November 10, 2021

A Three-Tier Approach to Automating Intercompany Accounting & Settlement

5-minute read

Intercompany operations require multiple entities of a large, typically global business to interact to produce finished goods and services. This can create a tremendous strain on an organization’s accounting and finance teams.

Accounting automation is an obvious solution. But for many organizations, the more difficult question is how exactly to get started. The solution for these companies, says BlackLine Director of Product Marketing David Brightman, is to take a tiered approach to full implementation.

“Intercompany accounting can be a chaotic environment, since it’s at the intersection of transfer pricing policies, tax regulations, and various processes and technologies,” he says.

“But it can also be a source of competitive advantage by helping minimize taxes and boost working capital. On the other hand, it can get out of control, particularly when it involves manual process, and that can lead to inaccuracies, financial restatements, and stale numbers.”

Leading Practices

Brightman recommends a tiered approach to implementation—one that will adhere to the three major leading practices of intercompany automation.

Tier One: Preapprove & Create Transactions

This tier creates dynamic workflows and templates for intercompany loans, royalties, and other non-product-related services. “This puts controls in place so payables and receivables have mutual agreements before the transactions take place,” Brightman says.

The tier one leading practice can be user initiated for ad hoc transactions, or it can be machine-driven when information is distributed across multiple systems. In either case, pertinent information is automatically filled based on legal entity attributes and embedded business logic.

“This practice benefits Accounting by reducing the chance for discrepancies, and eliminating the wasted time accountants often spend digging through emails or paper files to try and understand why some transactions were executed in the first place.

“It gives the company’s global business services a centralized repository with standardized processes and rule-based, automated postings. And it helps the tax department get the correct tax and compliance information.”

Tier Two: Balance & Resolve Transactions

This practice extends coverage to product-related, internal supply chain transactions. It also adds automated transaction matching, which can be applied continuously throughout the period. It permits easy drill-down for out-of-balance transactions and lets organizations balance intercompany payables and receivables—and resolve out-of-balance situations—proactively throughout the month.

“Automated matching saves accountants from manually checking all transactions and lets them apply their expertise to investigating the exceptions, says Brightman. “And continuous matching saves large amounts of time at the end of the period, when things typically become very hectic.”

The balance-and-resolve practice benefits the group reporting staff and the controller by delivering real-time visibility into out-of-balances. It reduces period-end activities and supports Accounting’s efforts to better collaborate with the organization’s business units.

Tier Three: Net & Settle Accounts

This practice encompasses the netting, settlement, and clearing of intercompany transactions or balances in a single, automated, and integrated cloud-based environment. It consolidates intercompany transactions from BlackLine as well as various source systems and creates an audit trail across the various entities involved.

“This gives the treasury group clear insight into cash and non-cash positions, which helps them manage risk and perform other functions essential to company operations,” says Brightman.

“Also, it automates the processing of foreign exchange transactions, and facilitates balance consolidation to clearing at the transaction or summary level—a substantial time and risk-saving benefit to Accounting and Finance.”

Multiple Dimensions & Solutions

Intercompany accounting is a complex, multi-dimensional process that involves a number of stakeholders, including Accounting, Tax, and Treasury. For some companies, getting started may seem overwhelming.

“That’s why BlackLine often recommends a tiered approach,” Brightman says. “And it can be tailored to each company’s unique needs. For instance, not every company may want to start with the first tier. Some might start with the second or third tiers, depending on their needs and where they are in terms of automation. 

“But what’s important is that they start somewhere,” he says. “Because not automating intercompany accounting brings great risk and can threaten even the best company’s future prospects. Better to start small, so to speak, than not at all.”

Read our latest issue of BlackLine Quarterly for more stories like this that can help your F&A organization move out of the disruption caused by the pandemic and into the light of a more normal—and fruitful—future.

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