Optimizing Intracompany Settlement – It’s about cash management

The world of Global 2000s is a complex one. Navigating multiple subsidiaries in many different jurisdictions while optimizing tax and managing working capital is no easy task.

Many of the worlds largest companies do significant trade with each other via their subsidiaries, and have increasingly added sophistication in the form of intercompany netting to reduce credit and settlement risk.

What is Intercompany Netting?

According to CoProcess, which provides corporate treasurers accounting software and expertise in this space,

Intercompany netting is an arrangement among subsidiaries in a corporate group where each subsidiary makes payments to, or receives payment from, a clearing house (Netting Center) for net obligations due from other subsidiaries in the group. Netting sums and converts each entity’s transactions (payments) into a single local-currency amount to pay to or receive from the netting center. By doing so it reduces the cost of making payments and brings structure and discipline to intercompany settlement.

There are many different ways to run a multilateral netting system. No two corporations will be the same and therefore they have different needs for their netting solution.

The benefits of netting are a direct reduction in bank fees for one, but also a reduction in complexity as one payment is made in the local currency amount as opposed to many payments. Having only one payment amount per month reduces settlement risk and consolidates foreign exchange (FX) exposure with corporate treasury. Subsidiaries, netting center, shared service centers, accounting can all be users of the system.

So what’s the working capital angle here – well, think about it for a minute. From a business perspective, netting creates a disciplined approach to intercompany invoice settlement and allows group companies to forecast cash flows with more precision. In addition, companies do not want intercompany balances to accumulate on the balance sheet (in the form of payables/receivables), since tax authorities may consider them an intercompany loan.

In terms of technology, MNCs have a choice between in-house netting via a treasury management /ERP system or an outsourced netting approach.

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