How to Manage Payments Across Subsidiaries

A subsidiary is a company that’s owned by a parent or holding company, but is its own legal entity. Because of this, it follows the rules and regulations of the region where it operates. Even if its parent company is based in the United States, a subsidiary headquartered in Canada is subject to Canadian taxes and laws.

The subsidiary has to keep separate accounting records from the parent or holding company, and all transactions between them must be reported. This can make managing payments across subsidiaries complicated. Fortunately, there are several strategies and tools to simplify the process.

Strategies for Managing Payments Across Subsidiaries

Here are some of the most common ways that companies approach payment management across subsidiaries:

• Centralizing payment processing: Payments for all companies are received and processed by a single legal entity.
• Automating the payment approval process: Companies use software to establish a customized, uniform process that ensures each payment goes through the same steps.
• Standardizing payment methods: The payment process is streamlined to avoid the potential issues of accepting various payment methods across different business entities.
• Establishing payment monitoring and reporting: Monitoring turns payment data into data intelligence, which can then be used to create reports and analyze payments.
• Implementing bank connectivity: Bank connectivity establishes streamlined communication and secure data transfer between banks and business clients.
• Implementing a treasury management system: The system automates the company’s financial operations, including cash flow, transaction processing, debt management, and reporting.
• Using cross-border payment solutions: This simplifies the process of managing subsidiaries in different countries, taking into account international fees, transfer fees, and local currencies.

Why Do Companies Set Up Subsidiaries?

There are plenty of reasons why a parent company may decide to create a subsidiary. Here are just a few:

• Expanding a business into new markets
• Targeting specific regions to attract top talent
• Preparing for an acquisition
• Taking advantage of tax incentives
• Improving operations by creating focused divisions

Risk mitigation is also a crucial component of the decision to establish subsidiaries. When branching out with a new or acquired venture, creating a subsidiary for that venture can remove liability from the parent company. For example, if a subsidiary were on the receiving end of a lawsuit, the parent company wouldn’t be affected. 

Of course, it’s still important to follow proper accounting procedures; subsidiaries should never be used to hide losses or to abuse accounting loopholes.

Common Problems With Managing Subsidiary Payments 

Setting up a subsidiary has its benefits, but like any process change or new business venture, it can also present problems. It takes a while to find the balance between parent company control and subsidiary independence—and that includes managing payments. Here are some of the most common problems and how to solve them.

Time Spent Managing Subsidiary Accounts

In a Deloitte survey, 68% of respondents said that “the parent boards of their client companies spend significant time overseeing the business and risks of the subsidiaries.”

Beyond its effects on day-to-day operations and accounting procedures, this statistic also speaks to the balancing act that parent companies must perform when it comes to subsidiaries. They have to make sure that each subsidiary can operate independently, while also ensuring that it reflects the parent company’s values, ethics, and processes.

On top of that, subsidiaries must keep their own books and records, separate from those of the parent company. This can require additional resources, review, and approval processes.

Compliance With Regional Rules

Subsidiaries are often established in certain areas to take advantage of tax incentives in a particular state, region, or country. However, this means that extra work must be done to ensure compliance with the rules, regulations, and tax laws of each subsidiary’s location.

For example, residency requirements in some states and countries dictate that the directors on a company’s board must live in the same state or country where the business operates. In other jurisdictions, subsidiary companies don’t even need to have a separate board from that of the parent company.

Tax laws also vary from place to place. Delaware, for instance, doesn’t charge tax on royalty fees for the use of trademarks—and companies like Apple, Coca-Cola, Walmart, and even former president Donald Trump have taken advantage of this loophole.

Different Currencies

When operating at a multinational level, dealing with different currencies is practically unavoidable. International businesses often run into issues when it comes to handling currencies across their subsidiaries—whether for transactions between the parent company and subsidiaries, sales, vendor payments, or employee reimbursements. This can be costly and time-consuming, and may require third-party software for currency exchange.

