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Payment Netting: Maximising the Possibilities
10-02-2013, 09:32 AM
Payment Netting: Maximising the Possibilities
Payment Netting: Maximising the Possibilities
Keith Harris, Coprocess - 30 Sep 2013
The resulting savings are great, but intercompany netting is all a bit manual and hard work. This often sums up the view expressed by those companies still using spreadsheets and imposing additional reporting requirements on their subsidiaries.

Corporate treasuries and their organisations want the big savings achievable in foreign exchange (FX), payments and fees from netting, so the subsidiary companies have to put up with the manual collection of balances.

But there is so much more netting that could offer, while at the same time addressing the problems of manual work by using technology effectively. For example, how about helping subsidiary companies fix the inter-company reconciliation nightmare? While there isn’t a strong business case for simply automating the current manual process, there definitely is one for a better solution.

Multilateral netting systems - or intercompany netting to give it one of several alternative names -really benefit from specialisation. Specialisation in the development, support, quality assurance (QA), IT infrastructure and more, leads to significant customer benefits. The more clients on the system and the more feedback from them, the better the system becomes. It is a positive feedback loop, but it requires a critical number of clients to achieve this and a focus on meeting client requirements

System Design is Key

One area that results from this specialisation is invoice level matching and netting. Allowing the upload of both accounts receivable (AR) and accounts payable (AP) items takes the system into a different arena from a simple input of gross flows of payables into a spreadsheet or typical bank run netting process.

Intercompany netting, often unknown to head office, suffers from problems caused by mismatches between the invoice details held by the payer and receiver. This can lead to the late payment of bills, inaccuracies in the profit and loss (P&L) and balance sheet reporting, and causes treasury problems in trying to forecast cash, hedge and other activities. Intercompany gets in a mess and if prompt steps are not taken this situation further deteriorates over time.

An intercompany netting platform could be the only firm-wide common platform for invoice level detail. Not only does use of the system result in greater visibility of payables and counterparty receivables but treasury has the opportunity to negotiate at the invoice level. Subsidiary companies can really help themselves by helping to sort out the ’intercompany mess’.

The matching and reconciliation process is something that has to be done on a monthly, quarterly and annual basis anyway. Giving the subsidiary companies a system which can help with the often fraught and time-consuming stress of month end reconciliation also provides treasury with good data on settled flows - before they happen and with a high degree of certainty.

The benefits of visibility are often understated. For example, we see a sizeable number of companies that do not know they have mismatches on the AP and AR until they get to the consolidated level. The invoice information needed to resolve this has been lost somewhere further back in the process. Netting at invoice level gives this information as part of the process, while tools in the system can identify and be used to resolve mismatches. The old gross level system does not make for an easy receivable driven process either. Receivable driven multilateral netting is a real boost to cash management.

Netting should also allow data enrichment and the standardisation of invoice level information, so subsidiary companies can include their own codes in invoice information - perhaps even a link to a scan of the underlying invoice and data export to allow the updating of both the AP & AR ledgers.

Tax Needn’t be Taxing

What about the transfer pricing problems and tax? Again, visibility and data enrichment offer answers. Transfer pricing is an issue; as we know governments are increasingly fighting against companies' transfer of profits into low-tax regimes. Often the internal tax department is not really aware of the detail pricing. They give some instructions to the business people but are these actually put in place? Adding product line information in one of the available fields to get a better overview about what is really happening in the different ledgers. Would this help controllers, auditors and tax?

The matching functionality of a netting system can also be extended to reconciliaton items (not for settlement) and in this case can bring a full overview of intercompany exports and imports between subsidiaries and countries. It can reconcile not only commercial flows, such as ARs/APs on a detailed invoice level, but also other balance sheet positions such as treasury items (internal deposits and loans, internal P&L flows such as interests etc), off-balance sheet items such as forward contracts, or non-commercial flows such as managment fees and royalties.

One could also consider invoice process savings, which possibly merits a whole article in itself. In short the result of standardisation: visibility and receivables-driven netting is a potential 25% saving on invoice processing costs.

Does the Business Case Now Look Stronger?

It is now possible to address the issue of manual processes mentioned above, because treasury can make a compelling business case for almost all corporates to interface their enterprise resource planning (ERP) to the multilateral netting system, both for upload of invoices into the system and export of the entries out for booking and accounting.

Indeed, it is possible to go further. Some companies are interfacing to their chosen FX dealing platform, incorporating import/export of rates from another system, executing payments to the bank and to the treasury management system (TMS) to update the cash book or in-house bank (IHB).

This, coupled with the availability of connectivity via the internet, also means a modern netting system is the perfect product for the internet and the Software as a Service (SaaS) business model.
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