Intercompany transactions are common in the business world. In truth, over 80% of all global transactions are intercompany. The challenge for finance and accounting teams can be daunting, but it doesn't have to be. It’s important to have a clear understanding of what these types of transactions entail, how they impact financial statements, and where to uncover value in places no one is looking.
Whether you're looking for ways to simplify the process, make cash flow more predictable, or be more tax-efficient, the five tips in this blog are sure to come in handy.
What Are Intercompany Transactions?
Let's start with the basics: a transaction is a completed agreement between a buyer and a seller to exchange goods, services, or financial assets in return for economic value. An intercompany transaction is one that occurs between different legal entities within the same parent company. Because these entities are related, companies can't include a profit or loss from these transactions on consolidated financial statements.
Intercompany accounting involves recording these transactions in your financial systems—sounds simple enough, but in reality, it can be a chaotic and lengthy undertaking. Here are five ways to prevent the intercompany mess so transactions run smooth as silk.
1. Identify the Type of Transaction and Set up a Standard Process to Record Them Properly
Not all transactions are created equally. There are two general categories of intercompany transactions. One is trade-based, directly related to the product you sell to the customer, such as materials and semi-finished products. The other is non-trade—in-direct or service transactions, including fee sharing, cost allocations, royalties, and financing activities.
Standard processes are important—they help you get things done in an organized way. For intercompany, the transaction type drives the activities required for each step of the process, so nothing slips through the cracks or needs any rework later.
Upstream work solutions achieve long-lasting results, giving you a way to detect problems before they arise by addressing early warning signs. So, intercompany should be a continuous operation to prevent reconciliation issues down the line—defining a standard process that acts as an invisible hero and stops the month-end firefights from occurring. With non-trade transactions, initiator-recipient rules will ensure transactions contain the necessary support, authorization, and validation at the point of need and before invoicing and recording.
2. Create an Agreement, Enforce the Agreement
Make, and stick to, intercompany agreements. Transfer prices play a large role in determining the overall organization's tax liabilities. Entity-specific rules must be centrally stored to ensure profit maximization and to take advantage of favorable tax setups for the group.
The optimal transaction price among transacting divisions then drives more profit and compels us to better plan tax. Tax and finance functions need to use integrated transaction-level pricing and analytics, thus allowing for price and tax optimization.
And any breakpoints in technologies, processes, and people create a manual overhead, often resulting in improper mark-ups. Duct tape works wonders, but not for stitching financial systems and data together. Spreadsheets don't cut it, and like back-of-the-envelope calculations, you end up with errors and no way to trace or validate your entries later.
3. Drive More Collaboration Across the Enterprise
Intercompany accounting can be a thorny topic because it touches so many parts of the company. The hybrid workplace is here to stay, and finance professionals are craving more flexibility and easier communication, particularly in the opaque world of multinational operations. Companies should look to remove organizational silos and use technology to act as the ember to spark collaboration.
Collaborators, i.e., the buyers and sellers, are still people transacting on either side. Automated workflows and collaboration tools let them interact and share their comments, empowering anyone involved in an intercompany transaction to communicate with their peers while keeping an audit trail for easy reference later on.
4. Push for a Unified Intercompany Technology Environment
The ultimate vision is uniformity and transparency of intercompany processes. Instead of having information in disconnected silos, business users share one intercompany solution—streamlining and centralizing all intercompany transaction records, corresponding journal entries, statuses, supporting documents, currency rates, transfer pricing rules, policies, and invoices in one place.
5. Add Automation to Minimize Transactional Accounting
According to APQC, finance and accounting can spend at least half their time in transactional accounting. Tedious work increases employee disengagement, decreasing productivity.
Financial and tax regulation is now a rapidly evolving area for intercompany accounting, so automating intercompany accounting will increase control, reduce compliance risk, and promote healthy operations. For example, by automating currencies, required tax calculations, and invoice requirements, you’ll minimize human input and open up new opportunities to improve working capital, cash flow, and profitability.
When you have more than one ERP, transactions can get "lost" if the other side of the entry is not added. Automated solutions can catch and prevent the fallout between AP and billing systems, accrue the amounts, and avoid plugging any differences.
For trade transactions, automation helps to shift our focus from rote data collection, processing, and emails to early intervention—analyzing exceptions and variances.
Above all, automating transactional tasks reengages your workforce to drive productivity where it counts.
Prevent the Mess at Month-End Closing
Monthly peaks are a pain. Companies can get ahead of intercompany issues with preconfigured leading practices to initiate, approve, and book intercompany transactions and invoices, while enforcing intercompany trading relationships, policies, and transfer pricing and tax calculations.
Get your copy of the white paper Stop Guessing, Start Automating: How to Turn Intercompany's Distraction into Action to learn about three innovative solutions to help you automate intercompany processes: Create, Balance & Resolve, and Net & Settle.