Tag Archive for: netting

The Core Benefits of Netting For Corporates

| 29-8-2019 | treasuryXL | BELLIN

Simplify intercompany commerce, minimize fees and elevate visibility

 

Understanding the core benefits of netting

Multinational corporations are familiar with the downsides when involved with intercompany commerce. Growing transaction fees, currency exchange risk, and lack of transparency are common facets that make it difficult for such organizations. Corporations can implement netting to mitigate those downsides and free up valuable time for treasury and accounting departments. This article will shed light on the benefits of netting and why your company needs to consider implementing it.

A brief definition of netting

Netting or “Intercompany Netting” is the process of reconciling and netting intercompany invoices between two parties, resulting in a final payment and netted cashflow. In regard to financial markets, the purpose is essentially to minimize transactions and distinguish remuneration in multiparty agreements. Netting is suitable for various situations, participants, and cycle types. For more information, check out our in-depth guide to netting here.

Bilateral Netting: Two companies reconcile invoices they may owe to each other and one company agrees to pay the other one sum.

Multilateral Netting: Three or more companies netting invoices together and a netting center is used.

Multilateral Netting vs Bilateral Netting

Further Reading: Netting: An Immersive Guide to Global Reconciliation

Macro benefits of netting

Foreign Exchange Risk Mitigation

Multinational companies often perform transactions with their own subsidiaries or with non-group companies. Because of this, companies must keep currency exchange rates in mind. Original invoices are often sent in the originating currency,  which raises the need for either an external exchange service, a bank, or a netting center. With netting, the foreign exchange risk is centralized to the netting center.

It will not only keep existing invoicing procedures intact but avoid the loss of money involved with inflated currency exchange rates when using external exchanges. As mentioned, the FX risk is transferred from individual subsidiaries to the parent company, which is usually more equipped to manage it.

Floating money is wasted money

Cash-in-transit is a thorn in just about everyone’s side. Stagnant approval and processing times can create a chain reaction of risk as that cash is unable to be used. Whether it is bilateral or multilateral netting, keeping invoices to a minimum reduces the amount of money that is stuck in the limbo phase of approvals and processing times.

Increased transparency

Treasurers are able to operate at a high level when they are afforded visibility of cash flows. When subsidiaries make bulk payments, lack of liquidity or financing issues can arise and if company-wide visibility is lacking, it becomes difficult for a treasury department to act accordingly. Bulk payments backload and are concentrated in a short amount of time, cash flow is stretched thin among many of the subsidiaries. A netting system will provide daily reports and monitoring tools that provide cash flow visibility throughout the group.

Netting Vorteil Transparenz

Maximize operational efficiency

Naturally, one of the more prominent benefits of netting occurs on a daily basis. Treasury departments will see a drastic reduction in time spent on transactions and managing foreign exchange risk. From an operational point of view, a netting process simply saves treasurers time and establishes a company-wide process for disputes.

An example of this is with BELLIN clients, who save an average of 2 days of work per month per affiliated company. For an organization of 30 affiliated companies, that’s 60 days per month or 720 days a year. Realized savings typically range from $250,000 to +$1,000,000 on an annual basis.

Manage Disputes

When implementing a netting system, the treasury department is tasked with establishing a protocol for managing disputes. When subsidiaries fail to submit payables, a hitch in the payment process is born. What this causes is the inability for the payee to continue with their daily operation as they wait for receivables. Administrators can establish automated escalation protocols, which will elevate disputes to upper management based on pre-defined time periods. The escalation system leads to both tangible and intangible benefits as it literally resolves disputes through escalation and also provides an incentive for subsidiaries to execute their payables to avoid the unnecessary involvement of management.

BELLIN tm5: a comprehensive netting solution

BELLIN’s intuitive TMS: tm5, has a netting module that reconciles invoices and manages disputes with an ‘agreement-driven approach’.

The ‘agreement-driven approach’ is essentially a self-clearing methodology that utilizes the previously-mentioned: escalation protocol. tm5 automatically matches all receivables against payables and has an embedded dispute workflow for discrepancies. Consequently, the group company establishes group-wide agreements for disputes and will elevate them accordingly. With such an approach, all subsidiaries are involved in the entire process, disputes are mitigated and automatically escalated, and there is group-wide transparency.

