Intercompany transactions are such a source of frustration for companies that even Deloitte refers to them as “a wild beast,” "a monster" and a "big elephant in the room” within the same article.
This is because intercompany accounting processes typically require numerous steps, manual data entry, and checks and rechecks to properly account for funds distributed among multiple legal entities within the same organization. It’s common practice in multi-entity accounting, but it doesn't have to be this way. We’ll show you how Gravity Software can help you tame the beast, allowing your team to trade endless copying and pasting for decision-making, analysis, stakeholder engagement and other activities that will propel your business forward.
The use cases for intercompany transactions
Although they can add complexity, intercompany transactions have a worthwhile role in any multi-entity business. The premise is to get the correct revenue and expenses in the correct company. Here are some ways they can bolster a business:
Streamlining payroll and shared expenses
One common use of intercompany transactions is for payroll. Instead of every company within an organization having its own payroll department, one company may handle payroll for the whole organization. The intercompany transaction occurs when the other companies reimburse the one handling payroll. In a similar effort to prevent the duplication of work, intercompany transactions may be used for:
- Shared inventory, raw materials or supplies — In addition to saving employees hours by having only one company tasked with researching products and engaging with vendors, ordering for the whole organization may garner discounts that individual companies might not have the clout to negotiate on their own.
- Research and development — The entire organization benefits from innovation and new products.
- Advertising and marketing — An organization-wide advertising campaign, as opposed to leaving individual companies to market on their own, is more cohesive as well as cost-effective.
Simplifying invoices
Companies within an organization may have similar names, causing a client to send an invoice to the wrong place. Intercompany transactions allow these types of errors to be corrected on the organization's end, rather than passing the responsibility back to the client.
It might also be beneficial to place all of a client's charges on a single, consolidated invoice, even if they received service from more than one company within your organization. A health system might want to include a patient's urgent care visit, subsequent follow-up with their primary care physician, and their later visit to a specialist on the same invoice to avoid bombarding the patient with bills.
Why are intercompany transactions so difficult?
The benefits of intercompany transactions can't be fully realized when the process of recording them is so cumbersome. This process is made even more frustrating by factors like an increasing volume of such transactions, a lack of cohesiveness among technology systems within entities, and frequent changes in regulation and tax compliance. Legacy accounting software further bogs down the process.
Because so many accounting software systems for small- to medium-sized businesses are designed with single-entity businesses in mind, accounting for a multi-entity business requires treating each entity as an entirely separate organization. That means using a separate database requiring a separately paid account and a separate login and password. An intercompany transaction ends up being treated essentially the same as a transaction with an unaffiliated organization — except it's your team doing the work on both ends.
With legacy accounting software, handling an inventory purchase made by a parent company on behalf of its 20 subsidiaries looks something like this:
- The parent company makes the purchase, pays for the inventory, and the finance team calculates (or finds out from the vendor's invoice) how much each subsidiary owes for their share of the inventory.
- The finance team makes 20 "due from" journal entries to reflect each subsidiary's share of the purchase price.
- The team creates a "due to" journal in each subsidiary's database reflecting their share of the expense. This requires logging into 20 different databases, navigating to the correct screen and recording the amount in the appropriate place.
- The finance team must then recheck their work to ensure all of the "due to/due from" entries balance and no entries were missed.
The few minutes it takes to enter this information for each subsidiary may not sound like much, but even two minutes multiplied by 20 subsidiaries adds up to almost an hour for a single transaction. Multiply that by the number of intercompany transactions your enterprise is likely to undertake each month, and it could be dozens of hours of extra work. According to Beth Kaplan, managing director at Deloitte & Touche, some organizations may have more than one million.
It's no wonder that, in addition to referring to intercompany accounting as a beast, she also describes it as "messy" and "potentially scary."
Intercompany billing compounds the complexity
Intercompany billing — for example, if one company prints brochures for several other companies within the organization — adds even more steps to the process. The company doing the printing needs to invoice each of the companies receiving brochures, and then each company receiving brochures needs to make an accounts payable entry in their database. If your organization has one finance team handling billing for all companies, they're responsible for both sides of the process.
Simplify intercompany accounting with Gravity Software
Like entry-level accounting systems such as QuickBooks and Sage 50, Gravity Software was designed for small- to medium-sized businesses. The difference between Gravity and other accounting software is that Gravity is designed specifically for businesses with muliple companies.
Unlike entry-level software, Gravity’s multi-entity accounting software doesn't require dozens of duplicate entries for every transaction. At Gravity, we built multi-entity capabilities into our software from the beginning. That includes an intuitive, powerfully efficient method of accounting for intercompany transactions. While the process in other software requires several steps and double-checks, Gravity accomplishes the same result with just a few clicks. If you are a parent company making an inventory purchase on behalf of 20 subsidiaries, here's how you'd do it in Gravity:
- Make the purchase, pay for the inventory, and calculate how much each subsidiary owes for their share.
- Enter the bill, amount and vendor ID into Gravity Software
- Go to "voucher lines," select the entities receiving a share of the inventory in question, and Gravity will create different line items for each one. Gravity automatically creates self-balancing "due to/due from" journal entries.
AP automation makes the process even easier
The vendor's invoice to your organization may include line items reflecting each entity's share of the inventory. Gravity's new AP automation feature uses intelligent document processing (IDP) to process invoices, including automatically designating which entity is responsible for a particular line item. Because the AI engine pulls information directly from the vendor's invoice, the descriptions are often more in-depth and accurate than what a team member might type in themselves. All your team needs to do is distribute the invoice to the individual companies and create a voucher. A task that once took 4-5 minutes is slashed by more than half.
Other scenarios where Gravity Software smooths out intercompany transactions:
- When an invoice is created in one company for goods or services provided to another company in the same organization (such as printing brochures), the payable is automatically created in the other company's ledger.
- A single cash receipt can be applied to multiple entities with the click of a few buttons. Making sure payment goes to the correct company when a client has made a mistake is no longer a multi-step ordeal, nor is consolidating invoices to promote client convenience.
Although Gravity Software was built specifically to improve intercompany accounting, we never stop innovating. Learn about our newest features.
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