Integrating Payables and Receivables to Unlock Working Capital

Approved for 1 CTP / CCM recertification credit by the Association of Financial ProfessionalsMay 2009

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David KunzTreasury Management Product Consulting – Payment Solutions• Financial Services – 15 years• Cash Management Practitioner – 5 years

Mark SchuchTreasury Product Manager EDI/Electronic Commerce/Development – Payment Solutions• Transportation, Logistics – 10 years• Financial Services – 12 years

Introductions

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What is Working Capital?How today’s environment and industry trends are affecting youWhat does it mean to automate your receivables and payables?What are the barriers to automation?What to look for in automation providers?How do you begin the automation process in your company?

Agenda & Purpose

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Definition• Current Assets less Current Liabilities - a measure of liquidity,

efficiency and overall healthCash Conversion Cycle• Days Inventory• Days Receivables• Days Payable

CCC = Inventory + Receivables – Payables

Importance: Cycle Time• Accounts Receivable Cycle vs. Accounts Payable Cycle

Working Capital

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Company A• Current Assets + 1 billion• Current Liabilities - 500 million• Working Capital = 500 million

Cash Conversion Cycle• Days Inventory + 180• Days Receivables + 90• Days Payable – 30

Importance: Cycle Time• 240 days

Company B• Current Assets + 500 million • Current Liabilities - 500 million• Working Capital = 0

Cash Conversion Cycle• Days Inventory + 15• Days Receivables + 30• Days Payable – 25

Importance: Cycle Time• 20 days

Working Capital – Cash Conversion Example

CCC = Inventory + Receivables – Payables

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Challenges in a demanding business environment• Increased complexity and diversity of business operations• Globalization• Responsiveness to a range of internal and external stakeholders• Emphasis on compliance and risk management • Maintaining a competitive advantage, demonstrating market leadership

and innovation • Protecting our environment

Area of Focus• Accounts Payable and Receivable must perform at their peak potential and

effectively contribute to lowering operating risks and cost from financing activities Operate with lean staffing levels – do more with the same/lessAutomation reduces the number of steps and administration in the payments value chain, and thereby decreases total costs

Expectations in Business Today

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Cash Flow Process

Through Electronic Commerce, you may extend business processing functions further, automate the financial supply chain management process, encourage the migration of paper to electronic commerce, and support the working capital goals of your company.

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What is driving automation at your organization today?

A. Improve cash flowB. Reduce costs/improve efficiencyC.Suppliers/Buyers requesting automationD. Improve visibility of payments dataE. Fraud Control/Prevention

Polling Question #1

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Paper to Electronic Trends• Order to Cash Automation• Procure to Pay Automation• Best Practices: Strategic Integration: Departmental Communication: Technology

Industries that are more likely to use automation• Transportation • Distribution• Manufacturing• Healthcare

Impact of Enterprise Resource Planning (ERP)• More bang for the buck• ERP moving down stream

Third-party Providers• Banks• Payment companies• Data translation Services

Risk AwarenessRobust Disaster Recovery Audit issues and security risks

Industry Trends

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ANSI (American National Standards Institute)• The organization that establishes procedures for the development and coordination of national

standards.EDI (Electronic Data Interchange)

• The computer-to-computer exchange of documents in standardized, electronic formats.ERP (Enterprise Resource Planning)

• Accounting-oriented information systems for identifying and planning the enterprise-wide resources needed to take, make, distribute, and account for customer orders. This may include manufacturing, distribution, personnel, project management, payroll, and financials.

Financial EDI• The electronic transmission of funds and related data through the banking system.

FTP (File Transfer Protocol)• A network protocol used to exchange and manipulate files over the Internet

NACHA (National Automated Clearing House Association)• Association responsible for administration, development and enforcement of rules and sound risk

management practices for the ACH NetworkX12

• The electronic data interchange (EDI) standard as supported by ANSI.XML (Extensible Markup Language)

• Provides a basic syntax that can be used to share information between different applications and different organizations without needing to pass through many layers of conversion

Commonly Used Acronyms

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ACH (Automated Clearing House)• Electronic Funds Transfer (EFT) is typically a next-day funds settlement

system originally designed to handle low-dollar repetitive payments electronically on a batch basis.

Wire Transfer• An electronic payment mechanism that allows quick (same day) funds

transfer. Designed primarily to handle large-dollar, time critical, non-repetitive payments or account transfers, and provides limited accompanying information.

Lockbox• Payments made by customers are directed to a special post office box,

rather than going directly to a company. A bank will then go to the box, retrieve the payments, process them and deposit the funds directly into the company bank account.

Commonly Used Payment Channels

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A Brief History – Proven Technology

Late 1960s large scale digital communications

1970s – NACHA, X12 rules were created

1980s ANSI rules published, large scale EDI

1990s – acceptance of the Internet

21st century – ERP automation

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Following the Automated ACH Transaction

Payment OrderRemittance Advice

OriginationBuyer/Payer

ReceiptSupplier/Payee

OriginatingBank

ReceivingBank

ACH Payment System

Payment Notification andRemittance Advice

CTX withRemittance Advice

CTX withRemittance Advice

CTX Format – Corporate Trade Exchange is a NACHA format that incorporates multiple addenda records

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Receivables

To achieve efficiency in receivables processes, the first step should be to evaluate the handling of paper-based receivables. Through the introduction of automation, wherever feasible, a reduction in Days Sales Outstanding (DSO) can be realized.

