Redesigning the accounts receivables process for competitive advantage

Companies can attain real cost benefits by taking the opportunity to redesign and thus enhance their accounts receivables process says HSBC.
  • Companies can attain real cost benefits by taking the opportunity to redesign, and thus enhance, their accounts receivable processes.
  • These benefits can be achieved by improving the collection process, receipt and processing of receivables information, billing and invoice management, and by integrating accounts and automating processing activities.
  • Cost savings can therefore be achieved and losses and delays
    cut by increasing operational efficiency, and by leveraging more enriched and timely information.
  • Through optimisation companies gain improved working capital management, operate more cost-effectively, and credibly differentiate themselves from
    their competitors.

Managing the turnover of accounts receivable is an integral part of working capital management. Accounts receivable is one of the core elements of current assets and is directly linked to a company's cash flow, inventory, credit risk and liquidity positions. Given its importance, companies are constantly seeking ways to enhance effectiveness in receivables management and, most often, attention is focused on expediting fund availability through shortening the collection and clearing cycles. Indeed, the collection process is an important component of receivables management, but it can only represent a subset of its underlying value. Essentially, receivables management may impact on every part of a company's business process and, if applied effectively, can offer vast opportunities for a company to revamp its operational arrangements and business strategy to gain a competitive advantage.

Where Do Opportunities Exist?

In Asia, complexities caused by differences in market practices, clearing infrastructure, and the diverse type of payments used in each market have made receivables management a challenge for many companies. Although these issues cannot be generalised and mapped to all markets, there are a few key areas that may offer opportunities for companies to enhance their accounts receivable process.

The Collection Process

The most fundamental way to enhance a company's working capital management is through the structuring of an efficient collection process. The collection methods and the type of payment instruments received by a company can directly impact its financial efficiency and cash flow position. Paper-based receivables, needless to say, are generally less efficient as they usually take longer to clear and generate potential "float loss" throughout the mailing, clearing and handling processes. Higher efficiency can usually be attained by using electronic collection methods, such as automated clearing house (ACH) debit, credit card acquiring, and real-time gross settlement (RTGS) remittance. Therefore, if a company can induce its customers to change their payment practices from being paper-based to being electronic, it can shorten the clearing and processing cycle and, hence, accelerate its fund availability and enhance its cash position.

However, in countries where the market infrastructure and clearing systems are less developed, paper-based receivables are unavoidable. In such cases, a company should look for solutions to shorten the clearing and processing cycles. One option is to find a bank with a wide collection network. This arrangement enables payers to directly deposit cheques into a company's account through a bank in the same clearing zone as the drawee bank, eliminating the mail float and reducing the cheque-clearing time. However, if most cheque receivables need to be cleared through the same clearing location (e.g. metro cheques), a company could consider using lockbox services to further reduce its processing float. Lockbox services can help accelerate the conversion of the company's accounts receivable into cash by reducing mail, clerical and cheque-collection times to a minimum. Cheques that are mailed to the company or a post office box location will be collected by the bank, have their data entered, and be sent to be cleared on the same day.

Use of Receivables Information

In addition to the collection process, the availability of receivables information also affects a company's effectiveness in accounts receivable management. The comprehensiveness of the required information directly impacts the efficiency of accounts receivable reconciliation. Besides the cost of additional manual effort in tracking and repairing missing information, delays in the reconciliation process caused by incomplete information can also impact other business functions. For instance, the ability to close a new sales contract would be hampered if the customer's credit line was on hold pending reconciliation of its outstanding balance. Thus, the completeness of the receivables details does play an important part in the accounts receivable process.

At this juncture, companies could look to their collection banks for solutions. For cheque receivables deposited through the bank network or via lockbox services, the required receivables' details could be captured in the bank's system during the collection or processing stages, and transmitted in a form that enables the company to perform reconciliation. For electronic remittances, there are some cash management solutions whereby companies can extract consolidated receivables' details on their electronic remittances instead of relying on bank statements or individual remittance advices; or companies could get around the information truncation of the remittances when there is an inefficiency in the clearing system. There are also ways to enforce payers to input the payment details directly into the bank's system when making payments. These services could assist companies in obtaining the required receivables details to improve their reconciliation efficiency.

