Guide to multi-entity accounting

Multi-entity business structures offer many benefits but also come with their fair share of challenges, especially for the finance teams managing the accounting for these organizations. 

Many private equity-backed businesses are structured as parent companies with multiple business units. This structure presents an accounting challenge for CFOs that can be addressed using automation.

This blog post defines multi-entity accounting, the pros and cons of operating with multiple entities, and the best practices for PE-backed businesses.

What is multi-entity accounting? 

Multi-entity accounting is a practice used by organizations composed of two or more divisions or subsidiaries to maintain accurate financial records for each distinct unit and facilitate consolidated reporting by the parent company. 

For example, let’s say a roofing parent company owns three roofing brands, each in a different state. The parent company’s operating team would use multi-entity accounting practices to produce accurate financial statements for each subsidiary and combine this information into a consolidated report for the entire holding company. 

Multi-entity accounting typically follows a two-step process: 

1. First, each business unit (division, subsidiary, etc.) must generate a set of financial records and statements. 
2. Then, the parent company uses the business unit financials to create the consolidated financial statements. 

What does it mean for a company to be “multi-entity”?

A multi-entity business has two or more subsidiaries or brands with distinct revenues, expenses, and reporting requirements. 

Here are a few examples: 

• Willet + Cumro Innovations includes ten operating entities in the executive coaching and youth sports industries. The parent company aims to strengthen brands, allowing each to maintain its distinct identity while benefiting from shared resources and knowledge.
• Best Bay Logistics operates a logistics business and a trucking entity, and the company served as a reliable supply chain partner during the pandemic. 

Multi-entity business structures can be quite complex, which can make accounting challenging. 

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For example, a parent company may operate through entities that use different currencies. The accounting department must deal with different exchange rates and the accounting impact of currency conversions.

How do multi-entity businesses typically form?

M&A activity is a common source of multi-entity business structures. A business acquires another company and must ensure that that entity’s financial statements and reporting are in the parent company’s financial reporting process. 

Tip: Multi-entity accounting is much easier if all business units operate using a standardized set of finance processes and systems. Many businesses use Rho to consolidate and track spend data for accurate multi-entity accounting. 

What are the benefits of having multiple entities?

Multi-entity businesses offer several advantages. First, businesses can merge or acquire new entities to enter new markets and leverage synergies to increase purchasing power, lower costs, and boost operational efficiency. 

Another consideration is if your business operates internationally, as having multiple entities is often necessary for compliance and to support operations. 

Creating an optimal organizational structure with corresponding intercompany agreements can also result in significant tax or treasury benefits for international or carve-out entities. Specialized entities, such as joint ventures or special-purpose vehicles, may optimize funding, tax, or business scenarios. 

Did you know? Rho operates as the CFO’s partner to maximize value on exit by fully automating finance and accounting processes. CFOs and controllers can seamlessly switch organizations and entities in the Rho platform to support treasury and finance processes in one spot.

Challenges with having multiple entities

Operating a parent company with multiple entities can be difficult, particularly if business units use different workflows and software platforms.

Your charts of accounts can be complex.

If each business unit uses a different chart of accounts, it will be difficult to generate consolidated financial statements. Each business unit line item in the balance sheet and income statement must be assigned to a parent company account when the financials are consolidated. 

The accounting department also removes the accounting impact of intercompany transactions for consolidated financial reporting. The process is more complex unless one chart of accounts is used. It’s critical to be thoughtful when rolling out new accounts and how they fit across business entities.

ERPs can restrict access to certain accounts based on role, geo, or entity to ensure users are limited to the relevant parts of their general ledger to simplify their reporting and prevent accidental cross-posting. 

Note: Some ERPs, like NetSuite, can support multibook and multi-entity capabilities, where all entries recorded at a sub are automatically matched to a corresponding parent account. However, doing so requires system knowledge and entity mapping, regular updates to the GL, and tight controls across the accounting data process. 

Managing payroll can be a challenge.

Payroll is often a significant expense for multi-entity businesses. For example, if business units use different payroll providers, your payroll report line items may differ.

As a result, payroll expenses, withholdings, and other ACH deposit compensation transactions may have inconsistent mapping when consolidating results. This can quickly cause headaches for your finance team. 

Whereas multiple systems can create problems, if the accounting department gathers financial data using spreadsheets, data entry takes much longer, and work in Excel generates too many errors.

Each business might have different systems and processes

System standardization is one of multi-entity businesses' biggest but most important challenges. 

As you integrate new businesses into the portfolio, you may find they have an entirely different ERP, bank partner, expense software, or AP process than the standard set your other entities use. Unification will bring simplicity.

Lack of standardization can impact everything from your ability to generate accurate financial statements in a timely fashion to closing the books.

Getting your entities onto an aligned close calendar will simplify your periodic reporting and reduce delays in delivering consolidated results.

Did you know? Clients can deploy Rho and sync to an ERP without complicating current processes with the help of a dedicated Client Success team. Rho integrates with NetSuite, QuickBooks, and Sage Intacct.

Why is multi-entity accounting relevant to private equity-backed businesses?

A PE-backed company CFO manages the business finds ways to maximize value, and looks for opportunities to scale. These CFOs must spend most of their time thinking strategically and looking forward. 

