Optimizing intercompany financial transactions

Which organization has never had trouble getting paid on time? Which CEO has never received a call from a frustrated supplier, eager to be paid?

But being paid is far more complex than making a bank transfer, and the resulting opacity and uncertainty on the actual payment date invariably lead to friction and frustrations within and between the trading parties.

There are a range of reasons for why intercompany transactions are often so problematic.

The first is that approvals are difficult to obtain. Indeed, the repository of the authority in the buying organization is often high-up in the hierarchy and thus fairly remote from the delivery of the goods or services. It may be difficult to be certain that the delivery is fully satisfactory, that it corresponds to what was ordered, that it is in line with the contractual terms and conditions—which often contain penalties for delays or bonuses for exceeding expectations, as well as possible volume rebates spanning multiple deliveries. There is indubitably delegation of authority and a range of actors in the organization to address the various check-points, but the resulting complexity is difficult to manage, resulting in delays which often extend to many agonizing months.

The second reason is that processes may be over-complicated, specifically the supplier‘s sell-to-cash process and the buyer’s requisition-to-pay process. To illustrate this, KPMG identified 30 steps in each of the above processes at one single company, each involving three to four parties. One complication may arise from the definition of such processes, i.e. what needs to be done by whom and when. The root cause is that process terms and underlying activities are not always well understood, and necessary documentation may often be partial or obsolete.

An imperfectly automated system

Many companies have implemented Enterprise Resource Planning (ERP) systems with the aim of automating tasks and processes, and cutting through the organizational silos. However, the ERP implementation is often imperfect with either mismatch versus the documented processes (and this is worse when there is no proper detailed documentation) or their usage circumvents the automation and the delegation of authority due to a mistrust of the IT systems or due to the reverting to historic manual practices such as requiring explicit approval from relevant leaders, be it by email (then attached to the ERP), or by in-system manual approval (clicking on the relevant “Approve” button, often without sufficient information to do so).

So, are these imperfections the necessary frictions of trade? This gives rise to the question of how organizations can radically improve intercompany transactions.

Firstly, the approvals can be facilitated by full and timely visibility of the proof of delivery, called Goods Receipt (GR). This is done by recording the detailed GR, approved by the actual users of both the supplier and buyer , in the IT systems of both the buyer and supplier. The GR must be compared to the purchase order (PO) and contract terms, with gaps being analyzed (ideally automatically) and recorded in both IT systems.

Secondly, the end-to-end processes must be fully documented (in alignment with proven best practices) and recorded with process management tools. Their implementation in the ERP system must be fully automated in line with a well-defined delegation of authority. To address the issue of a lack of trust in IT systems, process monitoring functionalities must be put in place, the purpose of which is to continuously monitor (in real-time) the compliance of process execution vs. defined processes. Deviation limits must be defined and alert mechanisms put in place so as to trigger root cause analysis and escalation to relevant authorities for remediation.

Monitoring performance

Last and not least, it is highly recommended that companies put in place a hierarchical performance system (enabling one single view of the truth) to measure process effectiveness (e.g. late payment %) and efficiency (e.g. invoice rejection rate) against targets defined by benchmarks and ambition levels. They would also do well to assign improvement plans to end-to-end process owners that cut across organizational boundaries.

The above best practices are feasible with top executive endorsement and proper implementation by knowledgeable parties equipped with adequate technologies. The reward is sizeable: trustworthy relationships with dependent parties, and greater productivity amongst their personnel and managers whose time is better employed in the core business rather than chasing (or being chased for) invoices and payments.

The UAE recently announced the “Principles of the 50” which invites “all state institutions, of all sectors and across different federal and local levels” to “bear collectively the responsibility of building the best global economic environment” and “work to build global enterprises and partnerships across the world”. In this context, optimizing intercompany financial transactions—leading to cash flow and trust benefits—is increasingly becoming a top priority for governments and business leaders.