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