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Virtual Accounts. The panacea for Accounts Receivables!

The global financial crisis has made companies look at the area of liquidity management more closely. Companies are keen on having more operationally efficient accounts receivable (AR) processes. The development in the “Virtual accounts” space has shown that this tool offers better visibility, accuracy and automation required to optimize transactions.

Traditionally, the AR process has been largely manual which was both tedious and error prone. The repercussions of an inefficient system were not only the fact that it had cost implications but more importantly there was a reputation risk. The associated costs are in the form of employing personnel to reconcile accounts and the cost of delays because of inefficient systems. If the systems are not optimized to collect and reconcile receivables correctly and promptly, there will be the need to set up collections calls and to institute other follow up measures. Additionally, the impression of the company in the external world, like amongst bankers and buyers, will not be positive, especially if the follow up was delayed or incorrect.

One of the solutions to improve the efficiency and effectiveness of the AR process is setting up Virtual Accounts. Typically, the Bank will allow its corporate customers with a range of account numbers to set up Virtual Accounts for their clients. The corporate customer will request their clients to quote the Virtual Account number in their transactions. The Virtual Account number does not mean that a physical account exists – all it represents is the details of the remitter and translates that information for the corporate customers account statement.

There are a number of benefits of using Virtual Accounts and some of them are:

  • The Virtual Account information provides for automatic reconciliation of entries which is definitely quicker than any manual system. This reduces the number of disputed entries and allows for better settlement processes and thereby a reduction in the number of debtor days.
  • The minimal amount of manual inputs not only reduces error rates, but also improves debtor management and cash flows for the company.
  • The electronic processing of invoices and payments helps improve the overall operational efficiencies dramatically.
  • In a world which is keen on creating an eco-friendly environment, the use of Virtual Accounts, reduces printing resource utilization and has a positive impact on conserving the earth’s scarce resources.

Corporate customers are aware of the advantages of using Virtual Accounts and they in turn have been pressurizing Banks to offer them these solutions. Banks are also offering these solutions in some form or the other, by developing some in-house applications or by making changes in their core-banking systems.  Banks are still in the process of adopting full-fledged systems for Virtual Accounts in a big way – once this is embraced in a more widespread manner, it is bound to have a salutary impact on Banks’ processing capability and their relationship with customers.

 

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Comments: (1)

A Finextra member
A Finextra member 12 August, 2013, 16:05Be the first to give this comment the thumbs up 0 likes

Thank you, it's a much under-reported and under-exploited area! There are specialist suppliers of virtual account based systems which are widely used by banks to serve specific segments - for example, for solicitors who often have to hold funds on behalf of their clients, but need a way to keep track of whose money is whose. They are becoming more widely adopted for broader use, such as in international payments.