BELLIN’s tm5 netting module has an intuitive interface but the key ingredient that makes it shine is that the platform has standardized functionality with the flexibility to meet the needs of all subsidiaries.

Interested in finding out more about whether netting is the right solution for you? Give BELLIN a shout or check out tm5, our intuitive treasury management system.

Author picture ofFlorian Kolb

Florian Kolb
As a Senior Treasury Consultant and Payments Specialist, Florian Kolb is in charge of a number of implementation and process consulting projects focusing on worldwide bank connectivity. He has great experience with SWIFT/H2H connections and complex global payments projects. Before joining BELLIN in June 2016, Florian worked as a consultant in accounting for an IT systems solutions provider. He studied at Verwaltungs- und Wirtschaftsakademie (Administration and Business Academy) in Freiburg, Germany, and is a Certified SWIFT Specialist.

 

Transform Intercompany Trade with Multilateral Netting

| 19-8-2019 | treasuryXL | BELLIN

Legacy tools yield legacy results

Too many international companies are manually reconciling and netting intercompany invoices. These companies may lack a clear and structured workflow for this process, leading to a host of potential risks and issues along the way including:

  • High volume of intercompany transactions
  • Too many invoice and expense disputes
  • Shadow bookkeeping
  • Lost productivity
  • High bank fees and fx costs

According to a recent Deloitte poll of finance professionals, reconciliation is the biggest intercompany hurdle. With only 9.2% of finance professionals saying their organization has a holistic, efficient, and clear intercompany reconciliation process, there is a clear need for a solution.

When asked what poses the greatest challenge to the implementation of intercompany accounting:

  • 21.4% of participants claim disparate software systems are their biggest challenge
  • 16.8% claim intercompany settlement
  • 16.7% said complex intercompany agreements
  • 13.3% said transfer pricing compliance
  • 9.4% said FX exposure

Introducing a multilateral netting solution

With a centralized multilateral netting solution, companies can boost profit and productivity by gaining global visibility and control, automating processes, settling disputes locally, and reconciling and netting transactions seamlessly.

Average BELLIN clients savings with our multilateral netting solution:

  • 2 days of work per month
  • $250,000 to $1,000,000 on an annual basis from banking and FX fees

Average industry savings figures:

  • 15% year over year growth
  • 50% labor cost reduction
  • €13 saved per invoice through automation
  • 1hr of labor saved per day

Would you like to learn more about BELLIN’s multilateral netting solution? Just reach out to BELLIN for a tm5 demo, or visit tm5 page.

The Role of Netting in Cash Management

|13-8-2019 | treasuryXL | BELLIN

Increased cash flow efficiency, faster cash allocation and optimized FX management

Cash management is every company’s bread and butter. Considerably fewer companies make use of netting, despite its many advantages for cash management.

 

 

 



Netting supports companies in making their cash management more efficient and less costly by:

  • Boosting cash flow efficiency,
  • Consolidating invoices and enabling faster cash allocation,
  • Allowing companies to better calculate their FX exposure and hedge it strategically.

Cash management

Through cash management, companies ensure they can always meet their financial obligations. It allows them to allocate the required liquidity to the right entity, at the right time, in the right currency. For treasury to achieve that, all incoming and outgoing payments as well as account balances and forecasts must be visible. With access to complete and up-to-date information, treasury can monitor processes, plan liquidity based on forecasts and strategically manage cash in different currencies.

Netting

Companies that have implemented netting offset cash flow obligations between two parties and consolidate them to a net payment. Most companies use netting for balancing intercompany trade flows. However, it is also possible to integrate other parties as netting participants. Using internally-agreed conversion rates, companies can engage in cross-currency netting.

