How to manage multi-entity financial accounts the right way

By Team bluQube

While structuring an organisation into multiple operating, or legal entities can bring big business benefits, managing them from a financial standpoint often remains to be a cumbersome and manual process.

 

Read on as we discuss the common challenges faced by finance teams in multi-entity businesses and reveal how having the right technology in place can solve them.

 

What do we mean by multi-entity accounting? Confused man

While the majority of single businesses will not often have separate entities, some larger organisations will separate out business areas into individual legal entities, also commonly referred to as operating entities, each with their own set of accounts.

To take a common household example, Unilever is a registered company but has over 400 brands such as Persil, Lipton and Magnum operating underneath it, in most cases individual businesses in their own rights. There are many reasons why an organisation may opt to be structured in this way, whether it's for legal, tax, geographical or simply structural reasons.

While this is an example on a huge scale, the same model is commonplace in medium-sized businesses too, often operating under a single roof, albeit as legally separate businesses.

As an example at the smaller end of the scale, think of a garden centre with a cafe, but with the cafe established as a separate entity from the retail business. These two businesses will have separate balance sheets, yet are grouped together under the overarching garden centre "group".

 

The 7 challenges of multi-entity accounting

Whatever the specific reasons or benefits to structuring an organisation into multiple entities or subsidiaries, managing these from a financial standpoint is not without its challenges.

 

1. Different entities will have different financial structures

Each individual operating entity will no doubt have different requirements for how their accounts and their accounting software is structured. Different calendars and year end, different VAT environments, different charts of accounts and different cost centres to name a few.

Trying to accomodate all the nuances of each entity within a single finance system would be near impossible and, at best, incredibly messy and complex.

 

2. Not all users will need access to all entities

Depending on the size of your business, you may have a single finance clerk, or perhaps an entire finance department that only works on tasks for entity A. You might not want those people poking around in sensitive data for company B at all, or even if you don't mind sharing information, you'll be opening up that data to increased risk of human error.

What's more, you'll be bogging staff down with accounting items that simply don't apply to them, making it harder for them to find what they really need.

 

3. Some users will need access to multiple entities

Colleagues sharing data over a laptopSo, surely the answer is a separate finance system per entity.

Well no. While some users will only care about their single operating entity, there will be staff at the top who want to see how the group as a whole is performing and need the data from all entities in a single place. Having to merge data from multiple systems in to one just to keep an eye on how things are going, can become unnecessarily complex and labour intensive.

Furthermore, having multiple systems setup could get very expensive. That's two separate software licenses you're paying for and if you're paying on a per-user basis, you could end up paying for a single person 2, 3 or more times over!

 

4. Sometimes entities trade with each other

If goods and services are moving across operating entities, correctly accounting for those transactions can become very labour intensive. You meticulously enter all the details for a sales invoice for company A, only to then have to re-enter the same data as a purchase for company B.

While that might not seem like a huge issue, that's double the amount of time spent simply re-entering the same information. Add that up over large numbers of transactions and it can equate to hours wasted.

 

5. Some invoices will need to be shared by entities

Jumping back to the garden centre example for a moment, where you have the retail and cafe businesses set up as separate operating entities, what do you do when the rent and rates bills come in. Both businesses are using the same premises and using their share of the heating and lights. Behind the scenes, their staff are sitting in the same office and consuming the same teabags.

If that doesn't make things complicated enough, how do you account for the garden centre having twice as many staff as the cafe, or for using more space? Costs will need to be divided up to appropriately reflect these differences in the businesses.

Not only will you be re-entering the same data again and again, manually calculating cost allocations becomes an extremely laborious and monotonous process.

 

6. Consolidated reporting can be a headache

Pie chartAs well as a P&L and balance sheet for each individual operating entity, when the time comes for the group as a whole to produce their consolidated accounts, the process can be an absolute headache. These will need to add together the results of each entity, but also need to be able to appropriately account for the intercompany sales, purchases, debtors and creditors.

Ok, it may be a headache, but we don't need to do it too often you might think. That's all very well, but if you want to make effective decisions you should want access to this type of consolidated data all the time and in real-time, or risk your business falling behind.

You then have additional issues when different stakeholders want different views of the data. Karen wants to report on the full group, while John only cares about entities A, C and D and Michael wants a consolidated report for entities A, B and E. It's easy to see how this can easily escalate and devour countless human hours without the right technology in place.

 

7. You'll enter the wrong transactions into the wrong place

It might sound silly, but believe me, it happens. You're working your way through a stack of invoices, meticulously entering them into the finance system, only to realise you had been working within Entity B this whole time, rather than entity A. Never a case of simply hitting delete, rectifying your mistake will undoubtedly eat up even more time you don't have. All before you even start entering them all over again, into the right place this time.

 

Working with the right multi-entity accounting software

lightbulbIf you recognise any of these pains in your organisation, the good news is that there is a solution and that's having the right accounting software in place.

While it's true the majority of accounting systems will offer the same core functionality that every organisation needs, many will undoubtedly offer additional functionality that makes them better suited to specific business types and structures. For example, a large retailer will require a system that can cope with complex stock requirements, a local college will need a system that generates the sector specific reports they require. In much the same way, a business made up of multiple operating entities should opt for a system that offers specialist functionality in this area.

When speaking to system suppliers, these are just some of the multi-entity accounting tools you should look for:
 

  • Highly customisable user access controls
    Essential for ensuring staff only see the data they need, while those that need it can also access the bigger picture.
     
  • Flexible entity structures
    As previously stated, many entities will have vastly different financial structures. Something simple like two different year end dates could cause huge problems in the wrong finance system. Ensure your system allows for these structural differences from one entity to the next.
     
  • Automated Sales Invoice and Purchase Order generation
    If your business entities are likely to trade between themselves, you won't want to be rekeying data from one to another. With the right system in place, you can enter a sales invoice within entity A and entity B will automatically be updated to reflect the purchase.
     
  • Simple cost allocation
    Software with a true multi-entity module should be able to handle cost allocations with ease. Enabling you to pre-define cost splits across entities on either a percentage or fixed value basis, saving you from manual calculations and endless data entry.
     
  • Flexible consolidated reporting
    If you're forced to manually export data sets and merge them outside of the finance system, then your system isn't doing its job. Consolidated reporting in a true inter-company system should be as simple as the click of a button, adding and removing entities as you need in a way that keeps your data protected within a secure database.
     
  • Clear entity by entity interfaces
    We spoke about the pains of entering data into the wrong place. While it may seem easily avoidable, it's inevitable it will happen from time to time. Although minor on the face of it, good visual queues within your software that indicate what entity you're working within can save countless frustrations in the long run. Look for things like clear entity labels and colour coordinated screens that stand out at a glance.


Take the next step

If you manage multiple entities and recognise any of the challenges in your own business, bluQube's accounting software could be the solution. Get in touch today to book a demo.

 

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