Optimising receivables to generate working capital

Improving company liquidity through automation

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Group treasurers and finance leaders throughout Asia-Pacific are looking for ways to ease the burden of their account receivables process in order to free up working capital and deliver better business performance. René Michau, Head of Payments and Receivables of Global Payments and Cash Management for Asia-Pacific at HSBC, explains how automation not only drives efficiencies, but also mitigates risk, strengthens visibility and control, and improves company liquidity.

Key insights

  • Automating the accounts receivable process delivers benefits beyond operational efficiency
  • A reduction in reconciliation effort can decrease Days Sales Outstanding (DSO) and provide faster access to funds for use as working capital
  • Accurate reporting and enhanced visibility, by improving the quality of the receivables book, reduces credit risk and improves the organisation's ability to secure external funding
  • Streamlining the accounts receivable process removes manual tasks and the likelihood of human error, while freeing up time for higher-value activities to drive revenue realisation and company growth

The average accounts receivable process should be relatively clear-cut in theory. Money is exchanged for goods and services – either up front or after delivery – and these payments are reconciled against the general ledger before the funds are made available as working capital. In reality however, this process is made considerably more complex due to several key factors.

New distribution channels and a diverse range of remittance methods can complicate the accounts receivable process, making it harder than ever before to monitor incoming payments. The fact that we operate in an increasingly global economy combined with an accelerated rise of international trade plays a significant role in complicating the core treasury function.

In addition, far too many organisations continue to rely on a traditional, often manual, process to manage their accounts receivable, employing an army of clerks to arrange credit terms for each client based on a host of factors including payment history, past disputes and how regularly the client buys the product or service. This team is also accountable for creating credit or debit notes for customers, as well as following up with a series of reminders when money is overdue.

Once a payment has been made, the finance team must plough through each and every settlement and cross-check it against outstanding amounts or invoices held in the ledger or Enterprise Resource Planning (ERP) system. Given many suppliers pay multiple invoices at once, or may not provide a precise instruction as to the exact invoices they are settling, this often means the treasury team must resort to analysing the narrative from company bank statements or even contacting the customer directly in order to decipher what has actually been cleared.

Following this, the finance department is also required to invest time and effort acknowledging receipt of payment before embarking on the drawn out task of making these funds available to the corporate treasury department to cover salaries and core costs, pay suppliers, invest back into the production process or finance company debt.

This entire process is not only extremely time consuming, it is often heavily manual and therefore prone to human error. The combined result is an added burden to the company in terms of liquidity and working capital irrespective of the business model in place. In addition all of these activities can have a profound impact on the credit exposure of the company and the relationship it has with its customers. As a result, an increasing number of corporates are looking to optimise their accounts receivable process and automate data processing activities in order to streamline procedures, enhance visibility, mitigate risk and free up time to focus on their core business.

Accounts receivable optimisation

Until recently, the standard approach to optimising the accounts receivable process was to focus on cutting costs, reducing inventory, changing payment terms and incentivising clients to pay more quickly. However in today's market, more sophisticated corporate treasuries in Asia are enlisting the help of a banking partner that can help them free up working capital by speeding up the conversion of payments into cash, reducing the risk of error, capturing critical information and generating client communications with an automated solution that will integrate seamlessly with their existing ERP or finance system. While the specific benefits vary according to industry and business model, on the whole there are four key advantages to automating your accounts receivable process.

Speed and scalability

The impact of a slow, manual accounts receivable process varies depending on industry and business structure, however there are benefits to automating this process whether one operates a pay-in-advance or a pay-on-delivery model.

Companies that are paid up front tend to be relatively well capitalised already, and are therefore less concerned with the DSO measure for example. As such, the key benefit of an automated system lies in the reconciliation process. Firstly, automated reconciliation reduces the risk of human error, which can cause costly legal problems. Secondly, it provides faster access to funds which can be channelled immediately back into the business to execute the service or manufacture the product, ultimately speeding up delivery times. This is absolutely critical for companies that rely on just-in-time manufacturing.

Examples of companies that require payment up front include several leading IT providers, travel agents and insurance companies. However, it is worth noting that an automated system can also benefit non-banking financial institutions in terms of regulations. In some markets, local legislation prevents or limits these institutions from benefitting financially while they hold client funds, which means it is imperative that they apply the money to the appropriate instrument or policy within a certain time frame.

Companies that operate under a pay-on-delivery model have realised vast additional benefits from an automated solution. Firstly, the time taken to reconcile the accounts is significantly reduced and the DSO measure is dramatically improved, which in turn accelerates the deployment of cash into the business. The DSO is calculated from the time the invoice is issued to the time funds are applied to the outstanding item in the ERP. Manually this could take weeks, however if this is completed in three to five days, funds are released earlier which reduces the reliance on other sources of liquidity.

Secondly, an automated receivables solution can assist with scalability and speed to market. If companies can reduce the amount of time it takes to process receivables they can free up working capital to fund their daily operations. At the same time companies can reduce the amount of external funding required to support business expansion and growth in the long term.

