Virtual accounts are highly flexible and are used by all types of companies, from single entity organizations through to multinational corporations. While the technology underpinning each solution is the same, the use cases vary significantly. However, there are still some best practices that all potential adopters can follow.

1. Remember that virtual account management (VAM) is a tool to achieve treasury objectives.

• Determine what you are trying to achieve, and set the solution accordingly.
• There are two models: single legal entity, where the central aim is bank account rationalization or reconciliation automation; and multi-entity, where the virtual account network becomes a de facto cash pool, settling on-behalf-of payments etc., and replacing the need for zero-balancing accounts (ZBAs).
• The end game is more efficient use of liquidity and working capital, and more effective management of financial and operational risk. These all have impacts on income statements and balance sheets.

2. Build a business case and an implementation plan.

• Look at the big picture — the possible end state — and work backwards. How do you get from the current structure to the end? Start small and add functionality over time. For example, start by adding POBO because it is easier and there’s no direct impact on customers, then add internal settlements, netting (single currency, then multicurrency), and end with receivables on behalf of (ROBO).
• The future might look more efficient, but you need management and business unit support, budget and resources to get there. Make sure the plan is achievable and understood by key internal and external stakeholders.
• Take tax, legal and accounting advice. This is critical for multi-entity, multi-jurisdictional solutions.
• Perform due diligence on all entities and on all variations (e.g., POBO/ROBO, virtual netting). Which entities can participate? Should those entities participate? How will you manage the entities outside of the structure? For example, if an entity cannot participate in netting, can the virtual account structure be used another way?

3. Look at existing technology solutions. Can they support what you want to do?

• If the existing platform isn’t suitable, consider a new treasury management system (TMS) or other technology solution in house, or go with a bank solution. How do you choose? Issue a request for proposal (RFP) or run a pilot. Take advantage of demos to compare the different looks and feels of the various solutions.
• Look at scalability. Most VAM technology can operate in multiple currencies, but many organizations don’t need that (at least initially).
• Remember connectivity, both internally, e.g., to ERP and other systems, and externally, including to banks. Channels are important — how will you connect to the bank?
• Map the cash flows from the source through to the general ledger.

4. Identify existing processes and determine what needs to change.

• For example, if you are rationalizing bank accounts, where do you need access to the local market clearing and payment rails? You’ll need to balance the endgame of a more effective future set-up with the need to develop it, test it, install it, train people on it and transfer operations to it.

To conclude, when designing a new structure, or updating an existing one, always keep the core objectives in mind. Assess any potential change against those objectives: Does the new solution offer measurable improvements in liquidity or financial risk management, or the ability to reduce operational risk?

Want to learn more on this topic? Download the AFP Executive Guide: Virtual Account Management 2.0, underwritten by J.P. Morgan.