Increased scrutiny from tax authorities and auditors, along with more complex value chains, are causing organizations to encounter expensive intercompany accounting challenges.
This, of course, can be mitigated with proper intercompany accounting practices. Annual cost savings for 10-billion-dollar-revenue businesses can go up to 2 million dollars, according to the Hackett Group.
NextGen Accounting has developed and compiled 5 best practices for intercompany accounting, so your business can avoid unnecessary costs.
What is Intercompany Accounting?
Intercompany accounting is the process of recording financial transactions between two entities that belong to the same corporate group or parent company. This includes:
Some intercompany transactions examples would be royalty payments, centralized cash management functions, fee sharing, and cost allocation.
Efficient intercompany accounting is necessary to maintain compliance and transparency within a corporate group. Streamlined intercompany operations drive positive outcomes – and vice versa. Negative outcomes can include an increase in tax and statutory audits and fees, diminishing margins, and delays in closing books.
Intercompany business is challenging to manage. The number of transactions processed in a single day can go up to the millions, and requires the use of powerful reconciliation automation software such as CrushErrors. Indeed, intercompany volume can be considerably greater than outside revenue.
For many multinational groups, the challenges go far beyond core compliance-related accounting. A shrinking world, M&A, and ever-increasing tax regulations pose a headache for every caffeine-fueled member on your accounting team.
All these challenges need to be addressed and managed by standardized, automated processes.
Intercompany Business: 6 Best Practices
1. Utilize Third-Party Reconciliation Software
Bank and credit card reconciliation can be incredibly time consuming and resource intensive. For reconciling transactions across multipleenterprise resource planning (ERP) systems, companies should use third-party reconciliation software that can track transactions between legal entities and identify a single transaction when required.
Various third-party reconciliation tools are capable of the above functions. Some, like CrushErrors, can manage high volumes. Still others are scaled down and offer the same services for small companies.
2. Use Smart Automation
Optimized intercompany accounting will involve using automation. However, it is important to not only automate existing processes, but simplify them so they become intuitive.
Some automation best practices include:
Automate postings across ledgers
Automate clearing losses & gains of exchange rate movements
Automate elimination entries postings
Automate matching process & dispute management
Automate transfer pricing workflow
Automate exception handling
Automating simple, repetitive processes will free up your resources so they can focus on value-creating work.
3. Have a Cash Management Strategy
Using a cash management strategy can help reduce bank fees and the amount of cash in accounts not bearing interest. It can also provide information that lets the organization hedge currencies effectively.
Companies require multilateral settlements to achieve proper settlement and netting, which is necessary for the treasury function. This should be based on a cash management strategy that outlines when settlements need accounting entries or cash transactions.
4. Standardize Global Policies
Often, high-level policies for intercompany business lack sufficient detail. For instance, information on the type of coding needed for coordination of ERP systems is missing.
Data management is a key area that standardized global policies need to address. It enables, with common accounts charts, intercompany transactions to be easily identified and managed across platforms.
Capabilities for integrated reporting that comply with finance, statutory and tax requirements should support integrated transaction flow.
Trading partner data should be identified and controlled to isolate intercompany transactions for reporting and elimination.
5. Educate the C-Suite
A survey from Blackline suggests that financial leaders need to educate themselves further about intercompany accounting and other processes. Failing this, they risk actually being an impediment to improved business outcomes.
According to the survey, 89% of respondents stated that C-suite leaders lacked proper understanding of intercompany processes. Only 11% thought their company’s C-suite had a sufficient understanding.
Such figures are troubling. Improvements to intercompany business cannot be made if C-suite executives do not examine their own shortcomings and improve upon them.
6. Set Up a Master Data Management Program
Setting up a master data management program will make sure that both acquired and new accounts comply with policies and that transactions are processed in a standardized manner.
Intercompany transactions should use tech-enabled approval routing and resolution of disputes. Furthermore, standard calculations and standardized methods should be used for centralized service charges and corporate allocations. This will help ensure efficient processing and consistency.
Intercompany accounting reaches into a wide variety of functions and entities, including but not limited to FP&A, transfer pricing, indirect tax, shared services, IT and controllership. It is hence critical for business leaders to adopt current technological solutions and best practices to automate and centralize processes.
If you want to get started on these best practices, look no further than NextGen Accounting. We provide credit card reconciliation services, bank reconciliation services, audit and anti-fraud assurance, financial consulting, and financial reporting. Our services are specially tailored to firms with vast amounts of data that are extremely difficult to reconcile.
To give you the fastest and most accurate reconciliation, we use our patented software CrushErrors, which you can also obtain as a product if you’d rather conduct reconciliations in-house.
NextGen Accounting’s management team has decades of experience and includes former executives of Barclays Bank, Bank of America, and ICBC. Contact us today for reconciliation solutions or book a free demo if you’d like to get CrushErrors!