Go Beyond Zero with Intercompany Cash Precision

In part one of this series, we discussed improving operational efficiencies in regards to intercompany processes. In part two, we learned how to go beyond zero by intelligently managing global tax processes. Part three discussed driving margin improvements and this final article in the series will discuss the benefits to cash precision through intercompany improvements.

Multinational corporations excel at turning trade-based receivables into cash. Scores of people, as well as numerous software solutions, are dedicated to negotiating contracts, delivery, billing, and collections on customer trade to maximize income and minimize cost and time to revenue.

Unfortunately, intercompany transactions get far less attention and effort. They frequently even go unsettled and unresolved. After all, the thinking goes, the cash involved in these transactions is ultimately all within the corporation. It can be seen as a “left pocket, right pocket” issue, and therefore its flows can seem less important. That’s a strategic mistake because of the value and opportunity lost in the resulting inefficiencies, lack of information, and lack of control over these funds.

A lack of urgency to integrate intercompany operations with Treasury means that cash meant to cover intercompany transactions, particularly services, is poorly used. For example, this cash can be delayed in reaching the appropriate balance sheet, thus negatively impacting liquidity, planning, and reporting. It can also sit in less-than-optimal currency positions and be shifted between balance sheets and jurisdictions with little consideration for negative tax implications.

Such tax considerations include intercompany AP/AR balances accumulating on the balance sheet, which tax authorities could consider an intercompany loan. In this example, the AR tax authority may tax on a deemed interest received, which the AP tax authority would typically not replicate in terms of a deemed interest payment. Hence, an asymmetrical tax result persists—a tax payment on the AR side without a tax reduction on the AP side. The tax team may want to impose actual interest payments being accrued and made, restoring the tax symmetry (tax rate differentials apart), but that is cumbersome and requires perfect insight.

Inaccurate and late information about the company’s cash positions will impact Treasury’s ability to create meaningful forecasts, manage FX risk, make informed investment decisions, and manage borrowing costs.

Improving intercompany processes and systems offers a systematic way to become more precise about how cash is managed and where it sits across and throughout the enterprise, bringing significant benefits in avoiding costs and capitalizing on hidden opportunities.

Better business decision-making

Sound financial decisions are based on cash visibility. Yet, treasurers often lack the necessary level of cash visibility to give them a clear picture of their organization's complete cash situation at both the local and group levels. Vast volumes of intercompany transactions across complex organizational structures and spanning diverse geographical footprints increase the difficulty of gaining complete cash visibility. This starves Treasury’s capacity as a disproportionate amount of time can be spent keeping systems afloat instead of strategically managing risks. So, the adverse effects of delayed or imprecise cash management can ripple throughout the corporation.

Conversely, a clear and accurate understanding of intercompany cash flow at every level, including at the corporate, divisional, geographic, and entity levels, improves visibility and insight. Hence, the treasurer knows what cash is available, where it’s held, and how it's expected to flow in the future.

Keeping capital at work

Speedy settlement of intercompany transactions keeps cash liquid and available. Inadvertently or inefficiently holding cash in entities and divisions starve others of operating resources—resources they could be putting to the highest and best use for the corporation.

Reduction of foreign currency risk

Improved visibility into currency positions across the enterprise, combined with the knowledge of where cash will be moving, improves both planning and execution of currency management in order to minimize FX currency risk and make better-informed hedging decisions. A current example of an environment in which intercompany cash precision could be worth many millions is the recent plummet in the value of the Euro. In May of 2021, the Euro was at $1.20 USD. By July 2022, it had plunged to $1 USD. 

In addition, intercompany balances in non-functional currencies create foreign currency gains and losses that survive consolidation, even though the intercompany balances should not. In other words, intercompany problems persist beyond traditional accounting and reporting cycles.

Tax considerations

Minimizing tax exposure is a result of IFM cash precision that challenges “left-pocket, right pocket” complacency. When government jurisdictions receive their rightful due, but those taxes could have been reduced with smarter cash management, the entire company is poorer. Worse, unsettled cash in certain jurisdictions can look suspicious and bring exposure from audits, with all of the related internal labor costs and reputational risk.

Streamlined and consolidated intercompany payments

Intercompany payments can often be a source of lost liquidity and inefficiency due to bank processing time, FX costs, and bank charges. Increasing cash precision reduces the number of individual transactions and intercompany payments that are made. This cuts administrative headaches, mistakes, and overhead. Reducing absolute administrative costs by allowing fewer staff to do more is one benefit. Still, more importantly, this can free individuals for better, more productive use of their time and reduces burnout from putting out administrative fires and manually settling intercompany transactions.

Continual visibility into intercompany activities is vital for decision-making. A comprehensive IFM approach allows you to improve how intercompany transactions are settled and resolved, including where cash is held and in what denominations. It allows a standardized process for intercompany settlements and integration with treasury systems in order to facilitate intercompany lending, cash pooling, and FX exposure management. 

BlackLine Intercompany solutions enable a disciplined approach to intercompany invoice settlement and allow group companies to forecast cash flows with more precision. The solutions are proven to help treasury teams settle more quickly, because AP/AR billing routes are centrally managed, and payments between entities are streamlined and reduced. Furthermore, after BlackLine, intercompany charges in multinationals are settled at least four days faster, improving liquidity and unlocking access to cash. BlackLine also enables the reduction of foreign currency risk, reducing it by about 50% on average, due to faster settlement, and improved currency controls.

Get your copy of this exclusive survey that examines essential questions about the state of intercompany at multinational companies.

Michael Polaha is SVP Financial Solutions and Technology at BlackLine.