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accounts receivable

Modern Accounting: How to Approach Intercompany Recharging

June 30, 2022 by Revelwood Leave a Comment

This is a guest blog post from our partner BlackLine, explaining best practice recommendations for managing expenses across various business centers within your company.

What Is Intercompany Recharging?

What exactly is a recharge in the world of accounting? It essentially involves providing a good or service to an entity and recovering the cost from the entity served on a fee basis. Intercompany recharging happens when one entity incurs a cost and then bills, invoices, or moves that cost to another entity in the larger organization. The goal is to accurately charge the entity that received the value of the good or service provided.

Notable examples of intercompany recharging occur when shared services, IT and telecom, or any costs that are centralized must be billed to their ultimate beneficiaries across the corporation. For example, charges for phone, computer, and networking usually come from vendors in one comprehensive invoice. That invoice might be paid by corporate, but corporate would have to split the invoice and “recharge” portions of the bill to the entities in the organization that used the service.

Two Different Approaches to Intercompany Recharging

Broadly speaking, intercompany recharging can be handled in one of two ways:

The very detailed allocation model involves getting down to a per head cost with each line in an invoice allocated to the specific person or project it served. That cost, such as a mobile phone expense, is charged to whatever entity that person rolls-up to in the organization.

Challenges with this model occur when an individual doesn’t align easily to a single entity or when personnel changes happen within the organization. For example, people change roles, the billing or accounting information changes, or the organizational structure itself adjusts.

The more generic allocation model involves setting a cost per person and allocating that figure to intercompany entities based on the number of people allocated to that entity. For example, a percentage of costs would be allocated based on headcount regardless of whether the people used the billed product or service.

The challenge with this method is that it results in many disputes. Arguments arise because people disagree with how costs were allocated to their group. For example, a French entity might argue that their telecom costs are cheaper than the US or that only a portion of their team were given access. Then charges must be debated.

How to Decide Which Approach to Intercompany Recharging Is Best

When deciding which approach to intercompany recharging is best for your organization, consider three things.

1. Understand the organization’s risk tolerance. 

This will help determine how precise to be. Risk averse companies will want their intercompany recharging to be more detailed to give them more support on how they allocate. Everything would be easy to trace back and serve as proof in the event of an inquiry or audit. Less risk averse companies, on the other hand, would take a more simplistic approach and might not be as concerned about how the costs are moved around.

2. Consider the organization’s cost tolerance.

How much it is willing to spend on being precise? This typically depends on where the business is in its evolutionary cycle. If it’s prospering and doesn’t believe it needs to worry about every detail on every line, then it won’t. But if the belief is that the organization needs to watch every cost, then the intercompany recharging will be broken down to the finest details.

3. Determine what the organization can operationalize and maintain. 

Find the sweet spot that provides enough detail that a consistent process can be maintained month over month or quarter over quarter. Intercompany involves many functions which might limit what is possible. It all depends on those who are actually touching the data and reconciling it. There may be technology constraints where the systems can’t handle all the data coming in. The account reconciliation team may not be able to handle the volume of transactions, and the people inputting the information can also become overwhelmed.

The Trend Toward More Detailed Allocation & Greater Transparency

Intercompany recharging practices are moving toward more detailed allocation and greater transparency. This contrasts with how the recharging process has been addressed historically, when companies simply threw people at the problem or employed front end technology overlaid with workflows.

Backend technology, such as spreadsheets or reports, have also been used to reconcile accounts. However, this is more reactive than proactive, and usually happens after the fact when the accounting team is trying to reconcile everything together.

Do It Once, Do It Right

The benefits of doing it right include fewer intercompany disconnects, which result in a more accurate and timelier close. Ensuring transaction allocations are correct before they are booked also eliminates last-minute conversations with people trying to work out where disconnects happened and why. There is less chaos and churn. And if issues do arise, they can be resolved faster because teams can quickly see where disconnects exist.

