A business that operates in multiple locations, as different brands, or distinct entities can face difficulties when it comes to preparing financial statements.
Each entity needs to be able to track financial performance individually, though still facilitate reporting for the organization as a whole.
A multi-entity accounting system helps address this challenge, providing large, complex organizations with better visibility and insights into the general company and each of its entities.
What is multi-entity accounting?
Multi-entity accounting is a centralized system used to manage the financial data of a company that operates as several separate business units.
The purpose of multi-entity accounting is to generate one cohesive set of financial records for the entire organization, even if its various legal entities operate separately for the most part.
In this case, each unit can still manage its own books and finances separately, but the integrated multi-entity accounting system allows the company to generate consolidated financial statements and reports for the entire organization.
Multi-entity accounting is often enabled by dedicated software solutions, which typically include features like:
- Consolidated journal entries
- Consolidated financial statement generation
- Accounting for intercompany transactions
- Real-time reporting dashboards
Among other benefits, these systems help larger companies produce timely and accurate financial reporting with consolidated company data. Plus, it makes it easier to manage compliance across various jurisdictions.
Single entity vs multi-entity accounting
Multi-entity accounting differs from single-entity accounting, which is the financial reporting process for organizations that maintain just one set of records.
As such, a business unit within a multi-entity organization will perform single-entity accounting, maintaining just one set up books.
Likewise, a small organization that operates just one location could also engage in single-entity accounting.
Examples of multi-entity businesses
Multi-entity accounting is used by parent organizations that are divided into several distinct entities, like different divisions, brands, departments, subsidiaries, or business units.
Here are some of the common types of multi-entity structures:
- Franchises
- Holding company
- Parent-subsidiary model
- Brother-sister entities
- Joint ventures
- Multi-location businesses
Within a multi-entity business, each unit may have completely unique operations, structure, and financial goals, meaning they might handle accounting processes differently from one another.
As such, there are some industries where multi-entity accounting is more likely to be used, like retail, healthcare, hospitality, professional services, and construction.
Benefits of multi-entity accounting
For smaller organizations that operate as a single brand or business unit, multi-entity accounting likely isn’t necessary.
However, for larger, more complex organizations that have grown over the years by merging or acquiring companies or establishing international units, multi-entity accounting can be extremely useful.
Here are some of the clear advantages that multi-entity accounting can provide:
Streamlined financial reporting
An automated multi-entity accounting system helps to streamline the financial reporting process for large and growing companies.
Rather than manually requesting or compiling financial data from each of the company’s business entities, this information is already integrated into one centralized platform.
Thus, it’s much less time-consuming and tedious to prepare consolidated financial statements using this system, as all relevant data is already kept up-to-date and compiled in one location.
Improved compliance and governance
Organizations that need to manage multiple units may find it easier to maintain compliance with varying accounting standards and tax codes with multi-entity accounting.
These systems automate tax calculations and keep financial records accurate and up-to-date, helping businesses achieve compliance with relevant regulations at the local, state, and federal levels.
In turn, the system enhances the overall auditability and governance of the company’s financial data, as the transaction data is complete and easy to track across the entire organization.
Enhanced visibility and control over finances
Again, a multi-entity accounting system enables the team to create accurate and consolidated financial statements more easily and with fewer errors.
This provides greater visibility into the financial health of the entire organization, not just the individual units on their own.
With an integrated multi-unit system in place, decision-makers don’t have to worry about relying on outdated or incomplete data from certain units. Instead, they’ll gain clearer insights into their financial positioning based on real-time data, powering important decisions.
Challenges in multi-entity accounting
While multi-entity accounting accommodates the varying needs of separate entities within a parent organization, this doesn’t come without certain challenges.
Here are some of the hurdles that teams need to be aware of:
Complexity in financial consolidation
It can be difficult to accurately gather and consolidate financial data from multiple business units without the risk of errors or discrepancies.
This is especially true if the units use different accounting software, manage transactions in multiple currencies, or are subject to different accounting standards.
This only becomes more challenging as an organization grows and adds more units through acquisitions or other expansion methods.
Inter-entity transaction management
Business units or divisions within a parent company may engage in inter-entity transactions, meaning they exchange goods, assets, or services between them, including inventory, consulting, or supplies.
To ensure accurate financial reporting, these transactions need to be treated differently from those done between the company and external parties.
Handling multi-currency and tax implications
If the departments, brands, or subsidiaries within a particular company operate in different regions or countries, they may need to manage transactions in multiple currencies and keep track of varying tax guidelines.
As a result, maintaining compliance can be challenging without diligent management and a solid understanding of the applicable tax regulations.
Consequences of ignoring multi-entity accounting
Given the several key advantages of multi-entity accounting, these organizations can also face serious consequences by choosing to ignore this type of system.
