If you run a finance department within a multinational or corporate group, it’s possible overdue and unsettled intercompany balances are the bane of your existence. Or, at the very least, a significant headache when each reporting period rolls around.
Businesses in acquisition mode may also be familiar with the challenges that overdue intercompany balances pose, as they strive to ensure multiple entities are operating in unison and not hampering one another’s growth prospects.
Yes, intercompany debt is “all in the family”, which means the risk posed by an ageing invoice is rather less than it would be if an external customer were involved. But that doesn’t nullify the risk or that debt’s potential for deleterious impact.
On the contrary, an open balance that remains open beyond the appropriate term represents a potential write-off, regardless of whether the debtor is a third party or a related entity.
If the sum is significant, that may have a material effect on the bottom line of the company that’s been kept waiting for its money.
Its balance sheet may need to be revised to reflect that write-off along with other transactions that are not aligned or couldn’t be substantiated.
And then there’s the issue of tax position. If the books fail to accurately reflect the charges incurred and revenue collected, the company may end up paying more to the ATO than it needs to.
Cash flow could also pose a problem if supplying your internal customers has required a significant amount of working capital. Being kept waiting for payment may force an entity to go to market for additional cash to support its operations.
One organisation, many tools
The absence of a coherent technology policy can contribute to intercompany accounting challenges. It’s not uncommon to see the various entities within an organisation using a disparate array of finance and accounting systems, of various vintages.
Very often, these systems are incompatible with one another. They don’t provide up-to-date visibility into each entity’s financial position or enable the free flow of data between them.
Unless the parent organisation is in a position to replace them with a single continuous accounting software package that automates repetitive processes, eliminates end-of-the-month bottlenecks and provides a detailed, accurate picture of where each entity is, finance departments need to soldier on with what they have and seek out ways to ameliorate the challenges.
Solving problems with standardisation
Adopting a standardised process underpinned by automated intercompany financial management software is one way.
Choose one that can span an ecosystem comprising multiple invoicing, treasury and ERP systems and you’ll be able to ensure intercompany transactions are posted promptly and accurately.
You’ll also be able to create a visibility layer that enables oversight of each ERP system and have the use of a centralised tool that allows those systems to communicate electronically.
Having individual charges and balances fully aligned and visible means intercompany balances can be settled in a streamlined manner. And because the process is automated, that can occur as often as daily, rather than weekly or monthly as was the case in the past.
Prompt payments spur profitability and growth
Regardless of whether customers are internal or external, finance professionals don’t need to be convinced of the benefits that avoiding overdue balances can deliver. Being able to reduce payment terms and settle accounts faster means improved cash flow and that means a greater ability to capitalise on emerging opportunities and expand operations.
If those things are important to your organisation, automated intercompany financial management software is an investment in future profitability and prosperity that’s likely to pay substantial dividends.
Claudia Pirko is regional vice-president, Asia Pacific, at BlackLine.