One of the biggest challenges of multi-entity accounting is balancing the needs of empowered decentralized organizations with the efficiency gains of centralized operations and processes. The CFO for an organization with multiple entities has to make sure each unit has the autonomy it needs to operate effectively while making sure that each unit’s data is readily accessible and shareable throughout the entire organization. Multi-entity accounting software helps achieve those goals.
A multi-entity business might have different brands, divisions, subsidiaries, units, branches, offices, or other types of entities. The parent company acts largely as an overseer. Each individual entity operates with a high degree of independence. This often means having different workflows even for routine business processes like accounting.
One of the biggest challenges for a multi-entity company is that it rarely grows as a single organization. This might include scenarios such as:
- Entities acquired through mergers and acquisitions with completely different accounting processes and software.
- International branches with completely separate accounting principles, laws, regulations, and culture.
- Business units that have always been internal but made separate decisions on things like accounting software before the parent organization decided to consolidate its software and processes.
Multi-entity organizations come in all shapes and sizes.
- Disney is one of the most common and complex examples. It has different resorts around the world. Within each resort are a number of theme parks and hotels. The theme parks and hotels have different divisions like attractions, food service, and maintenance. Disney also has other businesses like its movies, retail stores, and television network. All of these entities eventually combine into Disney’s net profit and loss statement, but they all operate with a high degree of independence.
- Major League Soccer is a unique example in the pro sports world because it doesn’t operate with the traditional franchise model. Instead, the league and teams are a single entity. However, the teams still have separate budgets and function as independent businesses.
- Even small retail chains can be multi-entity organizations if each store maintains separate accounting or if an expanding chain starts to divide into regions or different business lines.
When business entities have picked their own accounting processes or software, there’s usually a reason. They might need a specific feature that only one accounting software company offers. It can often be impossible to find one system that meets the needs of every entity within an organization. There’s also the common corporate problem of continuing to use dated legacy systems that were built over time because replacing them would mean rebuilding all of the entity’s computer systems from scratch.
Here are some of the common needs and challenges.
- Integration with other business software such as timekeeping, inventory control, or point-of-sale systems.
- Viewing and tracking financial performance using varying divisions — by entity, by business lines within an entity, or tracking specific metrics across entities (e.g., sale of a certain product across geographic divisions).
- Intercompany accounting of costs and sales between different units.
- Accounting, tax, and regulatory compliance across different geographic areas.
- Handling multiple currencies and accounting for fluctuating exchange rates.
- Varying accounts payable and accounts receivable processes and timelines.
- Variations in the mechanics of accounting, such as different entities using different account names or coding for the same or similar items.
What Does Multi-Entity Accounting Software Do?
Multi-entity accounting software can provide a range of options — from simply making it easier to compile data to moving the entire organization to a single system to the extent possible.
A typical end-of-period process might be for each business entity to go into its financial reporting software to run reports and send them to the CFO. Consolidation software replaces this process by constantly gathering data, including in real-time if desired. It can also act as a link between the different entities’ accounting systems and the parent organization’s various ERP systems.
A CEO might want to know how a product is performing across the company when considering whether to sell it. If the company is divided geographically and operating without consolidated accounting systems, this means asking each geographic entity to send in its sales data on that product and then compiling it.
With multi-entity accounting software, all that data is already gathered in one place. A project that previously might have taken days of waiting to finish now takes a few minutes to set the parameters for the desired report.
An American company could want to know how much cash it has on its balance sheet. That seems simple, except the company has currency in U.S. and Canadian dollars, the euro, Japanese yen, and a dozen other currencies. If it wants a total balance in U.S. dollars, it has to account for the fact that all the other currencies are changing in value every minute.
Of course, each international entity needs to keep everything in its home currency to maintain cash for its operations and avoid unnecessary currency exchanges. Consolidated reporting systems can automatically make any needed conversions on paper to provide a global view of the data while leaving the local accounting data unchanged.
An organization may be structured to have a procurement division that obtains supplies and materials then sells them to its other operating divisions. With separate accounting systems, this can create double the accounting work in the same way that a company has to log in and pay an invoice from an outside vendor, while the outside vendor has its own accounts receivable process. An intercompany accounting system links the internal systems together so that when one business entity processes one side of an internal transaction, the data automatically populates in the other entity’s accounting books.
It’s common for a company to need or have different sets of books for internal accounting, tax reporting, and public financial reporting. This gets more complicated when the company operates in multiple jurisdictions with different tax laws and public accounting principles.
When each entity has its own accounting system, it’s necessary to run and send separate accounting reports for each set of rules. With a consolidated system, it’s the raw data that’s shared. If the CFO needs to prepare five tax returns and a dozen public financial statements all under different rules, it’s simply a matter of selecting the right option when running the report. There’s no need to ask each entity to run multiple reports or to manually make adjustments to the provided numbers.
There are also indirect benefits of multi-entity accounting. These help streamline operations and improve efficiency.
Each business entity often has overlapping accounting functions. This may be due to the workload, but it could also only be because separate systems are in use and employees are underutilized.
For example, an organization might be better served by having a central accounts payable office but still needs to deal with differing processes, bank accounts, and payment terms between entities. Multi-entity accounting software syncs with each entity’s accounts payable systems to allow payments and approvals to be handled centrally.
Regardless of business size and staffing, the more different accounting functions are in place, the more time executives have to spend dealing with them. This could either be time spent dealing with things hands-on or coordinating with different teams. Having software to centralize and coordinate things leaves more time to work on strategy and other business tasks.
Any type of manual process leaves room for someone to be out of the office, get behind on tasks, or make mistakes when transferring data. Automation removes much of the potential for human error and helps your accounting processes become more of a tool and less of a burden.