Hands up whose finance team says intercompany transactions are their chief bug bear, every time, month or period end rolls around?
If this statement has you groaning in recognition, you may take some small comfort from the fact that you’re not short of company. Even in the most well run of conglomerates and corporate groups, sorting out trading partner balances can be a recurring headache – and a massive time thief – for finance teams looking to put the books to bed in their respective entities.
The never ending close
Why is it such a problem? In our experience, a big part of the problem stems from the fact that the consolidation process is typically seen as an opportunity to identify intercompany issues – but not necessarily to resolve them.
More often than not, these issues end up in a very thick ‘To’ file: ‘to be investigated’ or ‘too hard for the moment’. Puzzling them out generally requires the cooperation and assistance of equally hard-pressed colleagues from across the group, and doing so satisfactorily can take several weeks or another month.
The upshot? An ongoing series of adjustments in the books and the cascade of consequences that can arise down the track, as a result – think financial statement adjustments, account reconciliations and tax position adjustments.
Meanwhile, another series of anomalies will have piled up in their wake, and so it goes.
Pointing the finger at poor processes
In many corporate groups, less than satisfactory intercompany processes are at the root of the problem. While entities typically have robust, well-structured environments to manage their third-party transactions, the guidelines governing interactions ‘within the family’ can be more of an afterthought.
It’s not uncommon to see processes for managing these transactions evolve organically, with each entity arriving at its own ‘rules’ for dealing with sister companies.
The non-standardised, disconnected processes that emerge as a result don’t lend themselves to transactions moving between entities, teams and systems in a concerted fashion.
In fact, the reverse. We frequently see the same transaction being recorded at two different times – perhaps even in two different accounting periods – using two different currency conversion rates.
And even if the figures do match up on both sides, the paperwork isn’t always in apple pie order. Invoices may not meet the legal requirements in the recipient entity’s jurisdiction, or GST and import duties may be incorrectly applied. Having to check the documentation and fill in the blanks can hold up the close process. If the exercise needs to be repeated dozens, hundreds or thousands of times each month or period, it starts to look unsustainable.
Many systems, one solution
Requiring all entities within the group to standardise their ERP systems and internal processes is one solution to the issue, but doing so can be a major undertaking. The time and expense involved is likely to represent a significant impost and require the allocation of ill-spared in-house resources. In the meantime, the problems persist.
It’s far faster, simpler and cheaper to adopt an overarching solution: an ERP agnostic program that enables you to structure and implement a standardised intercompany transaction process across your entire ecosystem of entities.
That’s exactly what automated intercompany financial management software does. Integrated with global vendor invoice management capability, it improves close time and accuracy, and reduces intercompany administrative costs, by freeing up operations and finance teams across the group to concentrate on higher value work.
Reaping the benefits of an integrated approach
Corporate groups which have implemented this technology typically enjoy 50 per cent reductions in billing disputes and unreconciled accounts. In larger conglomerates, that can mean a saving of thousands of human hours and many thousands, even millions, of dollars – savings that can be redirected towards activities and initiatives that contribute to business growth.
If making the financial close process more efficient and economical is important to your corporate group, it’s an investment you’d do well to consider very carefully indeed.
Claudia Pirko, regional vice president – Asia Pacific, BlackLine
