We’ve just returned from Oracle’s CloudWorld event (formerly OpenWorld) in Las Vegas, a great opportunity for networking and exploring new industry developments. So now, it’s time to get back to the daily routine and the dreary British weather.
This transition signals more than just a change of season – while the summer holidays bring all of us some much-needed respite, it's time to face the music and address those lingering problems that have been holding us back.
One such challenge, often overshadowed by more overt issues, is the intricate world of intercompany accounting.
Intercompany transactions are complex and cumbersome. They require keen oversight, precise recording, and meticulous reconciliation. They straddle multiple legal entities and can span across various countries with differing tax regulations and currencies.
This complexity intensifies when considering the broad range of internal policies and the ever-evolving global tax environment.
Intercompany transactions are a persistent drain on resources when the processes involved are inefficient, but they often don't get the attention they require.
Amidst the hustle and bustle of daily operations, they remain on the back burner, only to resurface during month-end reconciliations or year-end audits. And even then, the inclination might be to apply quick fixes rather than focus on a comprehensive, long-term solution.
Intercompany accounting is not often considered a critical activity, but this may be because the processes seem too complex to untangle. It may also be due to an underestimation of the risks involved, or a belief that it doesn’t really impact the bottom line.
Allowing intercompany issues to fester can have far-reaching consequences, and the risk for large, global businesses is greater in some cases – after all, a more complex system with a greater volume of transactions means more opportunity for oversight and errors. It also means inefficiencies drain resources and waste time on a large scale.
If not managed proactively, these issues become a significant bottleneck, impeding the organisation's agility.
According to The Hackett Group, a typical USD 10-billion revenue company that has poorly controlled intercompany accounting processes are missing out on potential annual savings of USD 1-2 million. They also state that companies that have highly automated accounting processes have 75% fewer full-time equivalent staff.
How much could your organisation save and what could you achieve using those funds?
Poorly managed intercompany accounting can lead to financial misstatements, which may tarnish the credibility of a company's financial reporting and undermine stakeholder confidence.
Misstatements can be due to discrepancies in intercompany transactions, incorrect reconciliation procedures, or human errors in manual processes.
When financial data is not consistently accurate across all subsidiaries and entities, it becomes challenging to provide a reliable and comprehensive financial picture of the entire organisation.
Intercompany accounts that aren't settled promptly can lead to a range of treasury problems. Unpredictable cash flows can hinder financial planning and make it difficult for a company to meet its short-term obligations, while delayed settlements increase exposure to foreign exchange rate fluctuations, potentially resulting in significant losses.
Incorrect reconciliation may cause incorrect tax filings, which can lead to financial penalties, interest charges, and even lead to intensive tax audits. Beyond the immediate financial consequences, a reputation for non-compliance can damage a company's standing with regulators and stakeholders.
A key bottleneck is using separate accounting systems that do not connect well with each other. This can have the following consequences:
The use of automation and integrated systems are two important keys to cost savings, and more companies are starting to replace manual processes as they take strides along the path of digitisation.
This was reflected in a survey by Deloitte that researched the use of automation for intercompany accounting specifically. Their maturity analysis of the participating organisations defined four categories of intercompany maturity: developing, defined, advanced, and leading.
67% of leading companies and 43% of advanced companies used automated processing. In addition, none of the leading companies used manual transaction processing with limited counterparty visibility, while only 14% of advanced companies did.
Modern intercompany accounting software such as Virtual Trader drives efficiency by automating the whole lifecycle, from initiation to settlement. Some of the ways it assists are outlined below.
Virtual Trader gives organisations flexibility when it comes to the rules that govern automation. As such, the solution can be configured in line with each company’s unique needs. Should legislation change, reconfiguration is easy – no coding required.
Here is a snapshot of the ways in which it automates intercompany processes:
The Intercompany Reconciliation module identifies all unreconciled intercompany relationships and the items causing the imbalance within the transactional activity. As a result, staff spend less time resolving things, and the closure of accounting periods are less likely to be delayed. The module also carries out pre-reconciliation, through transaction-matches and auto-reconciles.
Another advantage of Virtual Trader is that it’s designed to function in multi-ERP system environments. Many providers offer solutions that assume organisations are using the same ERP across the board, but we understand the reality of the situation. This means our software works at the transaction level, which enables the quick identification of unreconciled items.
Our solution automates high volume settlement. It centralises intercompany activity through an intercompany subledger, providing a single source of truth about intercompany activity, no matter which ERP systems are in use.
The settlement process is automated through automatic journal entry creation, and entries are interfaced to the corporate GL. Companies can then settle invoices that are balanced and reconciled.
In addition, the software integrates with treasury management systems, improving efficiency when it comes to handling cash and non-cash settlements, journal postings, and currency FX.
Virtual trader produces invoicing for all intercompany activity and can be configured in line with varying needs such as including indirect tax details, gapless invoice number sequencing, and AP voucher numbering. All invoices are recorded in subledgers.
Performing transfer pricing agreements and calculations offline – and without standardisation – is risky these days due to increased scrutiny by authorities. Again, the centralised nature of our solutions means that all activity, including transfer pricing, is easily accessible.
Our software also provides supporting evidence for general ledger entries, attributes invoices to intercompany cash settlements, and supports SOX compliance with segregation of duties
Legacy systems come with many inefficiencies, which cloud based software overcomes in the ways listed below:
The cost of inefficient intercompany accounting is high – not just in financial terms, but the risk of tax penalties and compliance issues is always lurking around the corner. Automated, integrated solutions save the day, eliminating the need for manual reconciliation and other cumbersome tasks, while providing new levels of transparency.
Virtual Trader is a global leader in automating intercompany functionality in ERP and financial accounting processes. Our software helps the world’s largest companies solve everything from supply chain and inventory accounting through to royalties, share options and much, much more.
To discover how we can help you overcome your most pressing intercompany issues, request a demo today.