Netting: navigate technical hurdles and requirements
In an increasingly global business world, intercompany trade has become just as much many company’s bread and butter as external trade. From the outside, this may appear pretty straightforward: after all, the money stays in-house. However, taking a closer look at the transaction costs associated with intercompany trade as well as possible foreign currency losses, it becomes painfully apparent that the process causes significant monetary and operational issues. Additionally, the exchange rate risk and the complexity of groupwide liquidity planning throws even more wrenches into the plan. Netting becomes the clear candidate to solve those issues but there are netting requirements and hurdles involved before proceeding.
In our recent posts “What is Multilateral Netting” and “Regulatory Issues in Netting,” we have seen how netting can help tackle these challenges. But while we’ve looked at the advantages this process brings to companies in terms of a more structured and more comprehensive workflow, the technology behind it still remains a mystery to many. How do I net and which tools do I use? What technical hurdles do I face and can my company handle them?
Is netting for you?
The most basic netting requirement appears almost trivial: data needs to be offset, i.e. added and subtracted. So why should you need a special tool for this? Aren’t modern ERP and accounting systems able to easily handle this? Unfortunately, for various reasons, there are hurdles involved with netting, starting with the fact that many companies actually use more than one ERP system. Amongst the few “lucky ones” with a homogenous ERP landscape, there are even fewer who use the same release groupwide. The more common scenario is that large companies are faced with a number of different ERP systems. This can have various reasons: decentralized structures, growth through acquisitions or limited resources for the groupwide rollout of a standardized system topping the list.
One other fairly common netting requirement sees companies still managing their accounting with multilateral netting spreadsheets – a scenario that is not as unlikely as it may seem. In particular, for small subsidiaries in more “exotic” locations, this can actually be the most efficient solution considering potential costs and benefits. This also means that it is an immense challenge to achieve groupwide visibility for the data derived from all these different systems. A key netting requirement, therefore, is the ability to communicate with various different systems. Ideally, the interface structure is as simple as possible and the system should also allow for manual entries. While all companies obviously strive for a high degree of automation, a manual entry may still be the best solution for some subsidiaries.
Data entry is one step, data processing for netting purposes another. Many netting tools are simply “large-scale calculators.” They are fed with data and the tool does the math. However, things get tricky whenever mismatches occur. This is when access to the individual invoices would be needed; a company needs to know exactly where things went wrong. This leads us to another challenge nearly every company is faced with when it comes to intercompany trade: what if companies simply don’t pay and others don’t receive their money? This can have a ripple effect and effectively paralyze a business. Pure netting is therefore no longer enough. What is needed is a comprehensive reconciliation process and a technical netting solution to support this.
Further reading: Core benefits of netting
A perfect netting solution
The answer is the use of a single, groupwide platform. Even when other administrative units see no need for groupwide administration, when it comes to netting and consolidation, thinking “centrally” is key. Again, the simple truth applies: the fewer the interfaces, the easier the netting process. Ideally, a platform solution will not just be compatible with one specific system but accommodate various different ones. It pools all data and allows all group companies to have an active part in the process.
However, the devil is in the details: what features does your software tool have? What functionalities do you need to optimize your netting process? This is what separates the wheat from the chaff. You want your netting tool to be more than just a calculator and you want your netting to go hand in hand with reconciliation. The more differentiated your software, the more options are available to you. A good netting tool will allow for many different configurations and filters, for example enabling corporates to deal with issues such as currencies or regulations without complicated manual processes.
tm5 offers a very useful feature here: any matches are automatically confirmed and a chat function is available to quickly tackle mismatches. In addition to normal netting, the system also supports virtual netting and the netting of gross amounts. This means that all groupwide payables and receivables can be integrated into the process even when faced with local restrictions.
Overall, the technical hurdles to netting as such are nowhere near as high as one might imagine. With a groupwide platform solution that also supports reconciliation, you can jump them quite easily. And remember: netting often amounts to saving good money – so don’t throw it out the window again by using a sub-standard netting tool.