We’re frequently asked “I have an In House Bank (IHB), why should I also use an Intercompany Netting solution?” – our response is you can get some of the same benefits from using an IHB to settle Intercompany Invoice Balances but to really maximize the FX savings, transactional savings and process improvements you should be doing both. The following are some discussion points to help identify the key differences between them.
Centralisation
Nearly all our clients are multinational, nearly all run one or many ERP systems, many have a TMS, many use a dealing platform for FX. In short many have sophisticated cash management processes including bank based pooling and sweeping and are well down the road to (or aspire to) a more centralised approach for Treasury. Coprocess Intercompany Netting is supportive of the centralised approach and enhances control. It integrates well into the existing Treasury processes including in-house bank and is a means to capture even more efficiency. A multinational corporate may well have shared service centres, regional treasury and regional in-house banks, giving our clients flexibility when it comes to cash management. Many of our clients are settling the result of the netting in some centralised way. In this article we look at the additional benefits of running intercompany netting alongside an in-house bank.
Aggregation
Intercompany settlements usually involve many invoices from different companies and potentially different ERP’s. These need to be uploaded and aggregated into balances before crossing the IHB account otherwise they can be unmanageable.
Coprocess Netting facilitates import of invoices from different systems and then aggregates all invoices into the most efficient combination of settlement per party per currency possible. It considers any settlement and currency restrictions for all the countries involved resulting in the most efficient clearing of IHB accounts. It also sends settlement files to the bank if cash settlement is required.
Consolidation
An IHB does not help business units to agree invoice amounts or balances, a process central to Consolidation.
Coprocess Netting facilitates the reconciliation, discussion and dispute of invoices and imposes a set timetable to resolve any issues. Using the systems matching capabilities we can reconcile individual invoices and identify any differences between the AR and AP Ledgers. The discussion functionality links directly to your company email system and enables subsidiaries to review and discuss disputed invoices. This places the dispute process where it needs to be, at the business unit level and ensures accurate data in their ERP, which is usually used to drive the Consolidation. It allows Treasury to only deal with finalised data.
Visibility
An IHB does not provide visibility over the Intercompany invoicing process for Treasury or the business units.
Visibility and communication is central to resolving Intercompany settlement disputes, streamlining the intercompany settlement process and an efficient month-end accounting close process. Having a netting system imposes a discipline on the process, with defined dates and actions. We also allow for invoices that are not part of the Netting process to be uploaded and settled so you can achieve maximum visibility to all Intercompany positions.
Velocity
An IHB does not encourage invoices to be paid.
If you want invoices to be paid on time, improve cash visibility and forecasting, then run receivables driven netting. In receivables driven netting participants enter the invoices that other companies are required to pay them, this encourages participants to deal with disputed invoices and come to an agreement.
Accounting
The IHB does not necessarily help with the booking and accounting of paid invoices.
Coprocess Netting provides files of settled invoices to allow the booking of and accounting for all paid invoices and integrates with any ERP. This can either be done centrally or at the business unit level, to accommodate, for example, where multiple ERP systems are used through the group.
Controls
The IHB does not impose any discipline on the intercompany settlement process.
Discipline is encouraged and facilitated by use of a calendar. This is applied to all participants to enforce the dates and times by which action should be taken; such as the upload of invoices, discussion and dispute, netting day and netting settlement. Having a defined netting settlement date and coordinating that settlement date with other transactions such as hedging and external payments has considerable positive impact in the areas of liquidity, foreign exchange requirements and bank credit lines.
FX Hedging
The IHB process does not identify all opportunities for FX aggregation and control of intercompany settlements.
Coprocess Netting allows all intercompany invoices to be included in the clearing process, including transactions for business units that can’t settle via a Payment On Behalf Of (POBO) model and external supplier payments. “If it can’t be seen it can’t be managed”. In addition, Treasury can settle internal Foreign Exchange and Intercompany Loans through the netting; Business units can also use local hedging and bank accounts if that is the company model.
Technology
IHB is usually run on a TMS and providing access and information to business unit users is sometimes difficult and often expensive.
To provide access for remote business units to share the data and take part in the dispute process one needs to provide user id and profiles for the business unit users. A TMS is designed for central access and is sometimes not very good at segregating data and the pricing might involve numerous ‘seats’. Coprocess has functionality to safely allow access to the data and functions a subsidiary company is allowed to access and pricing is based on the overall size of the company, not the number of users accessing the data. Coprocess Netting can be implemented in a few days, business units just need a browser to access and training is done virtually via the internet.
Conclusion
Coprocess Netting encourages centralisation of intercompany processes without interfering in banking or trading relationships and enhances the settlement process for customers and suppliers. Netting supports your goals and the reasons to introduce an in-house bank in the first place. Liquidity management, payments processes, foreign exchange, account management and internalising transactions as much as possible. In short, it reduces risk in many areas yet its ROI is high, typically less than 2 months. If your company is using an in-house bank today there are many reasons to be netting too.
With thanks to Treasury Today for an excellent article on the in-house bank http://treasurytoday.com/2005/04/in-house-banking
