Cash & Liquidity ManagementCash ManagementNetting/PoolingPayment Netting: Maximising the Possibilities

Payment Netting: Maximising the Possibilities

Corporate treasuries and their organisations want the big
savings achievable in foreign exchange (FX), payments and fees from netting, so
the subsidiary companies have to put up with the manual collection of
balances.

But there is so much more netting that could offer, while at the
same time addressing the problems of manual work by using technology
effectively. For example, how about helping subsidiary companies fix the
inter-company reconciliation nightmare? While there isn’t a strong business case
for simply automating the current manual process, there definitely is one for a
better solution.

Multilateral netting systems – or intercompany netting to
give it one of several alternative names -really benefit from specialisation.
Specialisation in the development, support, quality assurance (QA), IT
infrastructure and more, leads to significant customer benefits. The more
clients on the system and the more feedback from them, the better the system
becomes. It is a positive feedback loop, but it requires a critical number of
clients to achieve this and a focus on meeting client requirements

System
Design is Key

One area that results from this specialisation is
invoice level matching and netting. Allowing the upload of both accounts
receivable (AR) and accounts payable (AP) items takes the system into a
different arena from a simple input of gross flows of payables into a
spreadsheet or typical bank run netting process.

Intercompany netting, often
unknown to head office, suffers from problems caused by mismatches between the
invoice details held by the payer and receiver. This can lead to the late
payment of bills, inaccuracies in the profit and loss (P&L) and balance
sheet reporting, and causes treasury problems in trying to forecast cash, hedge
and other activities. Intercompany gets in a mess and if prompt steps are not
taken this situation further deteriorates over time.

An intercompany
netting platform could be the only firm-wide common platform for invoice level
detail. Not only does use of the system result in greater visibility of payables
and counterparty receivables but treasury has the opportunity to negotiate at
the invoice level. Subsidiary companies can really help themselves by helping to
sort out the ’intercompany mess’.

The matching and reconciliation process
is something that has to be done on a monthly, quarterly and annual basis
anyway. Giving the subsidiary companies a system which can help with the often
fraught and time-consuming stress of month end reconciliation also provides
treasury with good data on settled flows – before they happen and with a high
degree of certainty.

The benefits of visibility are often understated. For
example, we see a sizeable number of companies that do not know they have
mismatches on the AP and AR until they get to the consolidated level. The
invoice information needed to resolve this has been lost somewhere further back
in the process. Netting at invoice level gives this information as part of the
process, while tools in the system can identify and be used to resolve
mismatches. The old gross level system does not make for an easy receivable
driven process either. Receivable driven multilateral netting is a real boost to
cash management.

Netting should also allow data enrichment and the
standardisation of invoice level information, so subsidiary companies can
include their own codes in invoice information – perhaps even a link to a scan
of the underlying invoice and data export to allow the updating of both the AP
& AR ledgers.

Tax Needn’t be Taxing

What about the transfer
pricing problems and tax?  Again, visibility and data enrichment offer answers.
Transfer pricing is an issue; as we know governments are increasingly fighting
against companies’ transfer of profits into low-tax regimes. Often the internal
tax department is not really aware of the detail pricing. They give some
instructions to the business people but are these actually put in place? Adding
product line information in one of the available fields to get a better overview
about what is really happening in the different ledgers. Would this help
controllers, auditors and tax?

The matching functionality of a netting
system can also be extended to reconciliaton items (not for settlement) and in
this case can bring a full overview of intercompany exports and imports between
subsidiaries and countries. It can reconcile not only commercial flows, such as
ARs/APs on a detailed invoice level, but also other balance sheet positions such
as treasury items (internal deposits and loans, internal P&L flows such as
interests etc), off-balance sheet items such as forward contracts, or
non-commercial flows such as managment fees and royalties.

One could also
consider invoice process savings, which possibly merits a whole article in
itself. In short the result of standardisation: visibility and
receivables-driven netting is a potential 25% saving on invoice processing
costs.

Does the Business Case Now Look Stronger?

It is now
possible to address the issue of manual processes mentioned above, because
treasury can make a compelling business case for almost all corporates to
interface their enterprise resource planning (ERP) to the multilateral netting
system, both for upload of invoices into the system and export of the entries
out for booking and accounting.

Indeed, it is possible to go further. Some
companies are interfacing to their chosen FX dealing platform, incorporating
import/export of rates from another system, executing payments to the bank and
to the treasury management system (TMS) to update the cash book or in-house bank
(IHB).

This, coupled with the availability of connectivity via the internet,
also means a modern netting system is the perfect product for the internet and
the Software as a Service (SaaS) business model.

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