The Benefits of Moving from Fragmented toIntegrated Cash Application

Basak Toprak, EMEA Market Manager for Receivables andChannel Services, Global Transaction Services, Citi

Frank Gastl, MD of Hanse Orga International BV.

March 2012

With financial markets under stress, liquidity and funding risk management continue to be board levelissues. It is well known that efficient working capital management and tight credit management of debtorsenable a company to self-fund its operating or production cycle, invest surplus balances and use funds topay down debt. To achieve this, companies have historically focused on applying best practices forcentralising payments and liquidity as well as maximising Straight Through Processing. Meanwhile cashapplication remained untouched. Yet improvements in cash application process have a direct impact inreducing Days Sales Outstanding (DSO).

Together with other internal company challenges hindering the optimization of working capital fromreceivables such as decentralized processes and/or multiple ERPs, the cash application process is oftenseen as non-controllable and this is why DSO has traditionally been considered a missing link to fullyoptimizing working capital.

Geographical Differences in Debtor Behaviours & Industry Payment Terms

Typically in order to assess potential DSO gain, a company will benchmark against the industry peergroup. Although it may not always be possible to influence the payment terms and payment instruments,companies still want assurance that they are amongst the top performers in their field.

Europe and US DSO Performance Average DSO per Country

48 48 45 47

5

19

32

10

95 97 9589

0

10

20

30

40

50

60

70

80

90

100

Consumer

and

Healthcare

Technology,

Media,

Telecom

Energy,

Pow er,

Chemical

Industrials

Median DSO (2010) Minimum DSO (2010)

Maximum DSO (2010)

Country 2010 2009 2008

Austria 46 42 48

Belgium 57 60 63

Denmark 59 63 62

Finland 51 49 48

France 64 63 67

Germany 53 52 50

Ireland 54 53 52

Italy 83 77 75

Luxembourg 43 38 36

Netherlands 52 48 50

Norway 49 49 53

Portugal 56 51 55

Spain 70 71 68

Sweden 53 54 59

Switzerland 56 59 56

UK 52 51 52

US 36 36 32

Country 2010 2009 2008

Austria 46 42 48

Belgium 57 60 63

Denmark 59 63 62

Finland 51 49 48

France 64 63 67

Germany 53 52 50

Ireland 54 53 52

Italy 83 77 75

Luxembourg 43 38 36

Netherlands 52 48 50

Norway 49 49 53

Portugal 56 51 55

Spain 70 71 68

Sweden 53 54 59

Switzerland 56 59 56

UK 52 51 52

US 36 36 32

Source: REL Working Capital Reports 2011.

In 2010 we saw that although the median DSO performance was constant, the DSO spread between thebest and the worst performer was significant – anything from 5 to 97 days. On the other hand,geographically, we saw that typically across industries commercial terms/payment instruments variedgreatly. Complex supply chains and global operations industries typically have the largest potentialworking capital savings and gain from accessing internal funding sources. By moving closer to theindustry median companies can explore how to unlock trapped liquidity. Even the minimum of obtainingone day of DSO gain can derive significant benefit savings in terms of absolute numbers. So what aboutcash application?

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Cash Application: Data Integration drives success

Cash application defines the various tasks involved in closing out open invoices against funds receivedinto the bank account. Citi estimates that the majority of multinationals still have large potential forimprovement in cash application processes. When Citi recently ran an online survey (1) approximately50% of clients taking part estimated that they have an automated match rate (automatically matchinginvoices against incoming payments) of 60% or less. On the other hand, approximately a third of clientsdid not know how many full-time employees (FTE) they have dedicated to manual reconciliation ofinvoices (post processing). In addition, only approximately 13% of our clients indicated that they aregoing to review their AR process in the coming year.

In most cases by making the cash application a streamlined process, not only can companies work out theDSO saving but there are additional tangible cost savings to be realised such as reducing the number ofFTEs servicing the manual cash application. Very often companies find that the FTE saving forms thebasis for the business case when presenting to senior management, yet that the intangible benefit of DSOsaving might be much bigger.

(1) From Fragmented to Integrated Cash Application” joint webinar held between Citi and Hanse Orga in December 2011.

How to identify and illustrate the opportunities?

Corporates with the largest potential to gain efficiencies from cash application optimisation project aretypically those that have a regional Shared Service Centre (SSC). And when it comes to SSCs, KeyPerformance Indicators (KPIs) provide critical data points for monitoring the performance of the SSC. Forthe cash application process, we recommend the corporate to monitor the following KPIs to bestunderstand the potential for improvement:

Volume – What is the absolute number of invoice items you reconcile on a daily or monthly basis?

Automation – What is your true “automated” daily matching rate? Do you start each day fresh with

no matching items rolled over from the day before?

Headcount – How many FTEs do you have dedicated to closing out invoices?

It is important to note that, looking at purely the automation rates may be a misleading indicator. Acompany may have a high automation rate, but may still have a large number of headcount dedicated toclose out the remaining percentage of invoices because a small percentage still represents a high volumeof invoices.

