The Best Solutions for Counterparty Reconciliation
As you probably know, when buying, selling and lending money between companies within a group, a process is needed for how these internal transactions should be handled. For groups that have several subsidiaries with a number of internal transactions it can be a major challenge to managing this. Many companies handle this process in Excel, where the manual process makes it difficult to ensure that these transactions are eliminated at group level. In this article we present the two best solutions for counterparty reconciliation.
There are mainly three problems with this, which many probably recognise:
Doing an analysis of clothing sales, in example for the legal entity Denmark is not very complicated, but analyzing both Sweden and Denmark's sales together can be problematic. If we do not eliminate the transactions between the two companies, sales for the group will look larger than it actually is.
Challenges arise when the various subsidiaries forecast their sales and these do not match each other. There is then a risk that the company at the group level either over- or underestimates its outcome and thus also its forecast ahead.
3. Administration in Excel
The idea is often that the different companies should discuss who will budget for the costs and revenues via mail or Excel files – which usually ends in the process being time-consuming and complicated. The risk of errors increases and many times the subsidiaries end up working on their own because the process is too manual and complex.
Counterparty Reconciliation Management
We usually say that there are two ways to manage counterparty reconciliation in a forecasting tool. The first, and easiest solution, is that one simply decides which party calls the shots. According to the second method you visualize what the counterparty has said and mirror that.
The First Method – One Party Decides
We’ll use the clothing company mentioned above as an example: If the Danish company states that they will buy goods from the Swedish company for 5 million, a revenue will then automatically show up for the Swedish company of 5 million.
In Excel, this method is difficult to handle, but with the help of a system such as Planacy, you can set it up so that the account for clothing sales is not editable in the Swedish company – it is controlled based on what the Danish company puts in as the cost of buying clothes. Of course, it’s also possible to set it up the other way around so that the Swedish company directs the process. This is possible since you from an administration perspective can decide which accounts should be counterparty accounts.
The Second Method – Approval Process
In a system for budgeting and forecasting it is also possible to visualize the counterparty's forecast. Here, no party is "in charge of the other", but each entity's forecast is visualized for the counterparty, thus clarifying if there are differences.
In Planacy, such a solution can be set up as per below. Here we clearly see a discrepancy of - 5,200 between the Danish subsidiary and the head office. In this example, the head office has forecasted a cost of this sum, but the Danish subsidiary has not forecasted this as revenue, which is visualized in red in the Check column.
In Planacy, it is then possible for the Danish company to approve the counterparty's forecast (in this case the head office's cost forecast) and then automatically have their forecast updated with the corresponding revenue or costs.
If you want to have overall control over the various transactions from a group perspective, you can of course set up a template similar to the example below. The template gives an overview of the differences that exist between the companies and thus which transactions must be adjusted.
If you have any questions about this article or want to learn more about Planacy and how you can work with counterparty reconciliation in our platform, you are most welcome to shoot us an email or book a demo right away!