Holistic Data Solutions Blog Reconciliacion Intercompanies

Intercompany reconciliation: 4 strategies to overcome your difficulties and reach closure on time

Intercompany accounting is a very important and necessary part of business expansion, but at the same time it is a big challenge for financial teams. That is why more and more companies are looking for solutions that simplify tasks such as intercompany account reconciliation and thus improve efficiency in their financial management.

In this article we talk about precisely this: which are the main problems in intercompany reconciliation processes that prevent reaching the closing on time and how to overcome them.

What is intercompany reconciliation.

Intercompany reconciliation is the verification of operations and transactions between related companies, that is, companies that belong to the same parent company. This concept includes divisions, subsidiaries, franchises or units that are independent companies but owned by the same organization. 

From the financial point of view of the parent organization, business operations between subsidiaries, i.e., their profits or losses, should not be reflected in the consolidation of the financial statements, since they are not really profits generated by external customers. 

These intercompany transactions may include the purchase and sale of products and services, loans, commissions or royalties, dividends, shared invoicing, etc.

The same applies to purely financial transactions, which affect the assets or liabilities of the subsidiaries (or the parent company), such as intercompany loans, assignment of assets or licenses or, of course, the investment in the parent company’s own shares of each subsidiary. 

In an increasingly globalized economy, intercompany accounting is becoming more and more common, and the lack of means and precision in its management can lead to errors and therefore to delays and problems in the closings.

Main challenges of intercompany reconciliation.

A common problem in intercompany financials is that different companies manage their financials differently.

It is common that companies do not have the same IT system (different ERP software or financial software, for example) or even that some of them do not use these software and manage their finances using Excel sheets.

Even if they use the same system, companies may have separate accounting structures, which poses a problem in the identification and therefore the processing of these types of transactions.

All this leads to financial data full of inconsistencies, which means that manual intervention will be necessary to unify the accounts. This will require a great deal of time from the finance team, at best. At worst: stress, burnout and delays that can even lead to legal problems for the company.

In addition, intercompany reconciliation is a very complex task that will require the attention of experienced members of the finance team, which causes the cost in resources to skyrocket.

There are other factors that can also create problems when it comes to reconciliation. For example, there are organizations that centralize these tasks in the parent organization, which can make it difficult for the other subsidiaries.There may also be language, cultural, timing and financial barriers (such as currency changes) that only add to the complexity of the process.

How to overcome the difficulties of intercompany reconciliation.

To prevent intercompany reconciliation from becoming a nightmare, it is necessary to optimize different areas within the company, from tools to processes and even information itself, as we explain below.

Identify and treat financial information in a common way.

As we have seen, companies may have different accounting software or structures, which implies categorizing and labeling transactions in different ways. 

This generates a discrepancy in the data that requires a great deal of time for the financial teams to resolve and is also the source of a multitude of errors.

Using a common financial policy eliminates this need to review and adapt all transactions. Using the right software allows you to include matching rules to automate this task, so that finance teams only have to deal with those cases where there is a problem, not every single account.

Establish standard procedures between companies.

Common data identification is only the first step in establishing standard procedures for all companies in the group.

Having common data and procedures makes it possible to automate many of the tedious and monotonous tasks that consume the time of finance teams. This also has another consequence: a significant reduction in errors arising from manual data processing.

An example of an application of this idea would be to define a process for the identification of intercompany transactions, so that the same range of accounting accounts is always used, or an additional field is used to identify the company against which the transaction is being made (by means of a unique company code).

Clear and defined procedures allow controls and approvals to be established where necessary, define ways to manage and resolve any discrepancies, etc. All this facilitates communication between companies, eliminating the chaos of emails and calls that would normally be necessary to find answers to data discrepancies.

Data homogenization and integration.

One of the main problems in intercompany reconciliation arises when the IT systems of each one generate non-compatible data. This implies that the data of each subsidiary must be reviewed and adapted in order to be integrated into the systems of the parent company.

Using financial software that is capable of integrating data from all these ERPs without the need for pre-processing makes the reconciliation process much more efficient, secure, generates fewer errors and offers more transparency to all organizations.

Automate the reconciliation process.

Manually processing hundreds of spreadsheets is tedious, inefficient, wastes a significant amount of resources and does not guarantee 100% reliable data.

Financial software that has intercompany processing capabilities allows many parts of the process to be performed automatically, whether it is identifying transactions by code or by intercompany accounting account, searching for equivalent and cross-company amounts, or displaying alerts when intercompany balances are not squared, among other examples. 

All of this helps finance teams only have to act on exceptions and un-squared transactions, while the software reconciles everything else.

Optimize your processes with financial software tailored to your needs.

Intercompany reconciliation is one of the processes that requires the most resources (time, money and energy) for many companies. As we have seen, there are solutions that allow you to alleviate this so that all that effort can be directed to tasks that generate a greater benefit to the organization.

If you are interested in learning about a solution of this type to improve your operational efficiency in both intercompany reconciliation and other key financial processes, do not hesitate to contact us.

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