Treasury, Payables, and Receivables: The alignment of the planets

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12 March 2009

Liquidity and cash management are the paradigms to measure current enterprise performance. Corporations strive for a holistic approach from their strategic banking partners made of "end-to-end" solutions and services that cross the traditional silos. Financial forecasting and planning are absolute prerequisites for a corporate treasurer. Under the current conditions of inadequate liquidity, invoice discounting is becoming a best practice: vendors offer discounts on the invoice's face value if they receive immediate payment.

From an income statement perspective, this brings value to the buyer because it reduces the cost of goods sold (COGS).

But the treasurer must question whether it does the same for the balance sheet. Can the buyer's company increase its debit level to benefit from the discounted invoices? What was to be paid after 60 days must be paid now, if the discount is to be taken. The first action would then be to ask for an increase in the credit line. The financial institution would immediately ask for a projection of future flows, and therefore for a better forecast. A reliable and timely forecast of cash flows before embarking on any initiative is mandatory for corporate treasurers. The sources of the financial flows are, principally, payables and receivables. Their dynamics, managed within the corporate ERP, must be constantly reflected in the treasury management system (TMS). This is, usually, a separate add-on suite of applications. Especially today, under credit restrictions and Basel II directives, banks are cleaning up their portfolios. A corporation that scores poorly on the financial institution's credit scoring would suffer from an immediate write-off. The treasurer must be able to anticipate the financial consequences of operative decisions and duly report them to the banking counterpart. Therefore, the integration between operational and treasury management systems must be properly secured. Technology can now play a significant role in making the concept of financial collaboration a reality by correlating the functions of treasury, payments, and receivables.

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