The intercompany recharging methodology that BlackLine specializes in eliminates disconnects, booking both sides of the transaction at the same time. It also gives visibility to that data to deliver an understanding of what is billed, and what is being billed for. This process also enables good reporting. This is how BlackLine provides full transparency into the intercompany recharging process.

Read more Modern Accounting blogs:

Modern Accounting: Using AR Automation to Boost Cash Flow

Modern Accounting: Achieving Finance Transformation

Modern Accounting: Easier Intercompany Transactions

Home » accounts receivable

Filed Under: Financial Close & Consolidation Tagged With: accounts receivable, automated accounting, BlackLine, financial close software, intercompany accounting, intercompany transaction

Modern Accounting: Using AR Automation to Boost Cash Flow

June 9, 2022 by Revelwood Leave a Comment

This is a guest blog post from our partner BlackLine, explaining how to gain cash flow confidence with AR automation.

Table of contents

  • Disruptions, Borrowing & Inefficient Processes
  • Raise the Bar With AR Automation

Put simply, a significant reason businesses are struggling right now is a lack of working capital. Preserving and maintaining sufficient cash flow is crucial for the stability and success of a business. When it’s reduced or restricted, businesses have less ability to perform, pay, and invest, meaning many turn to costly borrowing.

Businesses with a stronger cash culture are more likely to make it to the other side. Research from McKinsey shows that businesses that prioritize cash flow are more capable of recovering faster after disruption, especially in a post-pandemic world.

It all starts at the top. And by making cash a priority, CFOs are setting the tone for business success.

Disruptions, Borrowing & Inefficient Processes

Time is of the essence when it comes to achieving business success. But because traditional processes aren’t typically time efficient, finance leaders are challenged with aligning and unifying their cash flow systems. The longer that cash is unreachable, the older the debt gets, and the likelihood of receiving a payment in full is reduced.

You might think taking the tried-and-tested route of borrowing will work better for your business. While that may seem like a good idea at first, rising inflation and stringent lending conditions can create complications later down the line. Easy fixes like this only temporarily bridge the gap for businesses lacking cash—and you can end up paying through the teeth for it.  

The pressure brought on by the biggest disruption of all—COVID-19—is urging finance leaders to make better, more confident, and strategic business decisions. But to do so, greater business intelligence is required.

According to the Hackett Group financial report, finance executives consider it somewhat likely that innovation will fundamentally change the way financial functions work, yet relatively few leaders are acting on it currently. 

Without using AR data in the right way, businesses are less capable of understanding and categorizing customers, debtors, and their cash flow.

Raise the Bar With AR Automation

In 2019, PWC calculated that $1.5 trillion dollars was held hostage on global balance sheets. Without access to that working capital, CFOs have less opportunity to drive business success. 

But there’s a solution: get your cash flow moving to a different beat.

By implementing AR automation, you can unlock working capital with ease and achieve greater visibility into your cash position, keeping your business machine well-oiled and functioning to its full potential.

What’s more, you can surface critical customer data that your business can use to transform its cash culture for the better—and enable you to make more strategic business decisions that have a company-wide impact.

Plus, with greater cash availability comes greater financial flexibility. AR automation means you won’t have to rely on costly borrowing thanks to increased access to working capital from within. This also allows you to build financial resilience to cope with whatever is around the corner.

The market’s moving, and it’s time for you to move with it. With BlackLine AR automation by your side, you have the tools to boost your cash flow and improve business outcomes.  

This blog post was originally published on the BlackLine blog.https://www.blackline.com/blog/how-to-gain-cash-flow-confidence-with-ar-automation/

Read more Modern Accounting blogs:

Modern Accounting: Changing the Culture in Accounts Receivable

Modern Accounting: Intercompany Accounting

Modern Accounting: Accounting in 2022

Home » accounts receivable

Filed Under: Financial Close & Consolidation Tagged With: accounts receivable, automated accounting, boost cash flow, cash flow, financial close software

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