A recent report by Celent, a research firm focused on financial institutions, contains some insight that applies to corporate treasurers as well as their banking counterparts. The report sports the rather lengthy title, “Strategies for Cash and Trade Finance: Transaction Banking for Regional Banks in OECD and Non-OECD Countries,” and more info on it can be found here.

Perhaps the most significant finding from the report is the idea that trade finance and cash management are converging. Based on Celent’s own research, the two functions work closely together in more than 40 percent of companies; in about a quarter of companies, the two areas both work closely together and are integrated via a technology platform.

One driver behind this is the growing number of open account transactions, or those in which the seller lets a customer to make purchases without a formal borrowing agreement between the two. One sign of this: Among the banks that participated in the IMF-BAFT Trade Finance Survey from 2009, the overall value of letters of credit, which are one way to secure transactions, dropped 11 percent between October 2008 and January 2009. Nearly three-quarters of the 44 banks completing the survey indicated that the value of the letters of credit they issued had dropped.

In fact, according to “Rethinking Trade Finance 2009: An ICC Global Survey,” by the International Chamber of Commerce, just 20 percent of the $14 trillion in global trade each year involves “secured documentary transactions,” such as letters of credit.

While open account transactions lack the security of those supported by letters of credit, they’re cheaper and easier to complete. In fact, a 2006 Celent report found that trade finance costs can account for 8 percent of the value of a transaction – a hefty fee when margins are tight.

Nonetheless, open account deals bring their own sets of challenges. As more activity takes place on open account, treasurers and corporate finance execs will “require a bigger dose of visibility of what is going to happen if payment doesn’t occur,” says Enrico Camerinelli, senior analyst with Celent and the author of the report. That is, they’ll need to be able to figure out the impact on cash and working capital if, for instance, their firm makes a sale and the buyer skips town without paying its tab, or the effect of a protracted struggle before the buyer finally ponies up.

Fortunately, technology can provide greater visibility into both the physical and financial supply chains. In fact, these types of applications have been used for years in the automotive and pharmaceutical sectors to allow more effective collaborations between suppliers and their customers, Camerinelli notes. These applications can track the movement of goods (Where are they? How many have been sent?) as well as money (Has the invoice been sent? Has it been approved?).

Of course, knowing where the goods and payment are doesn’t guarantee payment. So, treasurers who are working in open account transactions also should identify the financial services, like factoring, that can help their firms weather a deadbeat or delinquent client.

Another issue with open account deals is the lack of standardization in the documentation of the transactions, Camerinelli adds. In Europe, for instance, each country has its own set of rules and regulations that determine what information needs to accompany the purchase and sale of goods and services. “It needs to be clear to everyone what needs to be done and what documents need to be attached,” he says. Right now, this can vary from one company and region to the next.

Finally, in order to really grasp just how trade finance and cash management are converging, treasurers need to learn more about the operations across their companies, including procurement, production. and sales, Camerinelli states. “In order to have a good, complete view of the company’s processes, you need to look beyond the numbers.” ###