More information on netting: Netting: An Immersive Guide to Global Reconciliation

Videos on Reconciliation and Netting and Cash Management

The impact of netting on cash management

Netting takes a specific proportion of all cash flows and places them within the framework of a dedicated and structured process. This process, the netting run, is repeated at regular intervals. It can be divided into four steps:

  1. Data import
    Data is imported from the ERP system to the netting system.
  2. Data reconciliation
    The netting system automatically matches and consolidates submitted payables and receivables based on pre-defined parameters and creates a netting statement.
  3. Data sharing
    Once data has been matched and invoices consolidated, the netting center communicates the net amount to every netting run participant. It can be issued in their currency of choice.
  4. End of cycle
    The netting center makes one single payment to participants with a positive balance. Participants with a negative balance make one net payment to the netting center.

netting run

Netting boosts cash flow efficiency

By offsetting payables and receivables, netting reduces the number of transactions. In turn, this reduces cash-in-transit. And reduced cash-in-transit and minimal transactions make for reduced efforts when it comes to procuring liquidity, interest burden and payment processing.

In addition, the schedule of the netting run means payments are made on a specific date: instead of having to monitor countless different dates, treasury can lean back and wait for the end of the netting cycle.

Netting makes the lives of cash managers much more linear: they can plan accurately and allocate the exact amounts of required funds to accounts. This means that the company can keep floating assets to a minimum. Netting lends structure to complex processes and ensures opitmal allocation of cash flows.

Netting accelerates cash consolidation and allocation

All transactions between two parties result in accounts receivable for one company and accounts payable for the counterparty. The respective journal entry must show a zero balance. However, without a structured process in place, consolidation efforts are often far from straightforward. The different parties pursue different interests – either receivable- or payable-driven.

A good netting process seeks agreement between the parties and allows them to clarify any disagreements within a structured and automated framework. Agreement-driven netting encourages participants to submit accurate data. This makes for a much faster reconciliation process and makes it possible to automate several steps of the netting cycle. A speedy reconciliation process is followed by swift payment processing –  directly in the system and with one click – and makes for greater efficiency.

Faster consolidation has a positive impact on cash flows. At the same time, netting saves treasurers valuable time when it comes to monitoring invoices. Conversely, accountants no longer need to waste hours matching invoices. On average, time savings amount to 1-2 man-days per month per entity. For a group consisting of 10 entities, this equals 10 to 20 days per month and 240 days per year – a full-time position that can be dedicated to other tasks that add real value to the company.

 

Netting saves time

Netting optimizes FX management

Netting makes it easier for companies to manage their FX exposure, i.e. to optimize their FX management.

The payment terms defined as part of the netting cycle govern the timeframe between issuing an invoice and paying it. Companies that use cross-currency netting also set internal conversion rates for the currencies in question that apply to the respective netting cycle.

Having defined dates and rates, treasurers gain insight into an entity’s hedging requirements for a specific time period and can consolidate this sum to one hedging transaction. The netting center also defines the settlement price that is used to convert each entity’s FX payments to the respective settlement currency. This creates implicit hedging. The netting center can post and settle the transactions for each netting run participant without impacting the FX result. Entities transfer their actual currency exposure to the netting center, where it can be hedged strategically.

How netting optimizes FX management – an example:

As part of a monthly netting cycle, a company defines a payment term of 30 days. An entity issues and posts an invoice in March, which is paid in April. In February, the netting center defines the FX rate for March, and the March rate is identical with the settlement price for April. The netting center has complete visibility of currency requirements and can hedge the FX exposure centrally. Transaction and conversion costs are reduced to a minimum.

Netting FX-Management

 

Netting and cash management in a nutshell:

Netting is a powerful tool for companies to optimize their cash management. Netting lends structure to offsetting cash flows and puts them into a clearly defined timeframe, the netting cycle. This has the following benefits:

  • Very precise account planning
  • More efficient cash flows
  • Faster consolidation
  • Option to automate processes
  • Speeding up of the cash allocation process
  • Visibility of FX requirements
  • Strategic FX hedging

Interested in finding out more about whether netting is the right solution for you? Give BELLIN a shout or check out tm5, our intuitive treasury management system.

 

 

The principles of multilateral netting: what, why and how

| 27-06-2019 | ENIGMA Consulting |

This article is meant as an introduction to the process of multilateral netting for international companies. It describes the fundamental concept of netting, the steps within the netting process and the ultimate benefits of netting. In addition, we elaborate upon the role of technology in netting and prepared a checklist for anyone that considers using netting in their company.

