent inflation amid a high-interest rate environment in which treasurers now operate – and the strain on businesses’ working capital that it introduces. In this atmosphere, corporate treasurers can consider how to get better visibility of their cash flows, improve operational efficiencies in reconciliation and application of cash, optimize and centralize overall liquidity, while keeping their business on track with digitalization trends and changing customer needs.

This is less simple than it sounds, as the considerations are many. Large international businesses often have a number of subsidiaries operating across multiple geographies – and the bank account structure used to manage the company’s cash is often equally complex and varied. For a treasury department, this brings with it several associated issues, including limited visibility and control over company funds, trapped liquidity, inefficient reconciliation processes and high fees from account maintenance, as well as the processes involved in centralizing cash. 

The emergent case for virtual accounts

In response to the evolving business landscape – and some of the challenges it creates for treasurers – virtual accounts have emerged as a strategic solution to address the complexities associated with traditional bank account structures. Although not physical in nature, virtual bank accounts mirror the functionality of actual bank accounts by allowing businesses to compartmentalize and manage funds efficiently, streamline cash flows and enhance overall cash visibility. What’s more, virtual accounts can offer real-time digital self-service tools to users, not only providing another level of autonomy to individuals, but also offering a recognizable experience that digital natives will be used to. This convenience, driven by the underlying business environment and technological advancements that make it easier than ever to deploy these tools, explains the continuing relevance – and growth – of virtual accounts in the treasurer’s toolbox.

Meeting real-time account visibility needs

In a world where instant services – and the faster payments that underpin them – are increasingly the norm, having a treasury function that can match the level of speed required is becoming critical. This is driving the treasury function – like the services it supports – to function as real-time as possible – a capability that virtual accounts enable. In this way, treasury can not only orchestrate efficient cash and liquidity management, but also can become an engine for business growth that is being driven by customers. It means that when the business wants to launch a new product, enter a new market or onboard a new customer, treasury can act as a key enabler, rather than a roadblock, in meeting these strategic aims.

One of the challenges faced in a typical treasury set up arises from the sheer volume and diversity of transactions. While individuals can easily track retail payments through bank statements that are often available online in near real-time, the same cannot be said for corporates. The information they receive is often provided at the end of each day and is far more complex in nature – making reconciliation a significant challenge. As the expectation for real-time payments – in both a consumer and corporate setting – becomes more prevalent, and as more businesses seek to embrace the digital economy, the challenges involved will likely continue to intensify. With this in mind, treasurers need an optimized set up not only able to meet the needs of the business today, but future needs as well.

But how exactly does this play out in practice? Picture the scene: a business receives payments from the many clients – across a variety of payment rails – who purchase its products. The company has to then reconcile each of these payments against the invoices, checking which payment comes from which client, ensuring the paid amount is correct, and that the formatting has been completed to match each transaction with its associated accounts receivable entry. Even when equipped with tools that automate some of these steps, the process remains resource and time-intensive, leading to delays in the application of cash and a higher daily sales outstanding (DSO). This ultimately has a material impact on the corporate’s working capital requirements.

By providing each receivable a dedicated virtual account – at a client, product, region, brand or invoice level – treasurers can help businesses mitigate these challenges. Under such structures, the end customer pays into the dedicated virtual account provided. Upon receiving the payment, the cash is credited to the underlying physical account and instantly allocated to the appropriate designated virtual account. The treasurer can then automatically reconcile their account receivables ledger with payments received on a real-time basis, while also centralizing their cash into a single physical account.

This brings corporates closer to the paradigm of consumer bank reporting – with granular, real-time payment details that go beyond the cash view and into the individual account level. Importantly, the implementation of such a structure is highly scalable. If the business decides to pivot in its strategy, the treasury can seamlessly open or close the virtual accounts as needed to support these decisions.  

Achieving immediate cash visibility

Businesses must often maintain multiple bank accounts designated for products, brands, regions, etc., to maintain the necessary level of cash visibility – creating a complicated enterprise-wide account structure that is difficult to manage. Take the example of a real estate company with a large portfolio of properties across multiple sites, each with its own unique physical bank account. Maintaining multiple accounts is not only onerous, costly and time consuming but, as a result of having to distribute cash across multiple accounts, the treasurer has poor visibility into the organization’s overall cash position.

By establishing virtual accounts and account hierarchies – by customer​, product, sub-product, purchase order, invoice, region or any internal custom group – treasurers can create customized segregation structures. Payments can be initiated to and from the respective virtual accounts, each with unique account numbers. This can help to streamline transaction flows, concentrate cash in real time, rationalize physical bank accounts and, ultimately, improve cash visibility. 

Liquidity structures using virtual accounts

Creating an optimal liquidity structure that serves the liquidity requirements for the whole enterprise is no small feat. Corporates often have multiple subsidiaries that receive and send payments autonomously. This can create issues for the corporate’s main treasurer by not only reducing the control that they have over the businesses’ finances, but also preventing a clear view of the numerous cash flows. Tracing these streams, whether receiving payments from clients or sending them to suppliers, can lead to a complex network that becomes impossible to navigate efficiently. This decentralized view of cash also means that treasurers are unable to use internal cash flows to fund short-term liquidity requirements. 

Virtual liquidity structures allow treasurers to create custom liquidity structures for businesses’ different legal entities and subsidiaries, which are then linked to a single group level physical account. Instead of each subsidiary or legal entity maintaining a physical account, the subsidiaries instead provide their payment instructions to the central treasury – with all payments settled via the physical account and records maintained at the virtual account level – essentially creating a payment on behalf of, also known as a POBO structure. Likewise, all collections are received for each subsidiary’s virtual account but are credited into the linked group level physical account – establishing a collection on behalf of, also known as a COBO structure. In combination, the solution places control back in the hands of the treasurer by ensuring all payments and collections across all legal entities are fully centralized – enabling them to maximize the value of their operational liquidity through in house banking or IHB structures across the entire organization in a more effective manner. 

Enabling the treasury of tomorrow

As the corporate world navigates changing customer demands, as well as the challenges of contemporary treasury management, the spotlight is on the transformative shift to 24/7 real-time operations. As treasurers embark on this journey, the potential benefits are clear: achieve a comprehensive view of global liquidity pools; initiate and reconcile payments instantly; and deploy cash with the most up-to-date information available. Outside of these efficiency gains, it also puts treasurers firmly in the driver’s seat as key enablers of business growth.

Within this landscape, virtual account-based solutions are quickly emerging as a vital component of the unfolding real-time treasury narrative. If a corporate needs to open an account, it needs to happen immediately. Treasurers require payments, both sent and received, to happen instantaneously and with accurate reconciliation. Treasurers need more time to be able to focus on investments, innovation and growth, and cannot exhaust their efforts dealing with inefficiencies commonly found in traditional bank account structures. By offering streamlined solutions to these challenges, virtual accounts can empower treasurers with efficient reconciliation, enhanced liquidity visibility and efficient cash management.