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How Virtual Accounts Create Efficiency

  • By AFP Staff
  • Published: 3/22/2021
virtual accounts article

With organizations more focused on cash than ever before, finance is under pressure to operate as efficiently as possible. Making best use of the available technology is naturally seen as one way to do so. In an environment in which there is constant innovation, with different fintech companies promoting their individual solutions, it can be difficult for finance professionals to identify the best technology for their organization.  

While some innovation is critical to overcome particular issues, it is arguably in some of the more established solutions that some of the greatest potential efficiency gains can be found. One such example is a virtual bank account structure. A number of banks and specialty providers offer virtual account structures, with functionality ranging from a fully centralized in-house bank offering to a simple solution allowing users to segregate accounts by entity, function (e.g., accounts payable, accounts receivable), project or customer, without the cost and complexity of setting up and operating multiple external bank accounts.

The difference between virtual accounts and many other solutions is that virtual accounts improve efficiency in a number of ways, the most common are: 

  1. Visibility to cash. All virtual accounts are sub-accounts of a physical bank account. An organization may have a number of physical accounts, each with a network of virtual accounts underneath, but to view its cash position, the treasurer only has to consolidate balances on the physical accounts. Positions can be updated in real-time, eliminating the problem of cash position forecasts being out of date before they have been finalized. And, because transactions on the virtual accounts all flow through the physical account, a treasurer has access to all the granular data on individual transactions.
  2. Automated liquidity management. Many organizations manage liquidity via a series of sweeps between operational accounts and header or sweep accounts. Although these are usually automated, such structures can be expensive to establish and operate, especially through the application of transaction fees. With virtual accounts, layers of cash sweeps are eliminated, as all cash sits, by definition, in the physical accounts at the head of the structure. This puts more efficient liquidity management within budget of all organizations, not just those with high volumes of transactions. Also, because the positions on the physical account are constantly updated, companies have to hold less precautionary cash, reducing their short-term borrowing requirement, or increasing the volume of cash available for investment. 
  3. Financial risk management. Streamlining liquidity management will have consequences for risk management too. Intercompany positions can be netted internally, so only net foreign exchange and interest rate exposures need to be managed.
  4. Treasury operations. Processes can be standardized across all entities using virtual accounts, improving finance’s ability to control cash. Data is held within the physical accounts, making it easier to generate reports.
  5. Bank account management. The process of managing virtual accounts is similar to operating traditional accounts, but they are generally much easier to set up and can be quickly reassigned (e.g., from one project to another).

Of course, the extent to which an organization is able to enhance its operations via the adoption of virtual accounts depends on both its current structure and how it uses the virtual accounts. But, for any organization that wants to improve its efficiency, virtual accounts are worth a closer look.

See the AFP Guide to Virtual Account Management for more information.

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