Intercompany accounting involves recording and reconciling internal transactions between entities under the same corporate umbrella. For large, global enterprises, properly tracking transfers of assets and balancing owed amounts across a web of interrelated subsidiaries is crucial yet prone to complexity. Fortunately, purpose-built software can automate the intricacies out of intercompany workflows – accelerating closes, reducing risk, and enabling finance teams to focus on high-value activities.
The Growing Intercompany Accounting Burden
Intercompany transactions represent the transfer of assets or services between business units under common ownership. For example, a manufacturing subsidiary ships goods to a distribution subsidiary to sell in another geography. Or a parent entity invoices business units for allocated overhead. On the surface, such exchanges seem straightforward. However, their nature and volume introduce immense challenges.
According to leading research and advisory firm Gartner, over 85% of large multinational corporations face increasing volumes of intercompany transactions alongside complexity from growing numbers of international subsidiaries and joint ventures. Further analysis reveals:
- Global 2000 enterprises average 9500 intercompany transactions per month – a figure growing 11% annually
- 72% of organizations have seen audit issues due to intercompany transaction gaps
- Intercompany exchange now represents on average 15% of total transaction volume
- Industry sectors like banking, insurance, healthcare, and technology top the complexity scale with over 50 thousand monthly intercompany entries
Forrester meanwhile anticipates upwards of 50% annual growth in intercompany transactions over the next five years driven by expansion into new markets. And a MorganFranklin benchmark study found that nearly half of companies continue reconciling intercompany transactions manually despite swelling transaction counts.
This growing density of inter-affiliate exchanges threatens to mire business units and corporate accounting teams alike in tedious and error-prone manual reconciliation efforts. Increasing regulatory pressures around documenting and controlling intermediary flows add further urgency for larger enterprises to pursue intercompany automation.
Pain Points with Manual Intercompany Accounting
Common pain points global Controller‘s face trying to wrangle intercompany transactions through spreadsheets, documents, and excessive email correspondence include:
Visibility Gaps – Consolidating intercompany entries from multiple global ERPs and subledgers concentrated across locations is virtually impossible. Identifying transactions even pertaining to intercompany trade amongst indirect subsidiaries requires substantial legwork cross-referencing systems.
Reconciliation Headaches – Pairing offsets between widespread internal trading partners is time-intensive, as are resolving discrepancies when balances don’t match up. The intricacy multiples across geographical distances, indirect hierarchical relationships, fluctuating currency conversions, and inconsistently applied business rules.
Close Delays – With 30% of finance capacity focused on intercompany during close, late or erroneous eliminations risk blowing out external reporting deadlines. Period bottlenecks directly undermine strategic decision making.
Audit Flags – Under-documentation around intercompany rationalization raises frequent concerns for internal and external auditors. Questions around the validity of consolidated reporting also erode investor confidence and increase scrutiny around controls.
Wasted Resources – Beyond direct finance costs tallying as much as $8 million annually for average Global 2000 companies, intercompany accounting complexity drags down business operations with costly working capital inefficiencies estimated at 3-5% of revenues.
The Benefits of Automated Intercompany Accounting
Transitioning from predominantly manual intercompany management to automated software solutions alleviates the above challenges according to surveyed adopters:
1. Faster Period-End Close
Automating transaction extraction, pairing, reconciliation, and elimination journal creation provides Controller‘s confidence around balanced reporting books well in advance of deadlines. IDC research finds an average of 1.3 days per close recouped from intercompany automation. Streamlined financial reporting translates into quicker operational decisions ultimately impacting the bottom line.
2. Reduced Risk and Errors
Automated matching and reconciliation based on globally deployed business rules significantly minimizes manual data manipulation errors that easily recur within spreadsheets. Automation further reduces likelihood that faulty or deliberately misstated transfers post across enterprise financials by flagging exceptions for transparent review. Together this guarantees greater confidence around accuracy of consolidated reporting – both internally and externally.
3. Unified Visibility
Modern intercompany automation hubs offer unified views into all intercompany transactions, positional balances, and granular supporting transactional details – covering direct and indirect tiered trading relationships worldwide. Drill-down dashboards arm corporate accounting and business units alike with needed transparency to balance books and facilitate executive decisions free of any question.
4. Proactive Reconciliation
Continuous transaction aggregation, automated pairing of debits and credits, and net balance calculations mean finance staff spends less time on repetitive reconciliation procedures and more on value-adding oversight and control. Configurable workflows further enable frictionless self-resolution of common disputes directly between business units with automatic system updates.
5. Streamlined Audits
With the full corpus of intercompany activity stored within a singular, digital system of record accessible to appropriate parties, internal and external auditors gain efficient access to trails detailing transaction flows, reconciliations, adjustments, and reporting. Documentation accommodates regulatory compliance efforts while grant funders also gain oversight into usage of directed project investments as needed.
6. Unlocked Working Capital
Combined efficiencies around identifying and resolving intercompany imbalances delivers over $25 million in cash flow improvements for average international companies according to Hackett Group estimates. Freed working capital unlocks funding for growth initiatives while minimizing unnecessary borrowing expenses.
