Streamlining Asia Receivables: Mission Possible

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To many treasuries, pan-Asian receivables management is a complex and evolving issue; a combination of inconsistent remittance information, payment behavior and multiple clearing systems reduce straight-through processing (STP) rates and inhibit visibility. Fortunately, as Jennifer Barker of J.P. Morgan Treasury Services explains, this need not be an insurmountable challenge.

Receivables management is a critical treasury discipline that affects a corporation's financial position in a variety of ways. At the most fundamental level, it has a direct bearing on the organization's working capital requirements; every day of delay in collecting against accounts receivable (A/R) feeds straight through to increased days sales outstanding (DSO). It also has an effect on the efficiency of other financial processes; for example, timely and high quality receivables data facilitates accurate cash flow forecasting, which in turn makes more effective liquidity management possible.

Irrespective of their location, treasuries attempting to optimize these factors face various challenges, such as attempts by customers to improve their own working capital position by paying late. However, in some regions, a range of local issues make efficient receivables management exceptionally demanding – with Asia being an obvious example. In addition to the broader A/R issues, treasuries in Asia also have to contend with a further set of challenges and complexities associated with their receivables management processes, including:

Inconsistency: The nature and format of remittance information provided with payments in Asia varies enormously across the diverse business environment. The format and ability to capture key receivables information (invoice number, additional reference data) varies from country to country. This inconsistency even applies within the same industry; due to the different clearing systems in each Asian country, an organization in Indonesia will require a completely different receivables process from one in Malaysia. However, from the perspective of a regional or global treasurer, the end result is the same – lower STP rates, high levels of manual intervention, poor process/cash visibility and reduced accuracy in cash flow forecasting.
Location: It is not uncommon for businesses or their customers to operate in remote locations that lack a banking presence which is tied to a corporation's global banking relationship. Therefore check and cash collections can often pose security and/or logistical challenges.
A/R Reconcilement: In B2B and C2B commerce, customers may issue a single payment that covers multiple invoices – but without necessarily specifying which invoices. This causes problems for many auto reconciliation solutions, problems which are then further exacerbated by bank lifting fees, or payees deducting early settlement discounts or credit deductions for shortages. Similar issues arise with regard to payee names; if the remitter’s name on the payment differs even marginally from that on the invoice, many A/R solutions will not be able to reconcile the payment against the outstanding invoices and these remittances will need to be exceptionally handled. A further complication here is the use of local language characters in Asia.
Technology Integration: Integration of collection files is also a common stumbling block for many A/R solutions. Companies updating or changing ERP systems often find themselves having to embark on expensive and time consuming IT development efforts to reconfigure their ERP to accept bank-specific file formats that don’t often align with common ERP platforms.

All of these complexities combine to form a set of formidable challenges: How can the available information be marshalled to improve the efficiency of A/R working capital? How, at the country or regional level, can a treasurer obtain a clearer picture of collection patterns from their diverse clients and ultimately reduce their cash conversion cycles?

Net results
The combined effect of all these issues is, to put it mildly, challenging. The high exception volumes force A/R staff to spend much of their time engaged in manual reconciliation – instead of more productive activities, such as chasing late payments or forecasting cash flow.

Even where investment is made in additional A/R headcount, client-remitter relationships can still be negatively affected by the time lag inherent in an inefficient reconciliation process. These delays also have an impact at a macro level; a regional or global treasurer attempting to forecast cash flow for investment placements or borrowings is at a disadvantage. They will have to contend with a forecasting gap at the point on the cash continuum where they should (in theory) enjoy the greatest degree of certainty. In effect, their forecast is dislocated by the length of the A/R time lag.

Advanced technology, enriched data
The good news is that deploying the right A/R technology can resolve many of the issues described, but in reality there will always be some exceptions that have to be managed manually. The objective therefore is to use the right solution to shrink the size of the exception queue to manageable levels so that A/R personnel can spend more of their time expediting cash flow. At the same time, the right technology and enhanced remittance information can also improve both the quality and timeliness of reconciled data and thus significantly improve the accuracy of cash forecasting.

When selecting A/R technology, some of the most important aspects include:

Ability to set tolerance levels at both the macro and remitter level: Where the amount received differs from the invoice amount, customizable intelligent logic, such as invoice sorting and tolerance parameters are required. The degree of flexibility around the rules-based logic will be able to handle the unique reconciliation requirements across both businesses and countries.
'Mappers' to match similar remitter names: Where remitter names on the instruments are not an exact match for those on the invoice, an ‘alias table’ can be used to capture all the possible naming variations, so that payments received with name variations can still be automatically reconciled.
Deployment of local language: Some clearing systems in Asia use local language as part of their payment details – for example beneficiary names in the Japanese market. Because of this, local language capabilities, such as J.P. Morgan's internet based receivables solution, Receivables Edge^SM, can significantly improve automated reconciliation rates.
Enhanced remittance information: Complementing the technical solution is improvement in the remittance information itself. Key to achieving this is a banking partner able to offer a broad network of collection points and the ability to capture value added data at these points to ease reconciliation.

