The question, “How’s business?” isn’t quite right. Most of the time, it really should be, “How are your businesses?” Many, if not all sizable business concerns, are actually running multiple, separate business entities. Even if the corporation looks like one company from the outside, the inside will invariably comprise a multi-entity structure. Accounting in a multi-entity environment can be a challenge without the right tools. It is possible, though, to streamline your multi-entity financials.
What is a Business Entity and Why Do Companies Run Multiples?
A business entity is a legal structure that allows one or more people (You know, human beings…) to establish a business that can conduct business. Typical examples include the S Corporation, C Corporation and Limited Liability Company (LLC). A business entity is self-contained. It receives capital investment from its owners, earns and spends money and pays taxes on its profits. In the eyes of the law, a business entity is like a person. It can enter into contracts, open bank accounts, buy assets like real estate, sue people and so forth. In the United States, business entities are formed and governed through state laws.
In practice, most companies set up more than one entity to do business. For example, a company that’s known to the public as Acme, Inc. might actually consist of Acme, a California Corporation and Acme, a Delaware Corporation. There are many different reasons for doing this.
Drivers of multi-entity business structures include differences in local tax laws, requirements to incorporate in a specific state in order to do certain kinds of business there, licensing requirements and so forth. Other factors involve a desire to bring different groups of investors into separate entities. This is common in real estate, for example, where each building or development project is a separate entity. Some companies may run wholly owned subsidiaries and foreign subsidiaries.
Challenges in Multi-Entity Accounting
Accounting and financial reporting in a multi-entity business can be challenging. While each entity has to report its own, unique profits and losses to taxing authorities, at a high level, it’s still really one big business. In fact, one variant of the multi-entity construct is to have a single holding company whose whole reason for existence is to own stock in all the subsidiary entities.
On a practical basis, much of the time, even if there are multiple entities, there is just one accounting department. And, even if each entity has a separate bank account, in actuality, there’s just one big checkbook, so to speak, to pay the bills. Multi-entity businesses are constantly shuffling money between entities to pay the bills.
Multi-entity accounting is therefore somewhat complex and labor-intensive. Financial reporting and closing the books on a period can be a big chore.
Streamlining the Multi-Entity Accounting Process
Financial management systems like Acumatica offer features that are designed to help make multi-entity accounting and reporting easier and less time-consuming than traditional alternatives. Examples of how this happens include:
- Entity setup – Acumatica and platforms like it have simple, streamlined tools for setting up business entities in the system. Acumatica can manage finances for multiple business entities at the same time through the same interface.
- Access controls – Not everyone on the accounting team needs to be able to access every entity’s books. A financial management platform should enable entity-specific access controls.
- Consolidation – This is a big one. Shareholders and senior manager want to see a consolidated view of the multiple entities. The system should make consolidation easy, ideally on an automated basis. At the same time, the system needs to provide independent balance sheets and separate tax reporting information on demand for each entity.
- Payments – Multiple entities often deal with the same vendors. To keep the process of managing payables streamlined across multiple entities, the financial system should enable cross-entity views of accrued payables, purchase orders, budgets, payment schedules, approvals and related information.
- Cash management – Even through there may be more than one business entity, a multi-entity business will want to manage cash coherently and efficiently across the entities. The financial system needs to make this possible in order to streamline multi-entity financial management. Learn more in ERP Decision Making: The Importance of a Powerful Cash Management Solution.
- Automated reporting – To keep multi-entity financial management streamlined, the financial system has to automate reporting. The accounting team will usually run the same reports every period, e.g. consolidated cash flow statements. It’s a waste of time to do a custom setup for this report to run every period. It should be automatically preset to run.
Innovative Cloud Solutions offers streamlined multi-entity financial management through Acumatica. To learn how we can help you with managing multiple entities, visit https://ics-cloudsolutions.com/services/consultation/