Key Capabilities of Intercompany Accounting Automation Software
Specialist intercompany automation solutions equip global accounting teams to stay on top of swelling transaction volumes across seas of international affiliates and reporting entities by automatically:
Extracting & Centralizing Data – Flexible web scrapers, connectors, APIs, and batch uploading aggregate intercompany entries from hundreds of downstream systems into a unified data lake. Always-on ETL processes synchronize source data to provide real-time financial position awareness.
Identifying Intercompany Transactions – Advanced machine learning algorithms trained on transaction data sets as well as dictionaries of business vernacular around internal dealings reliably flag intercompany exchanges for tracking and balancing. Natural language processing further detects obscure intercompany trades described in invoices, contracts, or emails.
Matching Debit with Credit – Once tagged, automation continuously pairs reciprocal postings using fluid, centrally managed account pairing rules, counterparty relationships, and exchange rates for reliable, hands-off reconciliation. Only truly questionable items enter workflows.
Enabling Reconciliation – Real-time dashboards with interactive visualizations afford complete visibility into individual transaction statuses, exposures, and net intercompany positions down to line-item details. Opinionated workflow automation guides intercompany dispute investigation, settlement, and résistance adjudication per established policies.
Eliminating Entries – Confirmed reciprocal transaction sets automatically generate elimination journals once properly approved. Ledger scrubs ensure rounding errors and other negligible discrepancies post out to zero-sum ahead of external reporting deadlines rather than dragging late into close processes.
Delivering Audit Trails – Modern platforms offer API access and data virtualization capabilities allowing auditors to extract slices of intercompany data sets matching criteria. Complete system logs detail each transaction undergone within the system facilitating internal control testing procedures.
Integrating Systems – Bi-directional ERP integration continuously synchronizes downstream systems with the centralized intercompany ledger view. Further connectors make data from AP, AR, TMS, and even bank portals available for holistic reconciliation. Strict access controls enable appropriate separation of duties.
Intercompany Finance Management Market Outlook
As multinationals continue expanding in size, scope, geography, and business model intricacy – intermediary exchanges of cash, inventory, IP, and services between affiliates will only increase in complexity. Stakeholders now expect near real-time transparency and control over such internal dealings as enablers of responsive, data-driven decisions.
MarketsandMarkets anticipates the global intercompany financial management solutions market reaching $1.6 billion in size by 2027 – reflecting an explosive 22.3% CAGR from 2022 onward. Driving this growth include shifts towards centralized governance, process automation, and standardization across conglomerates alongside interlinking supply chains. Regional expansion in high growth markets across Asia and South America further pushes intercompany transaction volumes higher.
On the technology front, Blockchain shows early potential for revolutionizing intercompany value transfers through integrated smart contract capabilities and cryptographic transparency overlays. While 5G networks and associated edge computing will enable real-time analytics into granular cash positioning.
Intercompany Accounting Automation in Action
Global bank Santander implemented specialized reconciliation software to get ahold of their unwieldy intercompany accounting. Automating data consolidation, transaction pairing, net balance calculations, and eliminations compressed their quarterly close from 15 painful days down to 5. The CFO estimates risk reduction benefits around accuracy and regulatory controls to approach $18 million annually.
Industrial manufacturer Illinois Tool Works (ITW) saw solutions resolve their close headaches stemming from over 5,000 monthly intercompany transactions spanning 82 operating entities. Centralized data with configurable business rules now facilitates automated account reconciliation in under 5 days – freeing teams to pursue process improvements while optimizing working capital efficiency.
Healthcare analytics provider Health Catalyst achieved a 50% reduction in staff time spent on intercompany reconciliations after implementing purpose-built automation. Their CEO credits optimized intercompany management and unlocked working capital with funding their continued high growth trajectory.
Best Practices for Intercompany Automation Success
According to leading finance executives overseeing transformational intercompany accounting automation initiatives:
- Secure executive buy-in early in the process to ensure enterprise-wide participation and sustain accountability
- Incentivize usage by directly involving business units in designing rule policies ensuring automation fits their requirements
- Clean historical balances between trading partners alongside validating data quality upfront to enable automation
- Plan gradual phase-in focusing first on high transaction domains before expanding tools wider to smooth change management
- Monitor reconciliations early on to quickly resolve gaps before automated routines become ingrained
- Integrate with core systems in the background for sustainable accuracy as operations evolve
Properly defining needs, aligning stakeholders, maintaining governance, and encouraging adoption sustains the dramatic productivity, control, and financial analysis improvements unlocked by intercompany automation over the long-term.
Gearing Up For Intercompany Finance Automation
As intercompany transactions, complexity, and associated risks continue swelling globally across industries, purpose-built automation now empowers enterprises to regain control. Eliminating tedious and error-prone manual processes around transaction identification, reconciliation, and elimination accelerates period-end closes while reducing compliance risks. Further gains around transparency, working capital efficiencies, and optimized decision making cement these solutions as a must have.
Industry leaders emphasize taking an enterprise perspective linking business units and corporate accounting to re-engineer intercompany management as a unified ecosystem. Methodically leveraging the latest automation and analytics capabilities then provides the digitally transformed environment needed for intercompany excellence regardless of future global growth and complexity trajectories. There has never been a better time to assess solutions.