Connectivity and workflow
Good technology and enhanced data can radically improve reconciliation rates, but this good work can easily be negated if the A/R technology is poorly integrated with other systems. Usage of a bank - and ERP - agnostic file format immediately avoids the problems that arise with A/R technology that is tied to custom formats, which can cause major A/R disruption if an ERP upgrade is required.

In a perfect world, a reconciliation solution also minimizes the amount of preparatory work required by A/R personnel. For instance, if it is automatically linked with company bank accounts, then same-day pan-regional reconciliation becomes possible, with incoming remittances immediately available for auto-matching. All the A/R team has to do is upload a file of outstanding invoices to the matching engine.

Accessibility and visibility
Maximizing the benefits of the ideal scenario just outlined also depends on efficient dissemination of the resulting reconciliation information. A key element here is flexibility; the A/R solution must be customizable so that each individual can see only the information relevant to their role. For example, someone who just chases late payments from Indonesian customers will not need to see reconciliation data for the whole of Asia, while a corporate treasurer making global investment / borrowing projections definitely will.

Another consideration is workflow; A/R teams will typically prioritize their efforts according to the size of outstanding debtor balances. Therefore some form of mechanism (such as client-configurable automated email alerts) that keeps A/R personnel completely up to date on the remittance activity of major customers adds workflow value.

Exceptions – a fact of life
In the world of A/R and Asia in particular, exceptions remain a challenge. However, it is possible to reduce these to acceptable levels with the right mix of technology and data - and to maintain this as the business expands into new markets. Accomplishing this confers multiple tangible benefits for the corporation as a whole, including enhanced A/R productivity, accurate forecasting, reduced DSO and improved customer relationships: which only leaves the matter of finding a provider which can offer an ideal combination of A/R technology and data.

CASE STUDY

Reducing Manual Monitoring and Matching

The Asian HQ of a multinational conferencing company wanted to outsource its receivables and reconciliation process to reduce the internal administrative effort required to monitor and track its receipts, which mostly consisted of paper checks and electronic receipts. The company, based in Hong Kong, also required collection of checks and the electronic capture of any paper-based remittance data associated with these items. To address these challenges, the HQ mandated J.P. Morgan to handle its receivables collections and reconciliations using J.P. Morgan's Receivables Edge solution.

The Solution
The solution reduces the level of the involvement needed from the client to the absolute minimum; all its A/R team now has to do is upload any open invoices into Receivables Edge where automated reconciliation is performed. J.P. Morgan collects any checks received from the client's customers via courier from its premises, and performs data capture through a wholesale lockbox via its local network. The client’s HQ then receives consolidated A/R reports, which include remittance data for both checks and electronic receipts on a daily basis.

Results
The solution delivers a number of important benefits to the client. At a resource level, it now enjoys a significant reduction in the need for its personnel to manually monitor and track receipts and to handle reconciliations. At the same time, the amount of manual matching required has declined, as have error rates. This has improved its relationships with its customers, as they are no longer being chased for invoices they have already paid.

The improvement in matching rates that has resulted from implementing the solution has had a direct and beneficial influence on the corporate liquidity position, in that the client now enjoys faster access to its receivables and therefore better utilization of its internal liquidity. The company is also now able to manage its cash flow and working capital more efficiently due to the regional and global consistency of the report formats provided by J.P. Morgan. At the same time, the greater transparency on DSO delivered by the management information provided in Receivables Edge has enabled improvements in cash forecasting accuracy.

A number of elements in the solution made it particularly strong and suitable for delivering the client's requirements. One key element was the ability to provide multiple collection points via the J.P. Morgan network in-country, capturing and transmitting additional information back to the client. The Receivables Edge technology is able to automatically associate inward remittances with the A/R file provided by the client to
J.P. Morgan. The bank's consultative approach to engineering a solution that targeted the client’s specific requirements meant that the end result was a best fit for its volumes, collection channels and frequency of receipts.

Contact:

Jennifer Barker
Head of payments and receivables, Asia Pacific
J.P. Morgan Treasury Services
Tel: +65 6882 7779
Email: jennifer.j.barker@jpmorgan.com