Compliance penalties
Without multi-entity accounting, it can be difficult to accurately track compliance in each department or business unit.
If found non-compliant with certain tax or reporting regulations, the company could face penalties, fines, or other legal consequences.
Reputational damage
The consequences of being found non-compliant with reporting requirements or tax guidelines doesn’t just result in penalties and fines from regulatory agencies.
It can also create reputational damage with customers and other stakeholders, who may view the organization as unreliable or untrustworthy. Thus, there is more than just fees and penalties on the line, organizations also risk losing valuable customers from non-compliance issues.
Operational inefficiencies
Despite any challenges in the initial implementation, a large organization that consists of various legal entities can only benefit from multi-entity accounting.
Thus, organizations that attempt to track the finances for each individual entity completely separate face an increased risk of data entry errors, mistakes, and incorrect reporting.
Poor financial visibility
Proper multi-entity accounting provides enhanced visibility into each business unit as well as the parent company overall.
Thus, overlooking this type of system creates disparate and siloed sources of financial data within a company, often meaning it’s difficult to gauge how the organization is performing with a high degree of accuracy.
Missed growth opportunities
Teams that don’t have access to accurate, up-to-date financial data can suffer from delayed decision-making and miss lucrative growth opportunities.
Without access to real-time, consolidated data, business leaders may not be able to make critical decisions regarding hiring, new market expansion, or resource allocation in a timely fashion.
This also means teams have a hard time identifying any trends or patterns across business units that would allow them to take advantage of emerging opportunities.
Employee burnout and turnover
As mentioned above, a tedious, inefficient system can lead to reporting inaccuracies, but it can also contribute to employee burnout and turnover.
Especially for those who rely on financial data to make important decisions, it can be frustrating to deal with inaccurate, incomplete, or outdated records.
Likewise, it can also be taxing on the employees responsible for manually entering the data from various business units into a centralized platform. Their workloads can seem unmanageable, eventually leading to feelings of stress and overwhelm if they miss important deadlines or make errors.
Reduced productivity
Organizations that don’t have multi-entity accounting in place can suffer from low productivity as decision-makers struggle with data visibility and accounting personnel deal with manually inputting financial data from various business units.
This type of approach also makes teams more prone to reporting errors, further dragging on productivity as the team needs to go back, investigate, and rectify any issues.
Implementing multi-entity accounting solutions
Setting up multi-entity accounting within an organization is not something that will happen overnight. It requires cross-functional collaboration with key stakeholders in IT, finance, and other senior decision makers. Here are some of the basic steps to get started:
Step 1: Verify entity setup
A business with multiple entities first needs to make sure they’re all set up properly. This means verifying that their individual financial management systems all adhere to the relevant accounting standards and tax codes they’re subject to, plus any unique operational requirements they may have.
It’s better to take care of these configurations before trying to integrate all entities together in one system. It may be harder to pinpoint potential problems after the fact.
Step 2: Adopt the right technology
The next step should be implementing a dedicated software solution for multi-entity accounting.
These solutions directly address some of the challenges that multi-entity businesses struggle with, like adhering to various accounting standards, tax reporting requirements, and multiple currencies.
In other words, these systems simplify some of the more complex and tedious issues associated with multi-entity businesses, while also automating time-consuming manual tasks like account reconciliations, invoicing, and reporting.
Step 3: Systemize workflows
To ensure consistent reporting for all entities, set up systemized, repeatable workflows and uniform settings in the system.
For instance, teams should use a comparable chart of accounts for all business entities, which supports accuracy and consistency throughout the organization’s financial records.
Choosing the right multi-entity accounting software
Multi-entity accounting software is invaluable for complex organizations that need to consolidate financial records and reporting across multiple units.
However, there are many options available, and each business must select multi-entity accounting software that best aligns with its unique organizational needs, goals, and budget.
That said, there are some general features that the best multi-entity accounting software all have:
- Consolidated financial reporting: Automatically combines the financial data and statements from all entities into one consolidated set of reports.
- Intercompany transaction elimination: Handles the transactions that occur between business units to ensure accurate reporting.
- Reporting dashboards: Provides companies with an overview of their overall financial positioning and that of different entities at a glance using real-time data.
- Multi-currency support: Enables teams with international units to accurately report transactions that occur in different currencies.
- Software integrations: Is compatible with the other financial management tools the business already uses, like expense management, payroll, etc.
Centralize financial visibility with BILL
With BILL’s integrated financial management platform, you can automatically sync transaction data from your accounting software so you get one centralized view of all important to-dos for accounts payable, accounts receivable, spend and expense.
BILL gives you just one platform to automate and manage your business’s finances to improve visibility, efficiency, and control.