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Payments received from vendors in multiple formats must be entered, reconciled to invoices and checked for errorsRe-keying of remittance dataCash flow management is difficult with reports at various times from various systemsReceiving separate (or no) remittance data with the payment requires re-association efforts

Receivables Challenges

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Integrated Receivables

Consolidate information related to ACH, wire transfer, and lockbox receipts into a single electronic file to automatically update an accounts receivable system

YourBusiness

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Receivables Integration Process

Bank Role• Payment/Remittance Information from buyers received throughout the

day via clearing networksAccumulate receivables information (payment amt, invoice nbr, invoice date) based on payment type (ach, wire, lockbox)Create output data format based on seller’s requirements (EDI, XML, proprietary)Initiate transmission of remittance data to seller (FTP, 3rd party network, web interface)

Seller Role• Receive data transmission of remittance data• Interpret data

Use translation software, proprietary programming, 3rd party network

• Process data into Accounts Receivable systemExamples include SAP, Oracle, Microsoft Dynamics, Quickbooks, etc.Match remittance data

• Send confirmation back to bank

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Integrated Receivables Benefits

Acceptance of virtually all receivables electronically, regardless of how each payment was made Reduces manual entry, improving accuracy of receivables updates• Savings can be realized in administrative areas such as personnel

costs, paper storage and retrieval costs and record management expenses

Improves cash flows and accounts receivable update processes • With more relevant information available, decisions can be made swiftly,

with a higher level of confidence; faster posting of receivablesImproves customer relations with more payment options, quicker inquiry turnaround times and fewer payment-receipt disputes

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The payment process is an area where a company's operations can be streamlined to enhance competitiveness by achieving end-to-end links between a company and its suppliers for payment of goods and services.

Payables

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Late payments can result in fees and interest penalties - and lost invoice discounts - which directly impact an organization’s bottom lineOur staff only processes the easy items first? keying from paper? little or no control of errors?Opportunities for mismanagement or theft of funds by your employees or through fraudulent transactionsStrained supplier relationships: late payments mean phone calls from suppliers that can drain an A/P staffs’ time

Payables Challenges

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Initiate electronic and check payments by sending a single file of payment instructions utilizing any of the following payment types: check, ACH, corporate wire transfer

Integrated Payables

YourBusiness

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Payables Integration ProcessBuyer Role• Process payment information from Accounts Payable system

Examples include SAP, Oracle, Microsoft Dynamics, QuickbooksInvoice matched with Purchase Order

• Interpret dataUse translation software, proprietary programming, 3rd party networkCreate data file structure (EDI, XML, proprietary)

• Initiate data transmission of approved payment instructions (FTP, 3rd party network, web interface)

Bank Role• Receive data transmission of payment instructions from buyer • Create output data format based on buyer’s requirements (EDI, XML,

proprietary)• Process Instructions based on payment channel

Send electronic payments to the respective clearing house (ACH, Wire)Print paper checks

• Send confirmation to buyer

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Integrated Payables Benefits

Reduce operating expenses • A single data stream, reducing administrative and auditing costs, and

disbursement management Increase productivity by minimizing manual intervention• Spend less time tracking errors and booking general ledger entries • Reduce tasks associated with check production and reconciliation

Enhance cash forecasting• Eliminate the need to wait for processing results from various payment

systems • Know when your account will be debited for electronic payments

Improve vendor relations• Trading partners will be able to effectively predict their cash levels and

post receivables accurately and cost-effectively

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Polling Question #2

What challenges does your business face in originating/receiving payments electronically?

A. Limited IT resourcesB. Trading Partners not automatedC.Check systems work wellD.Management not convinced of the valueE. Lack of remittance information standards

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Case StudyPayables Solution

Number of A/P Checks: 4500/moNumber of Suppliers: 900+Industry: DistributionStock• Check, Envelope, Storage

Hardware• Printers

PostageRemittanceEmployee Expense• Filing, Handling, Stop Payments,

customer inquiriesDrivers• Reduce Costs• Realize all the discounts from their

large suppliers, avoid late fees• Fraud Control

Current Costs• Avg per check: $10.22• Monthly: $45,990

Converting 50% of payments to ACH and outsourcing the remainder of the checks• Avg per payment: $5.37• Monthly: $24,165

Benefits• Reallocation of resources• Savings• Discounts• Improved Supplier Relations• Automation• Time Savings

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Professional Teamwork• Identification and removal of barriers, silos• Focus on improving business processes and enhancing business

controls• Improve productivity by automating both the external and internal

business processes • Be very open minded, adaptable, and prepared for continual change

ExperiencedTechnology to meet your needs

Partnership Qualities

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Implementation Best Practices

Periodic review meetings with your providerProvider that understands your business and payment cycle processesEnsure dedicated implementation project resources on both sides as well as understanding of resources requiredWeekly implementation meetingsFlexible solution that can solve multiple business problemsDocumentation of service capabilitiesEstablish metrics for success and measure

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Build a business case by examining your current structure, identifying areas for cost takeout and value-add

• Identify metrics that are measurable within your operations and determine those that support your company‘s strategic priorities and operating culture:

Process Costs Automation Improvements Error Rates Fraud & Duplicate Payments Financial Controls Supplier Satisfaction

Align internal stakeholders such as procurement and IT, in addition to A/P, A/R, and Finance

• Develop a workplan with milestones, objectivesDocument/simplify processesEnsure controls through automation

Next Steps to Automation

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Questions & Answers

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