Multi-entity accounting 101: The tricks, trials and tribulations
Keeping up to date with multi-entity accounting can be… overwhelming to say the least.
As soon as a business subsidiary exists accounting work is essentially doubled, and all those different financial accounts have to talk to each other.
(Don’t worry, that’s just the sound of a CFO crying quietly in the corner after learning they have to do accounting for multiple entities.)
For the sake of CFOs everywhere, let's break down exactly what multi-entity accounting is, why it's so challenging and how multi-entity accounting software can make things that little bit simpler.
- What exactly is multi-entity accounting?
- What are some examples of multi-entity companies?
- Why is accounting for multiple entities challenging?
- How can multi-entity accounting software help?
- What are the benefits of multi-entity accounting software?
- Pleo can help you control your multi-entity finances, not your teams
What exactly is multi-entity accounting?
A multi-entity company or organisation is simply one that has multiple subsidiaries, operations or locations, usually controlled by a parent company.
(In fact, a subsidiary company means a company controlled by another company.)
A multiple-entity business structure is usually established when:
- A business acquires another business, think back to those dizzying days when the news broke that ASOS had acquired Topshop
- Two companies merge into one, like when Exxon met Mobil and became… Exxonmobil
- A company establishes a subsidiary company, like Nike’s subsidiaries Nike Pro, Nike Golf, and Nike+.
Subsidiary companies could also be organised by country, like Nike Korea or Nike India.
The thing is each of these subsidiaries or business acquisitions has to continue running its own independent finances. They may already have certain finance processes in place that work really well for them and have done for years.
But the parent company, CFO, and CEO (not to mention the tax man) also need to see a financial picture of the company as a whole.
And that’s where multi-entity management comes into play.
What are some examples of multi-entity companies?
A great and often-quoted example of a multiple-entity business structure is Disney. The Walt Disney multi-company includes subsidiaries like:
- Walt Disney Studios
- Walt Disney Animation
- Pixar Animation Studios
- Marvel Studios
That’s not even mentioning the subsidiaries that run their theme parks or streaming service.
You can see why the needs of a theme park’s accounting and a film studio’s accounting might be very different. This is why multi-entity accounting can become rather… challenging.
Why is accounting for multiple entities challenging?
The more a company grows and adds new products, regions or services to its offering the more complex its accounting becomes. This kind of organisational drag creates a lot of extra work for a finance team.
Different ledger codes and financial procedures
For example subsidiary company A, which was acquired three years ago, will have a unique set of financial processes. Meanwhile, subsidiary company B, which was established to run European territories two years ago, may develop different ones.
This makes it difficult to see quickly and clearly where the company as a whole is spending money, without someone manually going through and collating different ledger codes and financial practices together.
Not to mention if the different entities even use the same definitions for budget lines or categories in the first place.
Finding ways to integrate different finance software
If lots of different subsidiaries use multiple kinds of software that can’t be integrated, it can make it tricky to bring accurate financial data together.
We have a sneaking suspicion it all ends up back in an Excel spreadsheet somewhere. And, you guessed it, some poor soul may have to manually collate it.
Tax rules and regulations are different in different countries
As companies expand into different territories, tax relief and regulation become an even more complicated ball game.
Each subsidiary company will require its own unique accounting system to adhere to their unique tax rules. Meanwhile, the parent company will need to know how much money is profit and how much is going on tax at all times.
If a multi-entity company is operating in different countries, it's likely to also be using different currencies.
The value of a currency changes by the minute, so determining the amount of cash you have in the currency of the parent company at any given moment can be difficult.
Welcome to the universe of multi-currency accounting.
Sometimes a parent company will own an acquisition company that secures stock, materials or other kinds of assets before selling it on to another of their subsidiaries.
For example, Disney might have a subsidiary company that buys materials and creates merchandise, which it then sells to every theme park and Disneys store.
The problem is both companies need to keep track of these expenses and this can often result in two people doing the same work on either side. Even though technically they’re all working for the same company.
Tracking financial performances across multiple entities
Let’s say a CEO wants to take a look at their company to understand what’s selling, what's not and why.
They need to be able to break down their finances by product, by region and by budget line.
Maybe they’ll learn the Australian branch is outperforming all others or a certain product is selling well across regions. This information lets them know where to invest further and where to rethink.
It’s important that even though the company has grown into different branches they can use each other’s knowledge and experience to improve performance.
How can multi-entity accounting software help?
Here’s the thing: If every subsidiary can use or integrate with the same accounting software then a lot of these problems disappear.
Multi-entity accounting software can help this process of multi-entity consolidation and do a lot of the heavy lifting for you by automating processes that used to take hours.
Automatic multi-entity consolidation and real-time data
Usually, at month-end, every subsidiary company would have to send off financial reports to the CFO at the parent company. They’d follow a month-end checklist and share what they’ve spent, what they’ve made and what their profit is.
The CFO will then have to spend time compiling all of the financial data of multiple subsidiaries into one document to present to the rest of the C-suite.
By the time this process is done, there’s a good chance the numbers are already out of date.
Using multi-entity accounting software negates this problem entirely, and in fact, can show real-time data that updates every time any subsidiary files even the smallest invoice.
Enhanced multi-entity management reporting
The way multi-entity accounting software works makes it easier to assess what’s performing well, whether it's a specific product or territory.
Using the same software creates one uniform source of truth that every business subsidiary feeds into regularly and creates financial data that a CFO can rely on.
Multi-currency accounting reconciliation
You heard it here first folks, multi-entity accounting software can automatically make currency conversions in real-time.
This means you’ll consistently have the most up-to-date picture of how much money is in the bank in your currency of preference.
What are the benefits of multi-entity accounting software?
In case you’re still on the fence about this miraculous gift to finance teams everywhere, let's look into how multi-entity accounting software is going to save your company time, effort and money.
Reduce duplication of effort
Remember what we said earlier about different subsidiaries both having to do the paperwork when they sell each other something? Or CFOs having to compile financial reports at the end of each month manually from multiple sources who’ve already had to compile it themselves?
Multi-entity accounting software gets rid of this by having all financial accounts in one centralised place. Some systems will even fill in the data for accepting an invoice automatically once the other company has filed it.
Giving the team time to do more of what matters.
Get more accurate and timely financial data
Multi-entity management makes it difficult to actually know what’s happening with your financial data, but multi-entity accounting software gets everyone singing from the same hymn sheet.
With all employees inputting in one source of truth the financial data you’re looking at is far more accurate than a monthly report.
This means that you’ll…
Make better strategic decisions as a CEO or CFO
When you have to make difficult decisions on whether to take a leap or play it safe, you’ll make better choices when you have a clear real-time picture of your finances.
In today’s world where CFOs and CEOs need to work hand in hand, financial accuracy is a necessity, not a luxury, and multi-entity accounting software may just be the answer to our prayers.
Pleo can help you control your multi-entity finances, not your teams
Control your finances, not your teams, with one spend management solution across entities.
Make faster and smarter spending decisions thanks to real-time spend data and save time and resources by automating tedious manual work.
Smarter spending for your business
Save time on tedious admin and make smarter business decisions for the future. Join Pleo today.
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Rather than feeling out of control, how about relying on a system that gives you efficient workflows and a detailed view of every expense?