Optimizing Intercompany Settlements: Not Your Typical Arm’s-Length Transactions

You’d think that a multinational corporation could adeptly gain control over its settlements. After all, it’s essentially doing business with itself. But with fluctuating exchange rates, an uncertain regulatory environment, and the fact that many multinationals are trying to get by with outdated, manual processes and disparate ERPs, intercompany settlements come with a host of challenges.

Add to that the fact that settling is, as many finance teams call it, the “last mile” of intercompany processing. Since it occurs at the end of the lifecycle, it tends to be given little attention. Organizations spend time and resources trying to improve upstream processes and consider settling an afterthought. Sometimes, no settling is performed at all.

So how can multinationals gain that critical control over settlements and approach them in a strategically advantageous way? It starts by shifting their thinking around settling—and the entire intercompany ecosystem.

Here’s the thinking that many multinationals go through regarding settlement. Suppose Entity A owes money to Entity B. When it’s settlement time, the pressure is on to close quickly, so it’s tempting to ignore settling and just report that the money is sitting in two different buckets. Or an organization might settle using the same system it employs for arm’s-length transactions. Given that it’s all happening under the same intercompany umbrella, no harm, no foul, right?

Actually, there is a danger in not settling or performing settlements haphazardly because different entities often need to comply with a myriad of tax rules that vary depending on where they’re located. Multinationals incur risk if they apply the wrong transfer price. They can fail to comply with tax regulations or suffer tax leakage. Therefore, balancing to zero becomes a serious issue that can’t be ignored.

Finance teams must come to grips with the fact that intercompany settling is a very different animal than settling with third parties. Intercompany is extremely complex and requires a much more sophisticated translation-tracking system than an organization would need if it were doing business in an arm’s-length situation.

Consider this third-party scenario: Company A sells to Company B. Company A will send an invoice to Company B and then make sure that the payment received matches that invoice. Company A is fixated on only one thing: getting paid. It doesn’t care how or if Company B accounts for the transaction. Company A would be fine if Company B were tracking payments on notecards as long as the invoice gets paid.

With intercompany, however, settling must be managed in a completely different way. All entities must adopt certain Intercompany Financial Management (IFM) best practices, which is grounded in three key strategies:

• Both sides—the buyer and seller—need to know what is happening on the other side of the fence and be able to verify the accuracy of settlements on a granular level.

• Multinationals must not wait for the “last mile” to address imbalances but rather focus on catching errors as far upstream as possible.

• Enterprises must adopt best-of-breed solutions that automate processes and enable end-to-end visibility across a Global Intercompany Subledger.

Once an organization has reconfigured its strategies and adopted IFM best practices, settling no longer becomes an excruciating pain point. Instead, those processes are managed seamlessly with few issues, allowing accounting teams to spend time on more meaningful, strategic tasks.

When you break down the settlement process, you can see that it involves a series of steps. That’s why BlackLine has developed a comprehensive solution called Intercompany Net & Settle that addresses settlement tasks that work within a Global Intercompany Subledger. This graph shows the various processes that make up Intercompany Net & Settle:

BlackLine’s solution optimizes settlement processes because the rules are already baked in. Unlike an arm’s-length scenario, it offers invoice-to-payment visibility so that all functions can observe the netting and settling and feel confident that the data is accurate. Intercompany Net & Settle keeps up with evolving tax regulations because it’s powered by a team of global tax-regulation experts. What’s more, the solution—along with other BlackLine intercompany solutions—is designed to catch issues as far upstream as when invoices are created.

By instituting IFM, multinationals can gain control over how they settle and process transactions throughout the intercompany ecosystem. The fact that multinational corporations are trading with themselves requires that they manage systems differently than they would third-party transactions, but it also provides an invaluable opportunity to optimize data processing and reporting so that organizations maximize liquidity, minimize the tax burden, and exploit currency movements to their advantage—from the creation of invoices down to the last mile.

Ready to learn more? Watch this on-demand webinar to:

• Identify top issues finance and accounting stakeholders face with managing intercompany accounting.

• Recognize the impacts of these issues on teams and business outcomes.

• Describe the benefits of technology innovation.