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I was catching up with my reading over the summer, an article in the International Treasurer magazine caught my eye ‘Cash Management: Don’t get Caught in the Netting’ (one can read it here, subscription required but, at the time of writing, a 30 day free trial is available). It is a report based on an International Treasurer User Group meeting. Essentially it says netting savings are great, but intercompany netting is all a bit manual and hard work. Clearly, having spent 20 years making the process as easy as possible this is a topic close to our hearts here at Coprocess. However it also stated that “getting multilateral netting right can save time and money”

spreadsheets

After reading the article it seems that many of the companies suggesting the process is manual and hard work are using spreadsheets.  An additional problem, not mentioned in the article, is that using a spreadsheet and simply collecting the intercompany payables at balance level, is an additional burden for Treasury and the subsidiary companies. It is just another reporting requirement imposed by Head Office. Is this really the face of netting for many? If a corporate treasury wants the big savings from FX, payments and fees, it has to put up with the manual collection of balances.

But there is so much more netting could offer AND we can address the problems of manual work outlined above. Indeed one of the conclusions of the article is that the process does not have to be hard work if technology is used effectively. However the business case for simply automating the current manual process does not stack up, we need a better solution.

Multilateral netting systems (or Intercompany Netting, it has several names..) really benefit from specialisation. Coprocess, for example, is a specialist netting company and has been for over 20 years. Specialisation of the development, support, Quality Assurance, IT infrastructure and more, leads to significant customer benefits. This in turn leads to a long list of clients, the more clients one has the more feedback and ideas that get built into the system, the greater the flexibility and configurability it has (because no two clients net in the same way), the better the system becomes.

The added functionality we can offer because we specialise, produces a product that adds real value, thus justifying its price and resulting in a sustainable business.

System design is key

One area that results from this specialisation is invoice level matching and multilateral netting. Allowing the upload of both AR and 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, often unbeknown 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, inaccuracy in the P&L and Balance Sheet reporting, cause Treasury problems in trying to forecast cash, hedge and more. Intercompany gets in a mess and worse still, if steps are not taken it gets into even more of a mess over time.

The Coprocess system is sometimes the only company wide common platform. Not only does use of the system result in greater visibility of payables and counterparty receivables but they have the opportunity to negotiate (discuss & dialogue) at the invoice level. Subsidiary companies can really help themselves to sort out the ’intercompany mess’.

The matching /reconciliation process is something that has to be done on a monthly/quarterly/annual basis anyway, so giving the subsidiary companies a system which can help with the often fraught and time-consuming stress of month end reconciliation also gives Treasury 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 quite a number of companies that do not know they have mismatches on the AP & 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 and there are tools in the system to identify and 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 standardisation of invoice level information so subsidiary companies can include their own codes in invoice information, perhaps even a scan of the underlying invoice and data export to allow the update both the AP & AR ledgers automatically.

Tax doesn’t have to be taxing

What about the transfer pricing problems and tax? Again visibility and data enrichment offers some answers. Transfer pricing is an issue. As we know goverments are more and more fighting against the transfer of profits into low tax regimes. Often the internal tax department  are not really aware of the detail pricing. They give some instructions to the business people but are these instruction 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 accounts receivables and payables on a detailed invoice level but also other balance sheet positions like 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 like managment fees, royalties etc

We could also look at invoice process savings, possibly a whole blog post in itself. In short, the result of standardisation, visibility, receivable driven netting is a potential 25% saving on invoice processing costs.

Does the business case look better now?

We can now address the issue of manual processes mentioned above because we can make a compelling business case for almost all corporates to interface their ERP to our system, both for upload of invoices into the system and export of the entries out for booking and accounting.

We can go further, we have clients that are interfacing to their chosen FX dealing platform, incorporate 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 netting system is the perfect product for the internet and to be hosted by us.

So, come on ITreasurer User Group members, give a dog a bad name and then get rid of it.

by Keith Harris, Sales & Consulting

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