By Paul Sparkes, Commercial Director of award-winning accounting software developer, iplicit.
Organisations don’t just grow in size – they also grow in complexity. What started as a single business or nonprofit can become a web of connected entities.
It’s quite likely that the different parts of the organisation will be using different accounting systems, which don’t speak to each other and may no longer be up to the job anyway.
It all adds up to a serious headache for the finance department that’s trying to keep track of everything and produce accurate consolidated accounts.
Why your accounting system has to deal with multiple entities
The fact that you’ve ended up with multiple entities for the finance department to handle could be the result of design or of the unique history of the organisation.
A business might have grown through acquisition – increasingly, through accelerated acquisitions, which are done against deadlines and happen faster than traditional mergers or takeovers.
It’s also possible that new activities might have been launched under the banner of separate companies, in order to limit risk and protect assets in the event of a business failure.
In the property development and construction sectors, for example, it is not uncommon to set up separate entities for each new development.
Separate entities might also have been established to take advantage of tax reliefs, or to make borrowing easier.
In the nonprofit sector, a charitable trust might have spawned a separate trading company which sells merchandise. That VAT-registered trading company then passes its profits over to the trust.
All this is rational enough, but you can end up in a situation where producing a reliable profit and loss account is tortuously complicated and is a drag on the whole business.
How complicated can things get when you’re accounting for multiple entities?
It might have seemed sensible and cost-effective at the time for each of the entities in your group to buy small, entry-level accounting software packages.
But after substantial growth, you’re likely to be faced with an array of software that doesn’t fit together, or multiple instances or databases for every company in your group. Either of those scenarios bogs down the hard-pressed finance team in duplication and complexity.
Here are some of the areas where things may have become way too complicated.
Paying the bills: If your finance team is handling the affairs of multiple entities, that can cause confusion when suppliers’ bills arrive. It can mean logging in and out of several accounting systems, running off reports, creating payment files, and uploading those into separate bank accounts.
Intragroup trading: It’s simple enough for one part of a group to sell something to another. But for the finance team, this can mean going into one piece of software to handle the sale and another software package to deal with the purchase, or at least duplicating the entry in two different ledgers.
Intercompany eliminations: The business of stripping out any trading between different companies in the group is one of the most painful parts of producing consolidated accounts. If you’re not handing over that job to software, you’re giving your finance team a lot of time-consuming, manual work.
Group VAT returns: Often, several companies form a VAT group. If they’re all running different instances, that means VAT returns have to be exported from each system and painstakingly entered into the system used for the group submission.
Management reporting: With multiple accounting systems involved, monthly management reporting becomes hugely labour-intensive. Figures have to be extracted from the different software, put into a package such as Excel and totted up. You’re practically doing it by hand.
How to start simplifying matters
If things have become too complicated in at least one of the above areas, it’s probably time to consider whether you need to move on from your existing accounting software.
In particular, you need to assess what your existing arrangements are costing you – not only in the money you’re paying out, but in the time that’s being taken up servicing unwieldy systems.
A finance director who’s able to step back and see the situation objectively is likely to conclude that there are better ways of doing things. Adopting the right software can put you back in proper charge of a business which, thanks to its complexity, was in danger of running away from you.