Companies that lack clear visibility struggle to demonstrate the quality of their receivables and can therefore find it difficult to secure external financing. Optimising accounts receivable can help overcome this challenge by providing greater visibility of the book, which in turn improves credit risk management protocols and the ability to source external funding.

Corporates that understand their receivables book in detail or have implemented an automated solution are much better positioned to discuss receivables financing based on their payment flows with their banking partner, regardless of whether they are looking for short, medium or long-term funding. They can also utilise their entire receivables portfolio in order to secure financing by leveraging the credit ratings of stronger clients on an individual basis and lesser-known buyers collectively. This opens the door for more effective ways of funding operations, which can be extremely helpful as organisations try to manage working capital.

One of the biggest challenges facing a group treasurer lies in the operational risk associated with managing multiple client accounts. Not only can funds be incorrectly allocated or credited, there is risk associated with accessing long-standing deposits in the company account that can't be identified. The reconciliation process is therefore critical to liquidity. By implementing an automated solution this operational risk can be significantly reduced, providing easier access to funds that are already within the business.

In many companies the operational cost of employing a large finance team, devoted predominantly to managing receivables, is high. However, automating the receivables process can shift the focus to higher-value activities and enable the department to cope effectively with rapid business growth without the need to increase operating costs. This is especially important for organisations that are experiencing a transformation in their business, such as a shift to online selling or heavy investment into growth strategies, because it allows them to stay focused on the new distribution channels that will enable revenue generation without impacting the cash flow that funds this expansion.


At the end of the day, optimising the accounts receivable process by introducing an automated system can significantly improve daily treasury operations and free up working capital trapped in the process. By choosing the right banking partner, the corporate treasurer can not only ease the burden of manual labour associated with this important task, they can mitigate risk associated with slow, manual processes and free up time so that the team can focus on strategic growth objectives and build the business. An automated solution also improves speed to market, encourages scalability and affords greater visibility, which in turn reduces credit risk to the corporate. And with the right banking partner in place, this can be achieved relatively quickly and smoothly.

Case Study (Fast moving consumer goods company)

A case for Automation

With net revenues in excess of USD65 billion, this global conglomerate owns a number of leading brands. The company's modern trade segment is one of its key distribution channels and the organisation works with more than 12 of the largest modern retailers in India contributing to more than 10 per cent of the their in-country revenues.

The large volume and complex nature of incoming payments, combined with a resource intensive manual process, made invoice reconciliation onerous and challenging. The accounts receivable function was costly to operate and resulted in poor visibility and control of the company's receivables position. With an anticipated strong sales growth rate, as well as increased labour and infrastructure costs in the Indian market, the current operational model was thought to be unsustainable.

As such, the company embarked on a process-reengineering project that aimed to introduce automation throughout their receivables process and increase visibility over the collection cycle. Increasing the quality and availability of remittance data was critical to its success.

A comprehensive receivables management solution was implemented to deliver:

  • Immediate payer identification facilitated by a virtual account solution;
  • Faster payment posting and credit release to customers via comprehensive intraday reporting delivered on the hour;
  • Enhanced integration between the customer's ERP and banking system to reduce manual intervention and data entry;
  • Increased quality and availability of remittance information by automating the preparation and integration of various remittance advice formats.

The amount of change required to migrate from a firmly-embedded manual process to one that is automated was significant, and included customised integration to accommodate the customer's ERP and enable a seamless flow of data to and from the bank. HSBC's Implementation team provided experience and expertise, working closely with the company's project team to overcome these challenges with limited corporate resources in a tight timeline.

Using proven HSBC Transition Management methodology, the project was divided into four stages:

  • Initiation– Thorough analysis of existing reconciliation processes to identify areas for improvement;
  • Planning and preparation – Development of a comprehensive project plan with detailed timelines, roles and responsibilities for each party during each transition activity;
  • Solution and integration design – Customised solution design to satisfy all the project objectives. This included file specifications, reconciliation configurations, as well as ERP development to ensure completeness of the end-to-end processing; and
  • Implementing and transitioning – Consultancy to support the company's change management activities. A training programme was designed and run jointly to ensure all stakeholders obtained the necessary knowledge and buy-in for the new process.

The project was implemented in phases starting from the appointment of a pilot retailer with a small number of retail outlets/centres. Learnings and insights from the pilot provided the company with the confidence to expand and accelerate the rollout to the other retailers.

The key outcomes made a significant difference to the organisation. Firstly, the company drastically reduced manual effort and cost associated with end-to-end process automation, resulting in a 50 per cent improvement in efficiency. This also released in excess of 9,000 man hours per year that can be spent managing exceptions and pro-actively following up with client payments. In this area, the company has already achieved an 82 per cent match rate, which is approximately 12 per cent above the industry standard of 70 per cent. In addition, the organisation also achieved 100 per cent payer identification using a virtual accounts solution providing timely and enriched information on receipt of electronic credits.

The end result also improved visibility and control of the accounts receivable process and provided seamless integration between the bank and company's ERP system ultimately reducing the operational risk associated with manual data entry errors.

All improvements were achieved without impacting the creditor's payment and reporting processes. There acceleration of credit releases and reduction in posting errors greatly improved end-customer satisfaction.

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