How to Manage Payments Across Subsidiaries By Sarah Murphy March 16, 2022 A subsidiary is a company owned by a parent or holding company, but is its own legal entity. In order to have a controlling interest in its subsidiaries, parent companies must partially own (more than 50%) or wholly own (100%) their subsidiaries. Subsidiaries must keep separate accounting records from their parent or holding company, and all transactions between the subsidiary and their parent or holding company must be reported (and vice versa). Contents hide Why do companies set up subsidiaries? Common problems with managing subsidiary payments The Solution for managing payments across subsidiaries Why do companies set up subsidiaries? There are plenty of reasons a parent company may opt to create a subsidiary. Some of them include: Expanding a business into new markets Targeting specific regions to attract top talent Preparing for an acquisition Tax incentives Improving operations by creating focused divisions Risk mitigation is also a crucial component of a parent company’s decision to establish subsidiaries. When branching out from a parent company with a new or acquired venture, creating a subsidiary for that venture can distance liabilities from the parent company. For example, if a subsidiary was on the receiving end of a lawsuit, the parent and other affiliate companies would be unaffected. Of course, it’s still important to follow proper accounting procedures — subsidiaries shouldn’t be abused by hiding losses for the parent company or taking advantage of accounting loopholes. Common problems with managing subsidiary payments Setting up a subsidiary has its benefits, but like any process change or new business, there will be growing pains. It will take a while to find the balance between parent company control and subsidiary independence — and that includes managing payments across both. Here are some of the most common problems when managing subsidiary payments 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.” In addition to 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 must establish and maintain a balance between parental control and subsidiary independence; they must also weigh that independence with ensuring that the subsidiary company reflects the parent company’s values, ethics, and processes. Furthermore, subsidiaries must keep their own books and records, separate to those of the parent company. This can require additional resources, review, and approval. Different currencies across subsidiaries International multi-company businesses also run into issues when it comes to handling different currencies across their subsidiaries. From transactions between parent company and subsidiary to sales to vendor payments to employee reimbursements, it can be costly, time-consuming, and may require third-party software to exchange currencies. When operating at a multinational level, dealing with different currencies is practically unavoidable. Siloed financial information Traditional accounting software is often not set up to manage multiple companies from the same login, and can become expensive quickly if multiple users need access to each subsidiary’s books. As such, it can be 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 difficult to retrieve. It can get even more expensive and complicated when the parent company needs to consolidate its subsidiaries’ financial results in their own accounting. The Solution for managing payments across subsidiaries 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 toggle between parent and subsidiary companies with a few clicks and one single login — giving you an overview of the business’s overall spend, as well as the details of each individual company. This also eliminates the need to manually sort transactions between parent and subsidiary companies, separating and simplifying your finance team’s job. 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 auditor permissions for affiliate companies. In addition to customizable permissions, you need a solution that streamlines approval workflows. Automating this process will save you loads of time in the long run. Notifications for employee requests make the approval process nearly instantaneous. You’ll also want a system that is adaptable and able to manage multiple currencies. 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 on-hand to optimize your corporate spend. That spend is then incorporated into your organization’s centralized information hub. Ready to optimize spend management across your subsidiaries? Book a demo with Mesh.