1. What is (multilateral) netting?

Netting is the process of consolidating payables against receivables between parties. Rather than settling each individual invoice leading to a large volumes of transactions, parties can consolidate invoices and agree upon one net payment stream. In the majority of the cases, netting is set up between internal group entities as parties for settling their intercompany invoices, but external (third) parties could participate in a netting process as well.

Most of the netting methodologies are either payables- or receivables-driven. In a payables-driven system, payables are netted against the payables of the other participants and in a receivables-driven system, receivables are used. Note that in the end it is (or should be) a zero sum game: intercompany receivables = intercompany payables.

If there are only two parties involved in the netting process it is called bilateral netting. If there are more than two parties involved that use a central entity to interact for all their intercompany transactions then the process is called multilateral netting. The figures below illustrate the differences between the payment flows before and after implementing a multilateral netting solution using a central entity (netting center).

Intercompany process without multilateral nettingIntercompany process with multilateral netting

Intercompany process without multilateral netting          Intercompany process with multilateral netting

2. How does the multilateral netting process works?

In general, the netting process (netting cycle) involves the steps outlined below:

Step 1: Collect invoice details from local entities
The first step is to have the local subsidiaries send their invoices to the netting center. Usually there is a central database where all the received invoices are collected. See also chapter 4 on technology.

Step 2: Verify / dispute invoices in the netting cycle
When invoices between two parties do not (automatically) match they should be investigated and disputes should be managed.

Step 3: Communicate netting balances to local entities
Once all invoices are reconciled, the netting center will calculate and send a netting statement to each of the local entities containing the balance that they will receive or need to pay.

Step 4: Settlement via cash or intercompany booking
The netting center distributes payments to the local entities that have positive balances. Local entities with negative balances will have to make a payment to the netting center. After the netting cycle is closed, a new round of collecting invoices will start (step 1).

3. Why use multilateral netting?

There are numerous advantages to those corporates that deploy multilateral netting:

  1. Reducing bank and transaction costs as a result of less funding transactions, less FX accounts and trades and savings on FX spreads, volumes and commissions. The pricing of FX deals can improve as the total number of FX transactions is consolidated into larger trades.
  2. Centralizing FX management as the netting center has the complete overview of currency requirements and is better able to hedge FX exposure.
  3. Standardizing the intercompany settlement process, creating both a single transparent approach throughout the company and discipline with regard to intercompany procedures and dispute management. This, in turn, can also minimize operational risks while maximize the operational efficiency.
  4. Improving the posting of intercompany invoices and reconciliation. By automizing this process (see chapter 4 on technology) not only treasury but also the accounting department benefits from netting.

For those international companies treating multilateral netting as part of their treasury roadmap it is possible to further enhance the benefits of netting by linking it with cash management. Integrating the use of a netting center with an in-house bank (IHB) can eliminate the use of physical cash payments by settling the net balances via the IHB.

So, for which companies it is worthwhile to consider multilateral netting? Corporates that have various (decentralized) local entities and various currencies and that have continuous multiple intercompany transactions between the local entities.

4. How can technology help

Technology and systems are key for an efficient and automated netting process. Examples of this are the following:

  1. Data collection
    The netting center relies on external input from its participants in order to reconcile invoices and calculate final settlements. The A/P and A/R invoices should therefore be collected from the ERP system and be sent to the netting center each netting period. Automation of the data collection will help the consistency and reliability of the data input for the netting process
  2. Netting calculation
    For the netting calculation, systems are crucial as the calculation for multiple invoices from multiple parties, in multiple FX can be quite complex.
  3. Dispute management
    Where invoices are sent, disputes can occur. These disputes can originate from administrative issues or be business-oriented. In a complex environment with multiple transactions occurring daily, disputes can often be overlooked. Systems are a helpful tool in providing an internal dispute management system.
  4. Liquidity management and settlement
    Upon the completion of a netting run and all invoices being reconciled, each company will receive a final netting statement, containing their new balance to be paid to or received from the netting centre. When a subsidiary is due to owe money to the netting centre, they will have various settlement possibilities available for use, and systems play an inevitable role to support these settlements. Subsidiaries can settle via bank account wires, take internal loans from the group treasury or book via intercompany accounts. Systems can be used to streamline the settlement process.
  5. Audit trail
    Some systems can provide a fully audit trail on all key variables in the netting process.
  6. Transparency and less manual tasks
    When all stakeholders of the netting process are using one central system where everybody has access to, there is only ‘one source of truth’ that increases transparency and supports consistent involvement of all parties. Systems will also diminish the manual tasks in the process and decrease the vulnerability to errors.

