By Shak Akhtar, SVP Finance Automation/Customer Experience Officer, Redwood Software
You’d think that the huge investments your organization has made in its finance and ERP systems would free you up from all sorts of drudgery and save massive amounts of time. In fact, back end accounting processes still require enormous manual effort and intercompany is no exception. Finance teams must plough through the vast quantities of transactions between subsidiaries and parent organizations that have taken place during the period, all of which need to be reconciled, adjusted and recorded.
For example, one of our clients had a team of 120 staff dedicated to reconciling and resolving intercompany balances at period end. And that’s not atypical. You can see why they are more than simply a necessary evil. Manual intercompany reconciliations are the bane of the CFOs life, bearing in mind they invariably are a time-consuming administrative function but a prerequisite for the completeness and accuracy of financial records and to the books balancing at group level.
Against a backdrop of pressure for organizations to close the books in as short a timeframe as possible, 40% of senior finance professionals say difficulties in reconciliations and intercompany agreement is the one factor that delays the reporting process the most, according to FSN Research and its Future of Financial Reporting report.
At their most basic, intercompany transactions require both the ‘sending’ and ‘receiving’ companies to record accounting entries to reflect the cross-charging of costs, the transfer of revenues, assets and liabilities or apportionment of head office expenses. It only takes the receiving company to miss a transaction for it to become a problem at month-end.
Missing intercompany entries and errors results in reconciliation differences, which must first be identified and then adjusted for by finance to ensure intercompany balances agree between companies at period-end. This invariably happens at the end of the month when finance is flat out and can ill afford to spend time correcting these numbers.
What’s also true is that the global proliferation of accounting and tax regulations, which can cause intercompany transaction volumes to significantly increase, together with a rise in enforcement exposes companies to greater risk if they fail to effectively govern their intercompany activity. In short, the challenges of performing effective and efficient intercompany accounting can be substantial, and when companies use band-aid tactics to address the problem, they only postpone the inevitable – and the mess keeps growing.
Prevention, as they say, is always better than cure. The solution is to automate reconciliation of intercompany transactions and make automated adjustments for missing or erroneous entries. With Redwood finance automation you can also automate the more complex financial adjustments, such as the identification and elimination of intercompany profit from transactions, which can remove hundreds of hours of manual effort from the process. In fact, we estimate that use of Redwood software offers the potential to automate 70% of intercompany reconciliations.
Even better is to automate the intercompany transactions during the period, applying appropriate rules, approvals and controls to ensure compliance with corporate policies and procedures. Being alerted to intercompany mismatches early on in the reporting cycle allows individual companies to take remedial action and correct their positions well before period-end
Not only does this eliminate potentially thousands of hours of manual effort and the risk of missing or erroneous entries, it provides a comprehensive audit trail of all automated intercompany transaction and reconciliation activity. Let the automation do the heavy lifting and make your period-end intercompany reconciliation a non-event.
Find out how to automate your intercompany and eliminate manual effort and errors with Redwood Finance Automation