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Going ‘beyond zero’ with intercompany financial management

By David Brightman, head of EMEA Solutions Marketing, BlackLine

Managing intercompany activity is often an uncomfortable barrier that falls on the shoulders of the finance and accounting (F&A) function. In a recent survey of F&A professionals involved in their companies’ intercompany processes, 96% of respondents stated they face ongoing challenges with intercompany. Why should a seemingly straightforward accounting process cause distress? 

It is because the sum of intercompany activity should be zero—but it rarely, if ever, is. Characterised by its manual, lengthy, and tedious nature, it can expose a business to unnecessary costs, delays, and compliance risks.

While finance leaders are aware of intercompany problems—costs showing up in the wrong places, overdue and unsettled balances, frequent charge disputes—most are unaware of their total impact that goes well beyond merely compliance. Reduced operational productivity, tax leakage, and diminished statutory tax positions are just a few of the challenges resulting from poor intercompany processes.

The Big Distraction 

Intercompany transactions for multinationals can dwarf their external sales by as much as a factor of 10 or more. Handling the immense volume and fragmented nature of intercompany data is an enormous challenge. Grappling with multiple unintegrated finance systems, companies are forced to adopt ‘band-aid’ tactics and, as Deloitte describes it, sweep the “mess under the bed.” This is especially true when working with trading partners and transactions that span multiple jurisdictions.

The F&A function spends far too much time being the ‘Balance Police’ consumed by digging up information and playing in multi-column spreadsheets to reconcile counterparty data, track open items, and send emails to dozens of parties. Many companies need access to more than one ERP system, meaning the data is not standardised—each commonly has its own chart of accounts. 

A Problem That Grows Worse

Intercompany discrepancies are cumulative, skewing the accuracy of financials. Manually marrying data and managing disputes can trigger financial write-offs and create setbacks for reporting. The effort and time required to handle intercompany transactions properly elongates the accounting close period.

As businesses extend market reach and influence, the intercompany supply chain becomes longer and more complex, making it difficult to apply and monitor the correct markup on transactions and resulting in longer settlement days and FX exposure. Intercompany is a big problem, far beyond accounting, as it challenges the broader business. 

Yet, with no action, the myriad of old, open, and unsettled intercompany invoices will continue to be finance’s biggest distraction and lost opportunity, keeping you focused on governance rather than guidance and analysis.

Going ‘Beyond Zero’

Corporations are composed of many legal entities, making it difficult to quickly and accurately connect the strands of intercompany transactions to address multiple requirements beyond statutory and group accounting. 

The constant pressure from tax authorities on intercompany revenue and charges leads tax teams in the direction of high volumes of frequent and granular intercompany charges. 

The more precise and granular intercompany charges, the more financial transparency on the underlying costs, resulting in defensible intercompany prices. It so happens that this higher level of granularity helps to demystify your actual unit costs, helping business leaders pave the path to profitable growth.

Moreover, by minimising value-added tax (VAT) leakage, companies can benefit from 

core capabilities of tax accounting and compliance and the use of analytics to better manage the tax incidence throughout the organisation. 

By shifting from traditional intercompany processes to operational excellence, businesses can overcome the accounting hurdle and focus on the value-added tasks that matter most. Employing modern accounting software, companies can fully automate the entire lifecycle of intercompany transactions, processing it across accounting, tax, and treasury departments, regardless of ERP(s) and systems. Ultimately, this can unify and streamline intercompany operations, ensuring more efficient and accurate reporting while reducing risk.

Through a combination of process re-engineering and technology that streamlines and automates these new process flows, intercompany can be managed holistically and globally, essentially creating an intercompany subledger that captures all intercompany data inputs and accounting and management outputs. 

Automating accounting entries booked on each ledger yields many additional benefits including statutory, management and operational reporting, automated transfer pricing markup, tax compliant invoicing (including e-invoicing), integrated dispute management, increased reconciliation rates, and more. We call this approach intercompany financial management and believe it represents the future of how intercompany will be managed.

Why Now?

Optimising intercompany processes is critical in the current economic landscape. Globalisation has assembled a web of highly complex supply chains that generate a blizzard of intercompany transactions. 

The rise in M&A activity is driving even more ERP and subledger fragmentation. Rising interest rates and global economic instability complicate cash flow and capital allocation. Centralising and automating intercompany activity can help to optimise tax strategies, minimise liabilities, increase cash flow, and reduce exposure. 

With a unified intercompany solution, businesses can reduce transactional work and intercompany disputes, enhancing operational agility to respond to market dynamics and regulatory needs.

Intercompany offers an opportunity to unlock growth with better tax-efficient processes and optimised business operations that can impact the bottom line, liquidity, and talent. By relieving finance teams of the challenges, they are free to fine tune operational efficiencies, employ tax-effective processes, and focus on new horizons for growth. 

Start Your Intercompany Financial Management Journey

The modern enterprise is globally connected and the activities spawned from this connectedness raise even more regulatory scrutiny. As explained by Deloitte, regulators are increasingly focusing their attention on the cross-border transactions of multinationals. 

F&A must become agile to respond to market dynamics and regulatory needs, which cannot happen if they’re buried in tactical transactional work and intercompany disputes. 

By eliminating the distractions of intercompany, businesses will free up resources and increase efficiency and drive F&A to move from data stewardship and compliance to improving the bottom line, supply chain dynamics, and liquidity, delivering significant value for the business.

By David Brightman, head of EMEA Solutions Marketing, BlackLine

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