Which system is used for the netting process depends very much on the system landscape of the company. Roughly there are three options:

  1. ERP system
    As the source of the A/R and A/P is the ERP, it makes a lot of sense to use the ERP for the netting process as well. In the following situations the ERP system is not ideal option:
    – when the company has multiple ERP systems
    – when the ERP system lacks netting functionality
    – when treasury has limited access to the ERP for the (internal or physical) settlement of the transactions
  2. Treasury Management System (TMS)
    Many TMS providers can deliver netting functionality that support the full netting cycle. Preferably the netting process is then set up with automatic upload/download interfaces for the input and output data from/to the ERP system(s). It requires that the treasury department takes the lead in the set up and management of the netting process.
  3. Dedicated netting software
    There is variety of other dedicated netting systems available where the netting process can take place. Interfacing with the TMS and the ERP is then even more important. Some companies also use Excel spread sheets for their netting process and that can still be practical solution if there are only limited parties involved, few internal invoices and a small number of currencies.
5. Checklist

To prepare the business case for setting up a netting process that meets the specific requirements of the organization, the checklist of questions below can be used.

Checklist
1. How many currencies are used for internal invoices?
2. What is the number of local entities?
3. What is the total amount of internal invoices per month, what is the monthly value and who are the counterparties of these invoices?
4. What is the background of the internal invoices: trade, interest, royalties, dividend, hedge contracts internal, fees, loan repayments, investments etc.?
5. In what countries are internal invoices send/received?
6. Which exchange control regulations are existing for cross border transfers and what are the fiscal and legal consequences of netting intercompany transactions?
7. How does the system landscape looks like, where is data stored and in which system(s) will the netting process takes place?
8. Where does FX management take place within the organization and how will that be impacted by the set-up of a netting process?
9. To assess the options for settlement of internal invoices:
– How does the current bank (accounts) landscape looks like?
– Is there already an in-house bank (IHB) structure set up?
10. What are the organizational consequences with respect to the treasury department, accounting processes and corporate policies?
11. Are there adequate resources available in the organization at the relevant departments (such as accounting, IT and treasury) to set up the netting process?

Dominic Hoogendijk and Bas Kolenburg are experienced senior treasury consultants working for Enigma Consulting. Enigma Consulting is a trusted advisor in Payments, Risk & Compliance and Treasury with over 20 years of experience. Enigma Consulting serves all Dutch financial institutions, many (international) corporates and charity organizations.

 

 

 

 

 

 

Netting: a viable value driver

| 17-12-2018 | BELLIN | treasuryXL |

How to save money and resources with a smart intercompany reconciliation process

The last two decades have seen treasurers graduate from haphazard data collectors to deliberate decision makers. As their empowerment is inextricably linked to the triumph of the internet and the technology it affords, it comes as no surprise that most of them are curious about new developments and eager to partake in them. Yet, the convenience and value of automated intercompany reconciliation is still comparatively underappreciated and overlooked. According to an article published in Financial Management just a few years ago, the vast majority of US companies still reconcile their balance sheet accounts manually and forfeit the countless benefits yielded by a centralized, agreement-driven netting process enabled by today’s technology.

What is Netting?

At its most basic level, netting is the offsetting of payables against receivables between two or more group companies to reduce the amount of net payments and save transaction costs. Originally a mere accounting task – ensuring that the balances of two accounts were matching – intercompany reconciliation has, with the advent of modern technology, transformed into an indispensable cash and FX management tool and thus become an integral part of treasury management.

