FinTechSystemsChallenges and Best Practice in Inter-company Transaction Management

Challenges and Best Practice in Inter-company Transaction Management

Corporate treasurers in large multinational organisations increasingly face challenges related to large volumes of inter-company transactions, accounts and business units trading in different currencies. This global inter-company ‘profile’ is now becoming a core business issue that creates an array of challenges including cash positioning, funding, risk management and time-to-close books. Many large multinationals have tried to address the issue by deploying ERP systems for core functions such as general ledger, payables, and receivables but these do not typically have the highly specialised capabilities needed for truly successful inter-company transaction management and reconciliation. Therefore, many corporate treasurers in multinational organisations still grapple with the complexities of inter-company best practices with varying degrees of success.

There is, however, a market that has been dealing with large volumes, complex transactions, multiple sites and intricate compliance requirements for many years – financial services. The global inter-company profile is well understood among these firms and it can even be considered a mature market as they have long had reconciliation systems in their back offices. So it is perhaps time for corporates to borrow best practices from this sector and consider what these solutions traditionally designed for the financial services sector can deliver above and beyond what ERP systems have already brought.

The Inter-company Profile

At the core of inter-company trading and reconciliation challenges lies the global inter-company profile that consists of entities that are geographically dispersed, containing dozens or hundreds of business units trading services and materials with various inter-company counterparties, as well as centralised services at head office or within a shared service environment.

With disparate business entities located across the globe, all trading independently with each other as well as with a centralised function, complex transactional flows of information are created. This creates a set of inter-company transactions which require effective transaction control, reconciliation and exception management if operational risk is to be mitigated and accurate financial reporting achieved.

As an example, raw materials need to be provided to all subsidiaries in order to manage their respective businesses and as a result there is an associated transaction that occurs – namely that subsidiary A, B, or C must buy raw material from central headquarters and central headquarters must supply and invoice the cost back to the subsidiary.

This inter-company transaction requires reconciliation and the timely management of any exceptions to ensure that both parties (subsidiary A and HQ) agree to the value of the invoice and that it is paid accordingly. By ensuring that all transactions are reconciled correctly, organisations can report on the status of their cash flow more efficiently and transparently.

Peripheral Effects of Inter-company Transaction Management

The peripheral effects of inter-company transaction management in the corporate treasury function need to be carefully considered prior to starting any project aimed at improving processes or implementing best practice. Areas of particular consideration would be:

Cash positioning: When inter-company balances, positions and exceptions are not clearly understood the downstream effect will be imprecision in cash positioning, funding, and borrowing. Visibility and transparency are keys to adequately determining true positions and improving working capital management.

Period-end close: Organisations are in constant pursuit of ways to streamline the process of financial reporting and improve its time-to-close books. Because of its inherent complexity, inter-company transaction management can be a primary target for improvement.

Compliance best practices: Compliance guidelines, e.g. Sarbanes-Oxley (SOX) clearly indicate that processes must be in place to address inter-company reconciliation and transaction management in order to demonstrate effective internal controls. The absence of such controls can be flagged as a ‘material weakness’ in internal/external audit with serious repercussions for publicly traded companies.

Operational efficiency: Inter-company reconciliation and transaction management has traditionally been manually intensive and inefficient. Resource productivity and cost reductions can and should be within the scope of any improvement project.

Centre-of-excellence: As finance and treasury functions move to centralised shared services operational models there will be a focus on ensuring that all facets of inter-company transaction reconciliation can be managed accordingly.

Operational risk management: Exceptions that occur in inter-company transactions and accounts but are not discovered and resolved in a timely manner represent one facet of operational risk. Timely awareness and resolution of these anomalies, which in some cases may be an indicator of fraud, is an aspect of best practice in operational risk management.

Standardised process: When multinational organisations have dozens or hundreds of localised operating units there will inevitably be variations of business process. However, for inter-company trading and reconciliation a standard process template can be deployed that helps reduce or minimise inefficiencies due to process irregularities.

Large multinational organisations that operate pan-regional treasury functions will likely have a myriad of choices when considering solutions and systems to address inter-company transaction management. Typically, these organisations will review their current ERP deployments for ‘fit-for-purpose’. Alternatively, best-of-breed solutions that are designed specifically to address the complexities of inter-company transaction management may also be considered.

In fact, large corporates are, in some cases, adopting the capabilities and best practices deployed within the financial services industry for complex transaction management and reconciliation. For example, financial services organisations such as banks and asset managers have relatively mature processes and tools for handling complex cash and securities reconciliation. Such organisations are finding that transactions are becoming increasingly complex and risk sensitive due to organic growth in trading volume and the intricacy of exotic instrument types such as derivatives. Therefore, the systems, tools and methods traditionally deployed within the financial services industry have, by these facts, had to become sophisticated and, as such, are now being examined and implemented by corporate treasurers who face similar complexities related to inter-company transaction management.

In Search of Solutions

As corporate treasurers team up with their IT partners to consider software solutions aimed at improving inter-company transaction management, they will need to evaluate enterprise system characteristics such as:

  • System scalability to handle global multinational transaction volumes and variable growth rates driven by organic growth and by M&A activity.
  • Flexible ‘rules-based’ matching logic which can match inter-company transactions containing standard and non-standard data.
  • Ability to allocate reconciliation users by account, department, business unit, transaction type or other variables.
  • Sophisticated user interface with ability to add, change, and sort data as well as add comments and notes with full audit trail.
  • Segregation of duties to allow for division of labour and adequate security control.
  • Single-sign-on (SSO) and LDAP to integrate with existing enterprise security structures and systems.
  • Business process modeling and workflow capabilities to efficiently route and allocate tasks and events while enabling rules-based escalation based on time, value, or other criteria.
  • Dashboard capabilities to provide transparency, visibility and alerting capability to various levels of the organisation including operations and management.
  • Thin-client browser-based architecture to ensure easy deployment on a global basis.
  • Multi-currency, multilingual, multi-time-zone capability to ensure successful pan-regional deployment.
  • Account certification capability to ensure appropriate review, approval, and sign-off of reconciliation balances and exceptions at the end of an accounting period to satisfy compliance requirements such as SOX.

Conclusion

The inherent complexity, cost, and risk related to inter-company transaction management coupled with increasingly stringent compliance requirements creates a unique challenge for today’s corporate treasury and finance professionals. However, by learning from an industry that has already sought out effective methods and processes that can be adapted to address even the most complex multinational inter-company operation, corporate treasurers can tackle the issue head on. Corporate treasurers will need to increasingly leverage sophisticated enterprise systems, some of which are specifically tailored to address the needs of inter-company transaction management, to help improve operational efficiency, mitigate risk, and support compliance initiatives. Ultimately, ROI for inter-company transaction management projects will be supported best by incorporating an array of benefits related to improved productivity, risk management, cash positioning, accelerated time-to-close, as well as compliance.

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