6 minute read
September 13, 2022
6 minute read
With 70% of global trade flowing through large multinational corporations, supply chains are inherently intercompany. If you don't have a sound approach to intercompany financial management (IFM), supply chain excellence and resiliency is impossible to achieve. The corollary is true: good IFM helps to enable supply chain excellence and resiliency.
Intercompany accounting has historically been a problem for multinationals. Inaccuracy, inefficiency, and low visibility have resulted in poor forecasting, poor decision making, and suboptimal intercompany outcomes. Leaders have suffered without clarity into intercompany volumes, costs, markups, and cash flows. This results in largely blind decision making when managing or analyzing supply chain for intercompany trade.
In many cases, entities within multinationals fail to source internally where they could have. Instead, they’ve gone to third parties, failing to work with their own intercompany brethren brought under the multinational umbrella for just that purpose. Business entities turn to third-party sourcing when intercompany options are opaque, populated with data that doesn’t correspond to reality, or is impossible to settle across business units.
Lack of clear intercompany data and the resulting suboptimal decisions have caused multinationals to depend on third parties, even though in many cases they could have sourced internally.
When the pandemic hit, multinationals discovered the risk related to dependency on third parties and missed out on prioritizing intercompany buyers. Disruptions that are still rippling through supply chains coupled with new economic uncertainty has large multinationals revisiting supply chain resilience. As they restructure their channels and their operating locations, many are making it a priority to improve the systems and processes that manage trade through intercompany relationships.
For external trade, there are well-negotiated and enforced contracts. Outside orders and deliveries are carefully planned and invoices are tracked along with their payments. To facilitate this, multinationals use advanced resource tracking, inventory management, warehouse management technology, global purchasing, and payment and receivables systems. These systems will process the purchase order, make sure that it goes through the right global workflow, and has the right pricing.
Often, these systems are integrated with supplier inventory and delivery windows. Regardless of if they have one ERP or 20, there are resources and effort spent to ensure external customer orders are delivered and paid for.
Unfortunately, ERP systems do not address intercompany very well and few multinationals process their intercompany transactions with that same rigor. Many even manage non-trade transactions at the general ledger level, carrying large, ill-defined balances of “due to” and “due from.” Lax process discipline and poor data granularity put intercompany out of balance and those responsible for rectifying it must rely on inefficient manual processes to put things right.
Add to these challenges another tectonic shift—rapidly evolving transparency requirements from tax authorities. Governments around the globe want more clarity on trade to ensure they are capturing the revenue they are due. Base Erosion and Profit Shifting (BEPS) came out of the Organization for Economic Cooperation and Development (OECD) study as a guiding framework for jurisdictions globally. Each country has their own version including US Base Erosion and Anti-Abuse Tax (BEAT).
Before these regulations, multinationals weren’t required to provide detailed substantiation for transactions. Consequently, there was little basis for jurisdictions to dispute what was reported. With these new regulations, multinationals must provide unprecedented clarity, substantiating everything.
This means furnishing clarity on intercompany transactions and related supply chain flows in the same way they substantiate external third-party transactions. Companies must now create intercompany invoices and supporting documentation such as sales orders, clarity on pricing and markups, and transfer pricing. For many multinationals, this means establishing processes to document that intercompany transaction pricing is in line with third-party transactions as well as creating and submitting intercompany invoices for jurisdictional review.
Intercompany financial management creates a single intercompany mantle across existing systems. Intercompany data needed to improve decision making is captured and made available even as a multinational’s technology landscape changes through M&A activity, and as the supply chain changes due to economic disruptions.
Without IFM, many multinationals are currently booking transactions at different times. At close, many bookings are one-sided or lopsided, resulting in significant risks and exposures including penalties, fines, write-offs, and tax leakage. In this situation, a well-allocated supply chain is difficult and supply chain excellence is impossible. IFM synchronous booking enables a company to book everything correctly the first time, with all requisite approvals. Controls are automated to ensure markups are aligned to the trading relationships and commodity fluctuations. Invoices are generated in a timely and a tax-compliant manner for submission to jurisdictions.
This intercompany layer also means transactions are right the first time. They are tracked throughout the entire life cycle of the transaction. It provides visibility into what is traded, when it's coming, and what the markups are with rigor equal to third-party trade. This clarity and access to data enables a team to make better trade decisions while radically improving financial operations such as cash flow management, tax decisioning, and foreign exchange planning.
Done right, IFM flushes friction and inefficiency out of supply chain decisions, enabling an enterprise to achieve supply chain excellence where it may count most—internally.
At the consolidated level, intercompany transactions net out. But as finance, accounting, FP&A, and tax teams know, that’s an oversimplification, and a costly one. While it’s theoretically true that intercompany is a “left-pocket, right pocket” wash, it’s also true that if a person spends half the day transferring money back and forth between pockets, and paying taxes and other costs for each transfer, things get lost.
Intercompany operations also impact the consolidated financial statement because multinationals try to manage the pocket switching by throwing bodies at intercompany tasks, inflating G&A expenses. And, as discussed, poor intercompany visibility also translates to suboptimal supply chain utilization.
With better intercompany clarity, better reporting, and a single layer of data available across intercompany, supply chains are more efficient, more resilient, and can be elevated to new levels of excellence.
Chad Soltman is the General Manager and Product Director of Intercompany at BlackLine.
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