The netting center — technology with teething troubles

The proverbial missing link to an enhanced netting process was the emergence of cloud-based Treasury Management Systems that afford users global visibility and control and enable the implementation of group-wide process automation. Bilateral netting was replaced by multilateral netting (figure 1) via the introduction of netting centers run by the group treasury. Isolated matching between single subsidiaries became obsolete, as the netting center acts as a reconciliation hub across the entire company: payables are made out by the respective group companies to the netting center, receivables get paid to the eligible subsidiaries by the netting center. Classically, this process was either payable- or receivable-driven. On the surface, this seems simple and efficient, but it’s not: as there is no room for doubt or dispute, it is susceptible to errors and abuse. In the case of payments-driven netting, subsidiaries can compromise the system by accidentally or willfully failing to enter invoices, while in a netting process based on receivables, group companies can enter fictitious agreements to garner illegitimate payments. In a setup like this, the netting center is as effective as it is blind – with guillotine-like precision it carries out what the subsidiaries have entered, without verifying its legitimacy. This creates uncertainty among the group companies and fosters catacombs of shadow bookkeeping at the expense of much-needed visibility.

Netting – it’s all about engagement

Therefore, modern multilateral netting systems should not only perform AP/AR matching but are also dispute management systems, performing – as we call it — agreement-driven netting. It enables payable- and receivable-driven netting, but in an advanced manner, as it encourages engagement and promotes transparency. Via the TMS, AP and AR line item data gets collected and subsequently matched. Disagreements are dealt with in a structured dispute process, the rulebook of which is defined by the company’s management according to the requirements of the group. Disputes between subsidiaries get reviewed by the netting center, which acts like a referee, applying said rules. The key principle and the main advantage of this approach is the engagement it fosters: each party gets their say, no one can be taken advantage of, all transactions are transparent as everything gets recorded and the proper settlement of balances is ensured.

Multilateral Netting as a cash and FX management instrument

The advantages of such a process are obvious: With fixed dates for netting runs, incoming payments can be predicted precisely. The netting center respectively the central treasury enjoys maximum control and visibility of cash movements and can optimize the use of funds within the group. The same holds true for FX hedging: netting enables subsidiaries to transfer the FX risk to the central treasury, where seasoned experts deal with it for the entire group. Consequently, the number of FX trades – and with it the transfer and bank fees – gets significantly reduced, as each subsidiary will only have one cashflow per netting run towards or from the netting center in a fixed currency set beforehand. As the netting center acts as an in-house bank, the group companies don’t make any payments via bank accounts anymore, which saves cost and resources and provides added transparency.

Cost reduction via best practice netting: figures!

Let me provide you with just one example from the plethora of companies, who were able to streamline their operations and encounter significant savings via a TMS-based netting process: the Austrian tool manufacturer Tyrolit, whose Success Story and accompanying video we’ve featured previously as part of our We Love Treasury 2 series. Upon counting all payments via bank accounts between group companies, Tyrolit arrived at the impressive number of 600 per month, most of them international, entailing substantial bank fees as well as float. The fact that many of those transactions were made in foreign currency added significant translation costs to that, which were hard to calculate due to the different margins the banks offered. With the roll-out of an agreement-driven netting process across the group, Tyrolit managed to reduce the number of transactions to a mere 5% of the original amount and ended up saving the whopping sum of about 500,000€ per year on bank fees and translation costs alone.

Netting company-wide: benefits, benefits, benefits

By transforming a company’s entire intra-firm trade, a robust multilateral netting process offers benefits galore, including but not limited to:

  • a company culture that enables dialogue, promotes engagement and fosters transparency and trust
  • facilitated cash and liquidity management via centralized IC reconciliation on fixed dates in fixed currencies
  • fair distribution and optimization of refinancing cost
  • centralized FX hedging aiding the consolidation of an over-complex banking landscape, reducing bank fees and minimizing translation costs
  • overall enhanced efficiency, visibility, security and compliance

By the way: the implementation of netting software is fairly straightforward, software-wise, once you’ve decided that you want to follow through with the process. It’s a one-time technical impact, user-training can be performed very efficiently and hosting as well as outsourcing options are available to overcome capacity shortages. So what are you waiting for?


Dr. Teut Deese
Staff Writer – BELLIN 

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Check out the video: “Netting: How to save resources with smart IC Reconciliation,” in which Martin Bellin gives us an in-depth breakdown of how your company can take full advantage of the associated benefits.