Why Intercompany Should Be Keeping Treasury Up at Night

By Ernie Humphrey and Chad Soltman

The treasury function has it tough when it comes to intercompany financial management (IFM). Amid all the issues that have historically plagued intercompany—huge transactional imbalances, next to no visibility across the enterprise, and inaccurate data, not to mention external economic headwinds—it’s Treasury that feels the fallout when attempting to net and settle intercompany transactions in a timely and effective manner.

Moreover, Treasury has the job of making the right borrowing calls when the pressure is on, even though it’s often unable to access all the relevant information. Treasury decisions are often hamstrung with a lack of visibility when navigating internal dynamics such as tax implications and the timing of intercompany settlements in addition to external factors such as interest rate fluctuations and foreign exchange dynamics. Ill-informed borrowing decisions impact a multinational’s bottom line.

Multinationals often face huge intercompany imbalances made up of hundreds of millions of unreconciled transactions every fiscal period. Unresolved disputes abound. When messy financial statements during financial close ultimately land in Treasury’s lap, surprises come related to the impacts of having silos across departments in managing intercompany transactions.

While there are many challenges that multinationals have no control over—inflation, rising interest rates, currency market dynamics, and tight tax regulations—there are plenty of issues that are, as what’s been said in horror movies, “coming from inside the house.” These types of intercompany problems manifest from inefficient infrastructure and processes, such as:

• Siloed operations. Due to the nature of intercompany, which often involves subsidiaries across the globe and disparate systems, it’s common for each subsidiary to process transactions using different (often manual) processes. Different business units often work with disparate ERPs that lack vital automation capabilities and suffer from both literal and figurative “language barriers.”

• Poor quality data. “Garbage in, garbage out” applies to intercompany when accounting teams work with inaccurate or incomplete data and pass it on to downstream functions in the intercompany and finance ecosystems. By the time it gets to Treasury, it can’t feel confident that it’s working with trustworthy data.

• Limited visibility. You can’t manage what you can’t see, so if intercompany doesn’t allow for end-to-end visibility, this puts the entire corporate finance chain at risk, partly because Treasury doesn’t have control over the creation and reconciliation of transactions by accounting. Without visibility at the granular transaction level, Treasury cannot effectively manage liquidity and make other key decisions, especially when out-of-balance situations are a perpetual problem during the financial close process.

• Outdated technology. Without state-of-the-art technology and automation, Treasury and other functions must rely on manual processes and cumbersome spreadsheets. As they try to make do with outdated technologies, the fix is often to increase headcount and pay those associated costs, even though it’s rarely a sustainable solution in the intercompany sphere.

There is a solution that can make Treasury’s intercompany nightmare a thing of the past, an intercompany strategy that would not only make Treasury’s job easier but also streamline all other intercompany functions: establish an intercompany Center of Excellence.

Best practice begins when enlightened finance leaders put a global process owner (GPO) in charge of intercompany. The GPO must understand IFM practices and appreciate the importance of getting different functions and entities working together to ensure everyone has timely, high-quality data and is using the most efficient methods and technologies to process it.

An intercompany Center of Excellence can achieve these benefits:

• Centralized processes. Every function in the enterprise works from a global intercompany subledger so that all data is processed the same way—wherever it comes from.

• Improved visibility. With clear, end-to-end visibility, accounting teams can quickly spot issues, such as when invoices and payments aren’t reconciled.

• Best-of-breed solutions. These technologies replace manual processes with automated ones, drastically reducing human error and enabling accounting teams to manage by exception.

• Clean, accurate data. Leveraging the power of automation, Treasury can trust the numbers in the multinational’s financial statements.

• Expand growth. Armed with the right strategy and solutions, multinationals can enjoy improved cash flow, invest in new technologies and talent, and expand their global customer base.

While this optimized strategy would improve all intercompany functions—allowing a multinational to enjoy a quicker close, reduced tax leakage, and resilience to economic headwinds—it would dramatically improve how Treasury manages financial risk exposures and liquidity.

Treasury could see significant time savings in the netting and settlement process since it no longer would be mired in ongoing out-of-balance situations at the end of each fiscal period. In addition, increased visibility and collaboration with tax and accounting colleagues would improve cash forecasting precision. Knowing the actual amounts of a multinational’s currency exposures would allow Treasury to make better borrowing decisions, setting consistent rates across subsidiaries.

Treasury teams shouldn’t have to white-knuckle their way through the job. They should feel confident that they are making the right decisions and saving the enterprise from having to overborrow, compromise on FX, or overpay in taxes. By establishing an intercompany Center of Excellence, a multinational can help facilitate intercompany transactions that are correct, efficient, and timely. It would also allow Treasury a better night’s sleep.

Watch this on-demand webinar Transforming Intercompany: Cash Flow Conundrum to learn the impact that manual intercompany has on cash management at your organization and how a “process plus technology” approach can remove the manual silos that exist between departments to create visibility into liquidity and enable immediate decision-making.