Who needs to drive the Cash Application Optimisation Project?

Efficient receivables management can only be achieved by engaging individuals across Treasury andShared Service Centre organisations and must involve account receivables, credit management,collections and treasury.

Furthermore, to achieve success in a cash application optimisation project there needs to be a focus on:people, process and profit:

Dedicated central team with clear process ownership

Good systems to support workflow process and strict finance approval for credit and payment terms

Visibility of metrics to senior management - driving behaviour in the organisation to achieve

profit goals

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Frequently, cash application projects are seen as purely technical and are left to technology teams. It isimportant for the SSC or Treasury business teams to be driving the optimisation project to ensure that thebenefits are met.

Integrating Bank Data and Cash Application Optimisation Software

Banks provide critical information to the corporates’ cash application process in the form of receivablesinformation on bank statements and other reports. However, the information that banks provide on thebank statement may not always be sufficient to allow for a completely automated matching process due tolack of, or truncated, information provided through the clearing. The accounts receivable team would thenneed to search for additional information to manually complete the cash application.

This creates the need for cash application technology tools to improve the automated match rates.Companies have the following choice of tools in the market:

1. Standard ERP cash application: Using the standard features of the ERP, which is often rigid anddoesn’t allow for flexible matching

2. Tailor made software: In-house developed software, which relies on in-house programmers and,over time, could become difficult to maintain and upgrade

3. External Vendors: Cash application software developed by technology companies or a bank that sitoutside the ERP and work through file transfers of data. However some corporates are notcomfortable with exchanging data in this manner.

4. Integrated Software from External vendor: This solution sits within the ERP but developedspecifically as a cash application module which allows for easy algorithm programming by thebusiness user and user-friendly screens for manual processing.

In order to support corporates with the challenges in improving cash application processes, Citi is workingwith an experienced technology company, Hanse Orga, that has solutions and expertise in corporatefinancial technology platforms, particularly SAP. Hanse Orga’s FinanceSuite AutoBank Automatic CashApplication is fully embedded within SAP.

The solution leverages Citi’s proprietary reconciliation technology, Citi® Accounts Receivable MatchingServices (ARMS) and Hanse Orga’s Autobank tool to deliver end-to-end receivables solutions.The collection data received from various channels and accounts is consolidated and may be correctedand/or enriched based on a series of rules and sub-rules. Sophisticated matching rules are then applied,and as these are based on complete and consistent data, reconciliation and account posting is rapid andaccurate, with minimal exceptions. Autobank has a series of user-defined matching rules based onexperiences derived from multiple projects across various industries, in order that clients can achieve thehighest possible auto-reconciliation rate with maximum accuracy. It is also possible to easily handleexceptions as well as monitor key performance indicators and provide executive dashboards forsenior management.

Conclusion

Many corporates have significant potential to improve their cash application processes through anefficient, integrated reconciliation solution, reaping more benefits from their existing SSC setup. Theprimary tangible benefit of optimized cash application is the cost savings achieved by reducing themanual effort required for post-processing, as well as consolidating data automatically from differentERPs and bank accounts. Reducing the time to post funds against outstanding customer invoices free upcustomer credit lines and allows for sales to sign more business, supporting companies’ competitiveposition.

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As companies identify the business case for cash application optimisation, Citi anticipate that treasurersand finance managers will evaluate and adopt integrated technology solutions together with their banks,enabling them to achieve improved DSO and control of cash for liquidity management purposes.

This Article First Appeared on GTnews in March 2012

Frank Gastl is Managing Director of Hanse Orga International B. V., the international subsidiary ofthe German financial software specialist Hanse Orga AG. He joined Hanse Orga in 2002 and hassince 2004 led the significant international expansion of Hanse Orga’s activities. Frank Gastl and hisinternational sales team, which is based in the Netherlands, drive the business development inEMEA and contribute to the ever-increasing number of over 500 satisfied customers worldwide.Hanse Orga provides state-of-the-art financial software solutions embedded in SAP that help marketleaders – such as Philips, Honeywell and IBM – unlock efficiencies in cash application andreconciliation, payment management, cash and liquidity management, treasury and theadministration of bank accounts. Hanse Orga also entered successfully the US-American market inearly 2011. Prior to joining Hanse Orga, Frank Gastl worked over 20 years for a number ofrenowned national and international companies in the sector of financial and controlling software.

Basak Toprak is the EMEA Senior Market Manager for Citi Global Transaction Services,responsible for the market development of end to end Receivables and Channel Services solutions.She joined the bank in 2000 as a Management Associate and completed her rotations in London andNew York. Basak held product management roles in EMEA Payments and Liquidity Management,and was responsible for developing and commercializing best in class liquidity and investmentssolutions for clients in EMEA. Prior to her current position, Basak was EMEA Senior CashManagement Sales Manager. Basak holds an MBA from Cass Business School in London.

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