This article is relevant if you are seeking an alternative to using NetSuite’s multi-subsidiary approach for multiple company accounting.
Background
During a recent NetSuite implementation for a non-profit focused on payroll processing for union members under two separate labor contracts, the organization sought to optimize its transaction processing. My firm, Prolecto Resources, was engaged to develop a deferred compensation payroll transaction system inside NetSuite. Since we modeled their entire operation, we had an opportunity to shape the accounting model to a desired end state.
Since each union contract represented a Fund and required its own balance sheet and income statement accounting, the common sense approach is to use NetSuite’s OneWorld multi-subsidiary configuration. While NetSuite’s OneWorld certainly can work, it exacts a toll on transaction processing depending on the nature of the accounting and operations. In our client’s case, the nature of the two funds represented nearly identical payroll processing operations. In contrast, NetSuite’s OneWorld system is well equipped to assist entities that have very distinct business operations across an organization’s subsidiary hierarchy.
When the day-to-day business operations are very similar between entities, there are opportunities to run with a more optimized configuration. Consider my article, How To: NetSuite Subsidiary Alternative to OneWorld.
Alternative Model for Multi-Entity NetSuite Accounting
The NetSuite platform has powerful capacities that allow you to produce your own accounting that can be leveraged to streamline your accounting operation.
NetSuite Accounting Platform Constructs
Two key platform features are important:
- Balancing Segment: a more recent innovation is the ability to craft a custom segment that is balancing. When I crafted the Subsidiary Alternative Article in 2017, we had to be careful to confirm that the segment would stay in balance. Each segment gives us the ability to create a distinct balance sheet.
- Custom Transactions: the custom transaction type allows us to produce clearing accounting. The clearing accounting technique is needed when we have cross entity transactions that must be reconciled. See my previous article on How To Cross NetSuite Foreign Currency Boundaries with the Account Clearing Model.
With these two constructs, we can produce a streamlined accounting model in NetSuite.
Period End Clearing Accounting Processing Pattern for Streamlined Multi-Entity Configuration
NetSuite’s multi-subsidiary accounting model uses an approach to produce the intercompany transactions based on every originating transaction. It’s especially strong when you want to have one selling organization’s sales order become a fulfillment organization’s purchase order because it will connect the coordination by having customer/vendors entity records represent respective subsidiaries. This model produces a plethora of intercompany transactions as you coordinate both sides of the resulting item receipt/fulfillment and invoice/vendor universe.
However, another approach is to instead measure all the intercompany transactions at period end (e.g., monthly), and then create a single inter-company transaction to clear the off-balance situation. This approach significantly reduces the record management overhead in day-to-day processing and ultimate multiple entity reconciliation.
Client’s Multi-Fund Configuration Requirements
Each configuration will be unique depending on the situation. Since our client was primarily processing inbound funds that required distribution to union members, the nature of the organization was concerned with processing speed, simplification, and accountability. The key innovations in this configuration were as follows:
- Class Setup at Header Only: we did not need to use a balancing segment as we instead deemed the Class dimension as a “Fund” and then marked the configuration to be mandatory and at the header only. All transactions must have a Fund (class designation). However, NetSuite’s Balancing Segment is certainly viable here.
- Custom Fund Transaction Line: we then created a custom transaction line that was mandatory and which sourced its values from the Class (Fund) header. The key to this innovation is that all line work could be tagged with the applicable Fund without having a concern for the actual accounting. Users can designate the right Fund in their coding work — a very natural process for data entry. NetSuite just sees this as additional reference information about the transaction.
- Balancing Clearing Transaction: by using a custom transaction type, we are able to craft a record that allows us to specify the class information at the line level, even though the global configuration enforces native transactions to work at the header level (and thus balancing).
Period End Clearing Approach
Once you have this configuration in place, you can measure the mismatches between the Class (Fund) designated in the header (core balancing segment) and the Class (Fund) tagged at the line level. The differences between these values represent the due to/from relationships between the entities.
Our client wanted to generate both an invoice and a payable for this difference so they can demonstrate the monies were moving between these entities for audit purposes. We then used our custom clearing transaction to finalize the accounting.
We created a custom application to make this easier for the accountants. It effectively presents the following:
- Inception to Current Period Mismatches: review the entire transaction system for differences between the balancing header and the reference line information.
- Current Period Mismatch: calculate the current period mismatch by comparing the last period’s inception-to-current-period balance to this period’s. This difference requires a clearing transaction to get them back in balance.
- Craft Three Balancing Transactions: automatically generate the vendor bill, invoice, and the clearing transaction to produce the balancing effect. Note, the vendor bill and invoice is optional; another approach is to simply book the amounts to the due to/from balance sheet accounts.
While we trust NetSuite’s global configuration for a mandatory header on the Class dimension, we still produced a reporting system to always ensure that our Class dimension was in balance. Click on the images to get a feel for the application.
Since our client had no concerns about interfund (intercompany) profit, we did not need to worry about elimination entries.
Model NetSuite to Optimize Intercompany Processing
The purpose of this article is to help readers understand that NetSuite can be extended to optimize intercompany processing. When planning a new NetSuite implementation, it’s quite important to study the business and accounting operation to assess if alternative transaction models present transaction processing opportunities. Check and challenge all conventional wisdom based assumptions.
We often see prospective clients come to us with significant challenges trying to make NetSuite’s OneWorld work with a “shared services” model. Shared services are often used when a common accounting department is used for multiple divisions and subsidiaries. NetSuite’s restrictions on the cash accounts between subsidiaries present significant boundaries when you simply want to pay a bill in one subsidiary on behalf of another subsidiary. An adaption to the above model can be used as an alternative.
Even if you are already live on NetSuite in a cumbersome multi-subsidiary configuration, there are ways to take this hybrid model and use it to your advantage. The key is to carefully plan out the transaction and accounting model to prove out assumptions.
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