Multilateral netting is one of the most underestimated ways to optimize intercompany payments and group performance. Many companies fail to recognize the potential this has for not only optimizing cash, but for improving the general management of the company, and instead merely put in place measures that conceal existing problems without getting to the bottom of them. A properly implemented netting process allows you to identify where there is room for improvement in your company, and helps optimize your receivables management.
Multilalteral netting primarily serves to reduce the number of invoices between group companies. This makes it appear less relevant - or even redundant, if a company has an insignificant volume of bilateral intercompany payments. This is especially so given falling payment transaction costs. However, we should never look at netting on its own. Intercompany netting is merely one step in a very long process chain, responsible for the settlement of receivables and/or payables on which both parties involved agree, but implemented successfully it provides optimization for the entire chain.
Looking at the supply and performance relationships between group companies, one company ends up with accounts receivable and another with accounts payable. When it comes to accounting, these financial positions have to balance out at zero. And if this were always the case, intercompany differences would be unheard of. In reality, such differences are commonplace and can be caused by a number of things:
- The invoice never arrived
- The invoice wasn’t booked accordingly
- There are issues with the formal procedure for the invoice
- The invoice contains wrong or not agreed upon prices
- And much more…
Many companies opt for automated reconciliation as preferred solution, and while that helps with the first two points it still leaves you having to deal with the next three. Cross-company code postings – if technology allows them – neither ensures that the contents are accurate nor the invoice recipients are happy with them. Even with correct balances, parties will not necessarily agree – and this is what you need to optimize. Just because you won’t listen to the other party doesn’t mean they’ve got nothing to say.
A good netting process takes this into consideration: both parties have the chance to comment in order to clarify why there are differences and to reach an agreement. This has a number of advantages:
- Both parties are invested and have an interest in proving their point
- Any mistakes are immediately obvious and can be corrected to the whole group’s benefit
- “Shadow reconciliation” or even “shadow accounting” are impossible
- No time needs to be dedicated to the “actual” reconciliation and the automation of the overall IC invoicing process can be optimized
- It no longer matters if an invoice was sent or received nor in which system invoices are booked. The process applies to all group companies, regardless in which country, and is immediately available
This can easily save you 1-2 man-days per month per company - time that is better invested in optimizing processes, and creating added value for the company. With 10 group companies we’re talking 10 days a month; with 50 companies, that much more.
If you compare the costs of implementing a netting structure with a reconciliation process to the potential savings you could earn from it, the choice is simple. So, the question really becomes: can you afford to continue with old, inefficient intercompany trade processes?