Although reconciliation is important, some companies can also make use of timely receivables information to enhance their working capital management. The ability to perform cash flow forecasting would largely depend on whether the company is able to monitor the status of its receivables; e.g. the maturity of a post-dated cheque or the value date of an up-country cheque. Also, the availability of time-critical information could facilitate just-in-time (JIT) management, thereby enabling a company to delay its procurement or production process by reducing the stock held and delaying cash outflow. As such, the provision of timely receivables details from banks could help enhance the effectiveness of strategic business management.

Billing and Invoice Management

Outside of collection and information-reporting processes, the way a company manages its billing cycle and invoicing can also impact the accounts receivable cycle. Notwithstanding that the turnaround time of a company's accounts receivable cycle is largely impacted by the credit terms offered to the payers, the billing arrangement is also influential - under normal circumstances, the earlier the bill is sent, the sooner the settlement is made. If a company chooses to bill monthly, essentially it is offering at most a 30-day credit on items purchased. On the other hand, this monthly billing arrangement could create problems in reconciliation for some companies. Normally, a monthly bill consolidates all items sold during the month, in which numerous sub-invoice items are documented. Mostly the payer would only initiate a single payment covering all or some items on the master invoice, and if the payment is made through an electronic channel (i.e. RTGS or ACH), then the payer would not list out all the line items in the available reference fields, meaning the bank would be unable to capture the reference details no matter how sophisticated its system. Thus, the company would need to manually track down the item references on its own to perform reconciliation.

Billing the customer on a single-item basis or grouping fewer numbers of line items on the master invoice could help ease this potential problem. However, this may also mean that the cost of billing would be higher. One alternative is to opt for electronic invoice presentment. This arrangement enables a company to present invoices electronically on the Internet, enabling its payers to view, dispute, agree or disagree to pay, and even settle online. Information captured on the electronic platform can be extracted for reconciliation, which could in turn reduce the manual effort of data capture. Electronic invoice management, however, could be a costly investment, and would only be justified if the majority of the payers are ready and supportive of such an initiative.

Integration is Key

Considering the collection process could impact the efficiency of working capital management, some companies may open numerous bank accounts on a domestic or regional level, ensuring that a comprehensive range of collection points is established to support extensive coverage. This arrangement could create potential issues for accounts receivable management, and monitoring the receivables status of numerous bank accounts through different banking platforms could be difficult. More so if too many banks are involved in the collection process, as this means that a company would receive collection reports in different file formats containing different levels of information - which could be a nightmare for reconciliation.

Rationalising the collection accounts (domestic and regional) with one to two banks would help enhance efficiency in reconciliation. Through consolidating bank accounts, the company can manage its receivables status in an integrated manner - from navigating the information through the front-end banking platform, to reporting and data-file downloading at the back end. This would significantly enhance the company's working capital management and its efficiency in the reconciliation process.

Automation of Processing Activities

Outsourcing non-core activities to automate the accounts receivable process is an essential consideration. For instance, the use of a lockbox service enables a company to automate its internal cheque-processing work, while accelerating the processing cycle and fund availability. In recent years, some banks can also perform accounts receivable reconciliation on behalf of their corporate customers, enabling them to free up their internal resources from non-core activities, hence improving the overall efficiency in accounts receivable management.

What's in it for You?

The first thing to acknowledge is that there is no model answer for effective receivables management that can be employed by all companies across different industry segments. A receivables management solution must be customised to support a company's corporate strategy and market practice. To a large extent, the structure of a receivables management solution should be tailored according to the specific industry and market requirements in which the company operates, as well as to its business objectives, operational processes, corporate infrastructure, financial strength and risk appetite. More importantly, a company needs to adjust its receivables solution as its corporate strategies and operational processes evolve to cope with changing market environments.

To structure an effective accounts receivable process, a company should:

  • examine its chain of receivables management activities, from invoice issuance to reconciliation;
  • identify opportunities that could enable it to improve its accounts receivable process; and
  • devise a plan to improve on areas that could create advantages, such as those that could enable the company to:
  • enhance its financial efficiency through better working capital management;
  • operate more cost-effectively than its competitors; and
  • differentiate itself with better customer services or product offerings.


