THE HUB OF YOUR INTERCOMPANY INVOICE SETTLEMENT PROCESS.
Multilateral Netting: The Hub of your Intercompany Invoice Settlement Process. November 14, 2020 | Author: Nigel Cripps
Looking back to the early days of multilateral netting, the focus was primarily on reducing FX spread and cross-border payment costs:
FX trade rates quoted by banks to all but the most sophisticated of corporate clients included significant spread cost, resulting in a fat profit for the bank to the detriment of the unsuspecting client; and the client’s more remote offices and subsidiaries around the world could be guaranteed an even worse experience from their local banks when settling their cross-currency payments and receipts through their local bank. Using a netting system to reduce the aggregate FX trade volume required to settle intercompany cashflows, and to then have that reduced volume traded more efficiently at the treasury center, was a win-win situation.
There were more currencies: in January 1999 the euro replaced 11 separate European currencies, and 8 more have since joined the party. Eliminating 19 currencies among a set of countries that have a very active cross-border trade had a major impact on the total value of corporate foreign exchange volume.
Wire transfer costs were significantly higher than they now are, and so the aggregate cost to the client could be very substantial when each office was responsible for initiating its own cross-border payments. Considering just the euro area again, within the last 12 years SEPA has resulted in very significant reductions in cross-border payment fees.
And the cross-border payment system was less robust than it now is. Despite SWIFT having introduced an efficient network for payments and other message types, it was still common for payment delays to occur through error, or to actually be built in to the process to the advantage of the banks who could earn float on uncleared funds at a time when interest rates were noticeably higher than they now are.
But each of these factors has since been mitigated to a greater or lesser extent. So, how are businesses now looking to benefit from netting?
The answer is invoice clearing and settlement efficiency.
Whereas a netting system 25 years ago might have been required to handle a few hundred intercompany balances, in which each balance might represent the aggregate value of a larger number of invoices payable by one company entity to another, that netting system is now expected to handle each one of those invoices, and to receive the source invoice data and then output the processed invoice results along with calculated countervalues and maybe additional accounting data in a highly-efficient manner. The netting system is now becoming a hub for a company’s invoice clearing and settlement process.
Of course, if you are one of the lucky few that has a global ERP instance that contains every invoice issued by every company entity worldwide, you don’t need a netting system because – provided you have the funds and patience for your ERP consultants to create a custom solution – it can all be cleared and netted within the ERP. The result is a highly-efficient solution. EuroNetting even assisted one client along a 7-year path towards successfully attaining that goal.
However, it’s still quite rare to find a business that is so fortunate. More typically there will be a core group of entities whose invoices are reasonably consistent and are coming from similar data sources, and then a second set of entities whose invoices come in from a variety of different sources, even output from a spreadsheet.
A netting system can add a lot of value to how these invoices are then processed, cleared and settled:
Avoiding Duplicated Invoice Payment A good netting system will offer the capability of inspecting invoice numbers and identifying duplicates that might already have been settled in a previous cycle, or which have been imported into the current netting cycle either by the same party in a different import file, or imported by another user. Configuration options will check for duplicates based on user-defined matching parameters, such as invoice number only, or invoice number + receiver, or invoice number + both payer and receiver, to still permit through identical invoice numbers which represent totally different transactions.
Invoice Matching If you expect there will be frequent disagreements between the two parties to an invoice – for example amount, due date, or just the correct invoice number – then using a matching system can help sort out the differences. A netting system is normally payable-based or receivable-based and therefore imports only the payer’s or the receiver’s version of each invoice, however a matching system will have you upload each party’s payables and receivables. Those records are then matched against their counterparties’ receivables and payables, resulting in lists of full matches, partial matches containing some but not all matched elements, and unmatched invoices, which will then be either moved forward into the netting, submitted to further evaluation and resolution, or rejected.
A matching module can be a valuable tool in identifying common sources of mismatched invoices and help clear up the number of disagreements over time. However, it can also be an additional drain on resources by requiring double the amount of data submission, and then your users’ time in resolving the partial and unmatched items. If poorly managed it can actually be detrimental to the netting efficiency.
Dispute Management A different spin on problem resolution is dispute management. This starts off with a traditional single-sided payable- or receivable-based data source, but rather than simply netting and settling all invoices, now the counterparty is given the ability to dispute an invoice. A good dispute management process will allow the two parties to conduct a logged exchange of opinions within the netting system that will hopefully lead to one or other party agreeing to a final version of the invoice, at which point it is then put forward into the netting.
Configuration settings can further adapt the process:
Are all invoices initially approved unless they are disputed by a counterparty, or are they initially pending until actively approved by the counterparty?
Are items held out of the netting until a dispute is resolved, or will they be netted even if a dispute is still open?
But as with matching, dispute management should be used sparingly to avoid unnecessary additional workload, and also the potential for parties intentionally holding items out of the netting.
Outputting processed invoice results back to the ERP This gets us to the biggest benefit a netting system will provide as the hub of your clearing process: once an agreed set of invoices has been netted, it can then output those processed results back to the source systems to clear the invoices across your network of parties. Typical data elements output will include both the payables and receivables for each party, containing the exchange rate and local currency equivalent of each settled invoice, exported in either individual files for each party, or in larger aggregations of multiple parties’ invoices mapped back to the original data sources.
More complex outputs can include multiline accounting entries or any other elements designed to improve the efficiency of the invoice clearing process. Most of all, make sure your netting provider can handle and implement exactly what you need: from experience we know that just about every client needs something a little different from everyone else. Contact us to learn more >