Intercompany accounting, like certain forms of government, is a good idea in theory but doesn’t always work out so well in practice.
It’s an important enough of a topic to address when discussing policies and procedures for a company, and regulators also are available to make sure that everyone follows the rules. (Available sometimes meaning ‘prepared to levy fines and penalties.’)
But as important as intercompany accounting is, it’s not often given a high priority. In many organizations, it’s considered a necessary evil that no one wants to touch, or at least a convoluted, time-consuming task that takes resources away from other interesting and potentially useful tasks.
For those less familiar with this, intercompany accounting is a process where one or more companies try their hardest to resolve financials from sources outside their organization.
Examples of Intercompany Accounting
One common example is trying to incorporate the accounting records from a new division that was previously a separate, perhaps competitive company but was absorbed in a recent merger or acquisition. It could be a friendly partner where products or services of equivalent value move back and forth to the benefit of both companies.
It could be required as part of a legal settlement. Although the public may only hear about a lump sum as a result of a legal resolution, the right amount of money still has to be moved from one place to another and make it into the appropriate ledgers.
Perhaps it’s a partnership with a foreign company, or even financial activity in different countries for a multi-national company. This could require more attention to different currency rates and tax rates.
Even a company with a central office and branch offices could still face challenges trying to make sure the right data gets to the right place.
There are also more challenges involved in taking care of intercompany accounting besides “no one really wants to do it” and “that’s sure a lot of paperwork.”
Challenges Revolving Around Intercompany Accounting
A common problem is disparate software: different companies may have used different programs to keep track of their details, and they don’t necessarily sync with each other.
This is more than an Office/cheaper Office knock-off conflict. Different companies, especially former competitors, may have used different hardware and software, as well as their own additions such add-ons or customized code.
When a new company tries to incorporate the new info they may not be familiar with how to access the data, or the systems simply aren’t easily compatible. The new system may not have been designed for multiple entities.
Other challenges can come in the form of fluctuating foreign taxation or currency rates.
In some cases, some of the challenges may be people-related. Employees may rely on oral agreements or paper receipts, especially if this is how they were trained. They may need to be repeatedly reminded to forward emails, invoices or other documents.
All of these variables mean that there could be, at best, incomplete data, and at worst, incorrect data. With the possibility of disparate software as well as poor procedures, It’s not hard for errors to start creeping in, which could impact a company’s overall financial data.
On a regulator side, while perhaps there could be “friendly warnings” if a company is dealing with a situation like this for the first time, there’s likely to be more enforcement if accounting problems become routine or provide the appearance of deliberately being performed poorly.
Improving Intercompany Accounting Outcomes
MIBAR, a leading NetSuite partner, can help businesses automate their accounting efforts to make the intercompany process easier to handle.
A big part of this solution starts with creating processes that can be automated for those within the organization and for any partner organizations.
This can require training for all employees in how to handle receipts and invoices on a company-wide level. It also could require more advanced training for those who work in finance or accounting. Representatives from different affected groups (including accounting, controllers and IT) can also be encouraged to have regular check-ins, especially when new additions come in such as new companies or partners. Establishing regular communication and problem-solving opportunities can lead to more consistent results than everyone scrambling before or during an audit.
Next should come efforts to automate these processes. This moves the unknown factors of manual entry or incompatible systems into a system-wide standard. NetSuite, when deployed through an ERP system, can put every user on the same page.
Here are three steps you should use to tame intercompany accounting:
1. Establish Standards, Policies, and Procedures
Creating a central source for all accounting efforts, if this isn’t already established, can go a long way. It will eliminate any questions about who’s telling who to do what and create one repository for all accounting info to go.
2. Automate Processes
The NetSuite Multi-Books module also can provide assistance with these reporting tasks, especially when international factors come into play, especially different reporting requirements in different companies. It may be beneficial to create one set of books for each country as well as master version for U.S. regulators.
Finally, a simple but effective way to make sure intercompany accounting is performed correctly is to designate an individual or even a team to this role. This makes the task a year-round constant duty rather than something that’s easy to give lower priority to.
NetSuite Intercompany Accounting, Configured by MIBAR
NetSuite automates intercompany accounting, making reconciliation and elimination of intercompany transactions more efficient and reducing the risk of errors. Sales orders and purchase requisitions can be tagged as intercompany transactions when created, linking them together for easy tracking. When the order is invoiced, the system identifies transaction lines that need to be eliminated and automatically posts the appropriate elimination journal entries.
NetSuite also improves financial controls and reduces the manual effort required to settle intercompany accounts. Accounts payable/accounts receivable netting allows accounting managers to combine mutual subsidiary balances and then automatically create settlements for select transactions.
Watch our NetSuite Advanced Intercompany Journal Entries demo below:
As a leading NetSuite partner in New York and NetSuite optimization experts, we can help you get your intercompany accounting under control. Our team at MIBAR is ready to answer your questions and get your new financial management system implemented so you can see how easy things really are when you have the right tools in place. Touch base with us today, and let us show you how we can help your organization perform better!