Figure 1: Potential Opportunities in a Manufacturing Company's Chain Accounts Receivable Process

As seen in Figure 1, a manufacturing company can redesign its accounts receivable process to attain advantages in the following contexts:

  • Enhancing its financial efficiency through better working capital management: a company can make use of the availability of timely receivables status to effect a JIT arrangement. For instance, only when receiving the payment confirmation would the company start to produce or deliver its goods and services. The JIT arrangement would enable the company to improve its working capital by reducing the cost of funds for production and reducing the inventory level.
  • Operating more cost-effectively than its competitors: a company could attain cost advantages if it could lower its operational costs. First, the company could consider outsourcing non-core activities, such as data capture and reconciliation, to reduce internal operations costs and to better use its resources for more productive activities. Second, it could consider using electronic invoice presentment and payment (EIPP) services to reduce the costs and improve the effectiveness for invoice issuance and management. In addition, the company could further achieve higher cost savings through consolidating its regional activities using a shared service centre. This would enable it to leverage the collection banks' integrated services and economies of scale in processing activities, further lowering its regional operating costs.
  • Differentiating itself with better customer services or product offerings: with the help of information technology, the company could leverage its receivables information, which can be offered electronically in a consolidated manner, to enhance its service standard and flexibility when dealing with customers. For instance, the ability to retrieve customers' past records and update receivables records could enable staff in customer service or sales to better respond to customers' enquiries on their payment status, credit terms, invoice content or even sales arrangements. Also, using EIPP could facilitate better communication with customers, enabling the company to react quickly to disputes and follow-up enquiries. On the other hand, the company could also make use of a JIT arrangement to offer more flexibility to its customers. If production starts after the payment is made, the company could reduce its price for the customer, given that the production cost and associated risk are reduced.


What are the Key Considerations for Making a Change?

The degree to which a company can initiate change in its accounts receivable process can vary from the evolutionary to the revolutionary. The evolutionary is usually much easier to do, as is most often the case, because it relates to small-scale changes such as outsourcing arrangements or the use of receivables details for efficiency gain, which do not impact a company's business process substantially. However, revolutionary changes usually involve a higher degree of transformation, such as the redesign of a company's business processes and strategic business scope (e.g. its JIT arrangement). Although this would usually require more company resources and investments, the long-term benefits are usually higher.

Nevertheless, the advantages one company can attain through changing its accounts receivable practice may not necessarily apply to another company, even when they both operate in the same country and industry. The following are a few points for consideration after a company has identified opportunities for change in its accounts receivable process:

  • Evaluate each option against the company's strategic goal and business objective. Select those items that could complement the company's strategic direction.
  • Do not attempt to mirror others - only invest or do things that could help the company strengthen its competitive advantage and add value to its business process. For instance, EIPP may be a good feature, but whether it could enable the company to achieve cost savings really depends on the market readiness for this new form of invoicing, and the level of technological sophistication of the company's customers.
  • Examine the current value chain - evaluate the potential impact of the changes on the company's existing business process and operational arrangements, and whether they can align with its corporate structure, technology infrastructure, people skills, and procurement process.
  • Ensure the changes complement the industry value chain - support from both customers and suppliers is required.
  • Set a clear road map - do not attempt to do everything at once, but work out a step-by-step plan. Start with the easiest things first, such as rationalising the bank accounts and outsourcing non-core data capture and reconciliation activities, then move gradually to implement solutions that will revolutionise the business processes and strategic goals.
  • Obtain senior management support and internal staff support on the proposal; both are equally important.


Accounts receivable management is not simply a collection function; it is an integral part of working capital management that is linked to a company's entire business process, including invoicing, collection, credit, operations, accounting, and treasury and supply-chain management. Most often, additional benefits in the context of improved cash flow and cost savings may be attained from modifying the accounts receivable process. For instance, a company could opt to redesign its invoicing pattern and customer credit arrangement to shorten the accounts receivable cycle. Alternatively, the company could work with its bank to structure a more efficient collection solution and implement an integrated account management system to facilitate more effective cash flow management. In addition, outsourcing of non-core accounts receivable management activities, such as reconciliation and information capturing, would create additional value through cost reduction and increased efficiency.

All in all, efficient receivables management is crucial for every company - its effective application enables a company to manage its cash flow, optimise its business processes and enjoy greater competitive advantage.

Yvonne Yiu is a Hong Kong-based senior vice president, global payments and cash management, HSBC Asia Pacific

This article was originally published in HBSC's Guide to Cash and Treasury Management in Asia Pacific 2004.

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