This blog was originally published by Anders Liu-Lindberg on LinkedIn.
Think of a finance and accounting process that only causes frustration and wasted hours without adding any value. Yes, there are quite a few of them, but from my point of view, the intercompany process takes the number one spot.
I have worked with intercompany accounting in various roles during my career, and I never saw any value add from this process. Granted, it is necessary for compliance purposes, but many accounting leaders steer clear of this thorny topic.
The truth is we should seek to automate as much of the intercompany accounting process as possible because it touches so many parts of the company. This will free up time for accountants to analyze the numbers and provide actionable insights for business stakeholders to make better decisions.
In many international companies, the madness goes beyond the core compliance-related intercompany accounting. We live in an era of global trade, mergers and acquisitions, and increasing tax regulations. It is a growing headache for not only Accounting, but also tax, treasury, and legal teams.
All these must be addressed as soon as possible and should be handled by a unified, standard process. It is time to investigate how we can automate intercompany accounting along with some best practices.
Smart Automation of Intercompany Accounting
To properly automate any process, it is key to not only automate the existing process but also consider how to make it simple and intuitive. This is important to ensure that we still understand how the process works once it is automated. If it is too complex, the Finance and Accounting teams may not understand it well enough to fix recurring errors or answer questions about it.
Here are the four best practices you need to achieve intercompany accounting excellence, and what needs to happen during each one.
- Ensure you have proper trading rules and agreements
- Automate the transfer pricing workflow
- Automate postings across ledgers
Balancing & Substantiation:
- Balance AR/AP postings with automated exception handling
- Ensure proper documentation and substantiation of postings
Netting & Settlement:
- Create an advanced netting and settlement process
- Automatically clear gains and losses of exchange rate movements
Consolidation & Elimination:
- Automate postings of elimination entries
- Handle top-side adjustments where needed
These four best practices work as an interconnected process—you cannot review them in isolation, as that would risk sub-optimizing the process. However, each step should be reviewed for simplicity and intuitive understanding. Have your transfer pricing and intercompany accounting experts explain the process to the FP&A team, for instance. Can they understand the current process? If not, simplify further.
Next, contemplate exactly how to automate by considering these three process steps. This is probably the simplest process description of intercompany accounting you can find:
- Create: Automate all postings, both trade (standard transfer pricing) and non-trade (management fees, royalties, loans, allocations, etc.) across sender and receiver.
- Balance: Automate the matching process and dispute management to the point where very little human intervention is needed. This goes all the way to month-end reconciliation, and with this in hand, you can create a central repository of all intercompany transactions.
- Settle: The settlement procedure should be integrated into your treasury management system, so working capital is optimized and no unnecessary funding is needed for intercompany transactions. FX gains and losses should be automatically recorded and be clearly identifiable on the ledgers.
Sounds simple enough, right? Well, it is simple if you understand your process and use the proper tools to automate it. This will reduce the noise across the organization and free up scarce resources for more value-adding work.
How Does Your Intercompany Process Compare?
Now, take a good look at your own intercompany accounting process. How much time and resources are you spending every month in this area? Most organizations have a significant efficiency potential to realize by properly addressing their intercompany accounting mess. The ultimate vision should be to move to a centralized clearinghouse to manage all intercompany transaction records, corresponding journal entries, and supporting details.
For example, BlackLine customer Kraft Heinz managed to achieve the following results:
- Reduced intercompany imbalances from $30m USD to less than $1m USD per month
- Strengthened controls and compliance
- Dramatically reduced the manual efforts involved in the process
- Reached a 93% automatic matching ratio of intercompany transactions
These improvements can result in a vast amount of savings or financial risk avoidance if you count on all the benefits. Perhaps the greatest benefit is the freed-up time for more value-adding work. This cannot be understated. When Accounting is entrenched in manual accounting work, far too little time is spent analyzing the numbers. This means business leaders are making mostly gut-based decisions, which typically perform poorer than data-driven decisions.
Are you ready to step up your intercompany accounting game? Then start automating this process today and reap the benefits in just a few months. There is no reason to spend valuable resources on this largely transactional process that adds little to no value to your company’s bottom line.
Get your copy of this white paper for a deeper dive into how to achieve intercompany accounting excellence for your F&A organization.