Siloed Financial Information

Traditional accounting software is often not set up to manage multiple companies from the same account, and can quickly become expensive if multiple users need access to each subsidiary’s books. This makes it difficult to share financial information between parent, subsidiary, and affiliate companies. 

Parent companies need access to all of their subsidiaries’ financial records in order to gain accurate insights into the health of the overall business. But if each subsidiary is using different software and processes, that information can be hard to retrieve. It gets even more expensive and complicated when the parent company needs to consolidate its subsidiaries’ financial results in its own accounting.

Lack of Central Control

If a parent company and its subsidiaries are operating differently when it comes to financial accounting and payment processing, the lack of central control can cause major headaches. A company that uses different software than its subsidiaries must rely on others to obtain data, instead of retrieving it on its own. It’s always recommended to establish standardized and uniform processes that simplify data transfer and financial consolidation.

Compliance Issues

Companies must establish regulations that keep both parent companies and subsidiaries compliant with auditing requirements and established financial principles. Parent companies are responsible for ensuring that their subsidiaries have no compliance issues, which is made much easier through standardized practices and centralized control. If a business unit is found to be non-compliant with something like GAAP, the parent company will be liable.

Risk of Fraud

Many companies have fallen prey to fraud, which often leads to major financial penalties or even complete termination of the company. To avoid this, checks and balances are essential. A smaller subsidiary company could have one individual both making and approving payments, which opens the door for fraud. Establishing effective internal controls and standardizing processes across all subsidiaries can substantially reduce the risk of fraud.

Difficulty in Forecasting Cash Flow

When it comes to forecasting, parent companies are reliant on the cash flow of all of their subsidiary companies. Each unit will have its own cash flow schedule that contributes to the parent company’s overall status. Without centralized processes, subsidiary companies could all have varying cash flow forecasts, making it nearly impossible for the parent company to consolidate them into a comprehensive cash flow forecast.

Language Barriers

Language barriers are a substantial challenge not only for communication, but also for things like currency differences. It’s vital that the processes for each company are standardized across different languages, so that when reports are run, analysis is done, or finances are consolidated, both parent and subsidiary are able to effectively perform the required tasks. Additionally, spot rates may need to be communicated person to person, and a standard system for currency conversion may need to be established.

Payment Reconciliation

When it comes to payment reconciliation, automation is key. An automated system is able to align the company’s accounting information with the bank it uses for payment processing. Without automation, individuals will have to spend significant time going over payments and making sure they’re reconciled properly. For large companies with a high volume of payments, this can be an incredible waste of time and resources.

Lack of Standardization and Automation

Large businesses that include parent and subsidiary companies can reap considerable benefits from standardizing and automating processes. These business structures rely on constant communication between units, and standardization and automation allow for massive time savings when it comes to consolidating financial data, combining forecasts and analysis, and creating an effective payment structure. Automation also helps to avoid the pitfalls of manual processes, such as fraud risk, inaccurate forecasting, and issues with compliance and control.

The Solution

A corporate payment management system like Mesh can help keep parent companies and subsidiaries on the same page. You’ll save time by being able to manage multiple companies through a single account and toggle between them with a few clicks. The tool will give you an overview of the business’s overall spend, as well as more detailed insights into each individual company—eliminating the need to manually sort transactions between different entities.

You can even control access to accounts based on role. For example, a finance employee of a subsidiary may have admin access to their company’s spend, but only auditor permissions for affiliate companies.

Look for a solution that streamlines and automates approval workflows; notifications for employee requests can make the approval process nearly instantaneous. You’ll also want a system that can manage multiple currencies, allowing employees to easily make and receive payments while ensuring compliance with local regulations.

Finally, to avoid siloed information, select a payment management platform that integrates with your existing ERP. This ensures that all of your company’s existing data is available to help you optimize corporate spend. That spend will then be automatically incorporated into your organization’s centralized information hub.

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