Fixing Intercompany

November 9, 2023

This guest post from our partner, BlackLine, explains how to get started fixing intercompany.

The signs are there. Quarter after quarter, your organization’s transactions aren’t balancing. Your close is taking too long, and write-offs and tax leakage are happening too often. In short, your intercompany operations are a mess.

As issues spring to the surface and create havoc, it’s easy to get pulled in different directions trying to fix each one. But it’s best not to get caught up in a Whac-A-Mole game of jumping from one issue to the next. Instead, step back and look at your intercompany operations holistically. Then, commit to improving them so all finance and accounting functions work efficiently.

That said, the idea of transforming intercompany is incredibly daunting. How does an organization even begin to develop a strategy to ensure that everyone is following best practices? Are the problems tied up in governance and policies, in processes, or both? Do new technologies need to be adopted to automate transactions?

To start: conduct a root-cause analysis of your intercompany finance and accounting processes. Once you do, you can pinpoint where things are breaking down and find solutions for making sustainable improvements that benefit the entire intercompany ecosystem.

Addressing All 3 Intercompany Processes

Intercompany is a network of functions and entities in which an organization is essentially trading with itself. To ensure that it conducts business fairly, it must operate according to an “arm’s length” model. Just as its different entities are segmented, a root-cause analysis must be broken down into distinct, manageable processes and address three key intercompany processes:

1. Balancing
2. Settling
3. Initiating transactions

When the Left Pocket Doesn’t Equal the Right Pocket

Many intercompany financial close delays are rooted in the fact that organizations are balancing transactions using manual processes that make it virtually impossible to identify and resolve errors, discrepancies in volume and price, currency translation, and timing differences.

Other negative impacts of transaction mismatching include:

Working with inaccurate customer data
Increased write-offs
Diminished ability for teams to focus on business goals

Analyzing balances to see where breakdowns occur requires a granular assessment of every trade. Examine how the seller recorded a transaction and compare that to how the buyer recorded it. Do the two match? If not, why not? Is the discrepancy an anomaly or a chronic failure that repeats throughout the system?

Ultimately, intercompany operations should work from a complete, virtual subledger of global intercompany transactions that streamline and manage reconciliation complexity and free up staff capacity and close periods quicker. This positively impacts transaction amounts, recorded taxes, and exception management.

Where Things Fall Apart Downstream

Errors accumulate when organizations fail to deliver settlement-ready balances to treasury teams and where reconciliations take too long to manage, thus delaying netting and settlement efforts. This increases FX impact and the volume of aging write-offs that can further reduce working capital and liquidity.

Other negative impacts of delayed netting and settlement include:

Impeded cash management
Adverse credit ratings and increased borrowing costs
Delayed mergers and acquisitions funding and lost M&A opportunities

Where intercompany balances are being settled, what do those settlements look like? Are they occurring as cash settlements where funds are being moved on the books of different entities? Where is short-term and long-term debt being created? When do equity infusions come into play? Is there good visibility into how transactions are being settled? Do you have creative control over foreign currencies, using the clearing or non-clearing of intercompany as a natural hedge against foreign currency movements?

An optimized netting and settlement function empowers the collaboration between Treasury, Accounting, Finance, and Tax with real-time visibility on the status of intercompany transactions. ERPs, banking, and treasury are integrated to facilitate and streamline netting, settlement, and clearing processes.

Where Bad Data First “Infects” the System

Very often, issues arise from the moment a transaction is begun. A common problem is that transactions and invoices are initiated in an opaque way to users. When stakeholders and accounting teams don’t have visibility and operate in silos, there’s an increased chance of errors entering the system.

Other negative impacts of initiating inaccurate transactions include:

Inaccurate transfer pricing mark-ups
Reduced tax defensibility
Increased preventable losses due to foreign currency fluctuation

Which transactions are taking too long? Are manual processes slowing things down? Are humans doing the heavy lifting where technology could automate processes and save teams time so they can focus on more meaningful tasks?

During this process, teams should have complete visibility when initiating, approving, and booking transactions and invoices, while enforcing correctly applied intercompany trading relationships, business logic, transfer pricing markups, and tax determinations. Intercompany service activities should follow preconfigured billing routes, automate journal entries, and produce tax-compliant invoices using automated processes.

Starting on a Path Toward Intercompany Excellence

Once an organization completes a root-cause analysis, it’s perfectly positioned to develop a strategy to optimize intercompany operations, improve governance, policies, and processes, and implement intercompany financial management best practices.

This blog post was originally published on the BlackLine blog.

Author

Revelwood

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