This article is relevant if you are thinking about a new business system and / or you believe you need multi-company capacities activated in your NetSuite account.
Extract a Department into a New Company
Many times, organizations grow to develop different service and product lines. Questions may develop surrounding should a new company be constituted to distinguish it from different business departments. There certainly are good reasons to do this. For example, management may wish to extract enterprise value, produce management and operational focus, and diversify risk. Separating a particular business operation from a family of disjointed services may clarify to outside third parties the value of the stand-alone organization. Yet, often times, services between different business areas are complimentary. The same sales people can sell all products; and perhaps many of the same people are involved in fulfillment. Another example of complimentary services may exist between shared general and administration services, such as accounting or HR, that serve multiple business lines.
The Multi-Company vs. Multi-Department Consideration
Here are some situations that indicate that a departmental approach may be better than a multi-company approach. If you answer no to all these questions, you should be able to use department capacities instead of multiple company:
- Does your line of business need a separate legal status? Does it require its own tax compliance structure?
- Must your line of business have its own balance sheet?
- Are you seeking to inflate and hide the prices of goods and service sold between each line of business as a way to gain tax or other advantages?
- Are products and services completely distinct and require different marketing and selling tactics that are not complimentary?
Avoid Multi-Company: How to Powerfully use Offsets for Cross Department Sales and Delivery
If you answered no to the questions above, you have an opportunity to use your accounting system in a powerful way to avoid the setup, cost and operation of a mult-company business system.
If you were to break this deal respecting departments, here is how things may look:
The Department Offset Concept
The way to solve this is to use an offset concept that accounts for each departments’ “buying and selling” of other departments’ offerings. Under department offset accounting, we setup the departmental income statement as follows:
Under this presentation, we see a different story:
- The Product Department bought services from the Service department at an agreed upon value (here, $3,500).
- The Product Department Sales is lower (here, $6,500) now reflecting the offset to Services.
- The Product Department’s margin is now lower because the salesperson elected to take the inflated margin to purchase services and sweeten the prospect deal; it worked and the prospect accepts the offer.
- The Services Department sold services (here, $3,500) to the Product Department distinguishing it from traditional Service sales. Net sales for Services is correct for the Services department.
- The offset helps management understand how each department contributes to the complimentary aspects of the other department offerings.
- The Services department produced positive margin (here $1,000); not the loss as previously exhibited.
- Sales Offsets generally should always have a negative amount (or debit). Overall margin by department is properly reflected.
Marty Zigman
Holding all three official certifications, Marty is regarded as the top NetSuite expert and leads a team of senior professionals at Prolecto Resources, Inc. He is a former Deloitte & Touche CPA and has held CTO roles. For over 30 years, Marty has produced leadership in ERP, CRM and eCommerce business systems. Contact Marty to set up a conversation.
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