Cash & Liquidity ManagementPaymentsSTP & StandardsRemoving the Barriers to More Accurate Financial Reporting

Removing the Barriers to More Accurate Financial Reporting

The initial barrier to more accurate financial reporting was removed by the
Venetians with the introduction of double entry accounting.

It took another 450 years for reporting and accounting practices to come up
with workable and understandable definitions of modern principles of forecasting,
analysis and comparability. (Yes, recent scandals ala Enron and Parmalat do
give pause to our reliance on a purely numbers viewpoint, but that’s another

The point is that it takes standards for recording, keeping and accounting
to be able to produce definitions for cash flow. Although these standards have
been in existence for sometime, why aren’t there more timely financial

Automating the Financial Value Chain

The trend in enterprises has been to implement one of a number of ERP systems.
These systems have the goal of providing and integrating a company’s information
systems across the enterprise. No small task! Issues such as the scope of the
enterprise (language, cultural, currency, etc), mergers, acquisitions, and restatements
remain ongoing concerns for financial reporting and greatly complicate the accuracy
and timeliness of reporting. The topics covered in this article acknowledge
these challenges, but this is not a project plan for implementing and maintaining
an ERP!

So what exists beyond the ERP implementation to facilitate better financial
information? As a newly developing concept this has been on the horizon for
some time now, but only recently have the components become available commercially.
We at Microsoft call this concept “Automating the Financial Value Chain”.

The idea is that while organisations are very good at managing information
within the ‘four walls’ of the enterprise, the interactions with
their financial institutions is still point- to-point. It is the difficulty
of maintaining this point-to-point information flow between banks and their
counterparties that impacts the timeliness and quality of information, and in
turn, it is the ability to address the timeliness that impacts the relevance
of the information provided.

Recent developments in technology and standards have come together to provide
a dramatic breakthrough in the timeliness and accuracy of cash recognition.

Corporate to Bank Connectivity

The recent inception of the RosettaNet Payments Pilot is one of the first instances
of using standardised XML interfaces between trading partners and their banks
to increase the visibility of cash to sellers. RosettaNet is the consortium
that provides a standardized method for companies in the high tech sector to
trade with one another using XML.

This initiative has proved highly successful, with the majority of large technology
partners migrating their business interaction to electronic trading models based
on XML. However, what hasn’t happened, until now, is the integration of
the financial services infrastructure to trading partner interactions… the
order to cash process.

Traditionally, the problem for buyers and sellers has been the disconnect between
the payments processed by the buyers’ bank – and matching them to invoices
when the payments finally arrive at the seller. When it’s difficult to
know what you’ve been paid for, it’s difficult to measure financial,
trade, and credit risk.

The RosettaNet Payments Pilot is predicated on three conditions:

1. The buyers’ bank accepts standardised XML payments messages from the
buyer, and the sellers’ bank can remit credit advices to the seller. The
payment carries a unique ID applied by the buyer.

2. The buyer sends standardised remittance advices to the seller, including
the unique payment ID that has passed through the settlement process.

3. The seller’s ERP is enabled to both receive the remittance advices
from the buyer and credit advices from his own bank. By matching the remittance
advices to the credit advices, the seller is now able to reconcile the payments
to the invoices being paid. While the clearing and settlement process has not
changed, the application of cash to the appropriate accounts improves visibility
– sometimes by many days – on the seller’s side. This increase in
availability works to improve liquidity and reduce credit risk between trading

While RosettaNet is a big deal for the 400+ companies and banks that are members,
how does this apply to the majority of companies who are not?

As the old saying goes, “A Payment is a Payment is a Payment”.
Well, when you consider that, for corporate treasurers and their cash management
service providers this represents an opportunity to save money (and for banks
it’s an opportunity to sell new corporate services) its very likely that
this integration across the payments networks will became a standard, and not
just for RosettaNet banks.

So, while it is the IT industry (through RosettaNet) that has established this
new integration opportunity, astute IT managers and financial managers in all
industries will want to track this initiative. While supply chain integration
will provide business value to virtually all vertical markets, there is a cash
reporting opportunity that can be developed even before the full supply chain
integration has developed.

Cash Reporting via SWIFT

Founded in Brussels in 1973, the Society for the Worldwide Interbank Financial
Telecommunication (SWIFT) is a co-operative owned by banks to provide standards
for defining financial messaging and a network for processing them to over 74000
banks throughout the world. The financial messages include instruments such
as letters of credit, payments, and securities transactions. Member organisations
create formatted messages that are then forwarded to SWIFT for delivery to the
recipient member organisation.

What’s this got to do with improving cash reporting? A lot. Up until
now, SWIFT provided a store and forward messaging service. It was secure, it
was ubiquitous, and it was standardized. But it was store and forward only.
However, SWIFT has now upgraded its network and the connectivity it offers to
banks worldwide. So while it used to be that banks could only forward messages
to other participants on the SWIFT network, banks can now query information
from connected counterparties. This technology – the implementation of
Internet protocols over the secure SWIFT network – provides an enormous
breakthrough both within and beyond the banks themselves.

For the banks, there is an immediate application in the area of cash reporting
for Nostro accounts. Nostro accounts are those that banks hold with each other.
There is a large, dispersed, complex and varied set of protocols and methodologies
in which the banks communicate with each other about transactions and balances
they hold. Up until now, banks would prepare a SWIFT message to inform their
bank counterparties on balances and transactions that impacted the Nostro account.
These messages were store and forward. The bank treasurer, who has the responsibility
for liquidity and risk management, has been dependent on these reports to see
his position with his bank counterparties. Since these messages were initiated
by the counterparties, there has been no way of automatically querying the counterparty.
By providing XML standards for balance and transaction reporting, and an interactive
platform for querying the information, the treasury function within the bank
can now get a far more accurate view of its cash position in an automated fashion.

Nostro accounting is only one of a number of query services that can be built
on this new technology. The same technologies that make interoperability between
banks and their corporate counterparties feasible will also become available
between banks and their settlement systems – and between all the parties
in the capital markets infrastructure as well.

In other words, what was until recently just a concept, is today becoming a
reality. This reality is breaking down the barriers that only a couple of years
ago would have been seen as inhibiting quality and timely cash reporting.

The automation of the financial value chain and the cash reporting examples
highlighted above are only two examples of barriers that are being removed as
new technologies improve the timeliness of business information. Barriers to
cash reporting? They’re only as limited as your imagination in today’s
new world.

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