The accounting process can become complex as the business acquires other entities to increase profits and parent company value. Management needs real-time, customized reports to make decisions and quickly identify potential problems. 

Multi-entity accounting software helps PE company CFOs save time and prioritize work. With technology, the finance team can identify opportunities and risks before they impact the business.

Running consolidation, intercompany transactions, and foreign currency translation in Excel can become time-consuming quickly, whereas ERPs allow you to automate mass amounts of that and maintain a detailed ledger, audit trail, and reconciliation process. 

What do private equity firms do?

Private equity firms raise money from investors and invest capital in private businesses with growth potential.

When a company chooses PE financing, the PE firm invests capital in exchange for equity or some other ownership stake. The PE firm often owns a majority stake in the acquired company.

PE firms can provide expertise to help the management team make better decisions to grow the business. The PE company aims to scale or refocus the business, increase profits, and ultimately generate a large return when the business is sold, spun off, or held for a long period. 

Best practices for integrating new portfolio companies

As the size of your holding company’s portfolio grows, here are several steps to maximize your success odds. 

Complete a full finance and operations process audit

Review and document each routine process a business unit must complete monthly and yearly – and areas where automation can potentially add value. 

Appoint a central finance lead at the PE firm level who can be your primary point person to: 

• Map our key processes and stakeholders, relying on portfolio finance leads as your voice of truth for each subsidiary. 
• Identify opportunities to drive process efficiencies at the portfolio company level and how portfolio companies interact with the PE firm. 
• Collect insights from finance leads at each portfolio company and distill this data into actionable steps the PE firm can use to synergize with peer companies. 

Set your non-negotiables

Where you can decide on a single chart of accounts, general ledger, payroll system, and other financial tools that should be used company-wide, this most critical starting point is arguably the ERP, considered the single source of truth for many organizations. 

Evaluate and consolidate software that makes sense for your portfolio businesses so that all business units and the parent company use the same technology wherever possible. 

These changes will streamline operations and back-office processes, including accounts receivable and accounts payable, and uncover potential cost savings. 

Align on your North Star metrics.

Identify data points that most impact revenue for each business unit, and create a dashboard that helps you track this information and scenario plan. 

For example, fuel prices will significantly impact the profits of a holding company comprising various landscaping businesses - so it’s best to track this. 

Each business unit needs leaders who act as change managers to increase profits and find opportunities to scale. Leaders can take action faster when they have timely information.

Create portfolio counsels 

Many PE-backed CFOs and PE operators we’ve spoken to have shared that they create mini-counsels composed of finance managers at each portfolio company. The goal is to bring peers together, share best practices, and troubleshoot issues they may be having.

For example, a holding company comprising three roofing businesses could benefit from implementing a counsel of each portfolio company's controllers and accounting managers, with the parent company’s finance lead moderating. 

Ensure you have the right personnel.

Talent management can make or break a parent company’s success. One tip we’ve heard from several PE operators is to use the following three-step framework when evaluating current finance talent in your newly acquired portfolio companies. 

“Get It”

Are they on the same page regarding the systems and process changes that must be undertaken to ensure success? An accounting manager who understands your key metrics and can be a transformation driver for your change management strategy is vital. 

“Want It”

Are they motivated to be part of this transformational change you will undertake? Skillsets with cultural buy-in can make change easier to stick to. 

“Have the Capacity to Do It”

Does the current team have the skill sets required to drive success or is training or additional talent recruitment needed to fill the gaps? 

For example, your staff must understand consolidation accounting to generate monthly consolidated financial statements. How long does the process take? 

As you add more entities, can your staff manage the complexity? If a parent company grows from five entities to 15, the number of journal entries sharply increases. More transactions increase the risk of error. 

A significant plus is having controllers and accountants with experience operating in PE-backed portfolio companies. Knowing how to manage a ballooning consolidation and implement large-scale systems with several stakeholders is a unique but multiplying skill. 

Work with the parent company’s leadership to map where each team member lands in this talent evaluation framework. It will help you identify where promotions are in order, how you can support growth for those invested in your transformation plan, and maximize your chances of success operating a multi-entity business. 

Determine your reporting frequency

An accounting staff can produce massive amounts of data, and many reports are produced with a single click (if it’s not so, then make it so!). Prevent information overload by discussing what data the accounting department will produce and how often.

Cash flow forecasting is the most important accounting task for many businesses. You may update the forecast weekly to manage cash and accounts receivable. Retailers often review inventory levels daily to meet customer demand and avoid shortages.

Business units may have uneven cash flows and other situations that must be monitored closely.

Establish an effective budgeting process

A business needs to start each new fiscal year with a completed budget. Managers should frequently compare budgeted spending to actual and review variances to make business improvements.

Provide each business unit with the data you need to create the budget and provide deadlines for submitting data to the parent company. The accounting manager at each unit should provide all assumptions used to create the budget (sales, costs, production levels). 

Multi-entity accounting tips to close the books faster

PE-backed CFOs can use several tactics to close the books and generate consolidated financial statements faster.

Researching unusual transactions

Investigate unusual transactions and post any necessary adjustments before the end of the month. Utilize systems that can surface the data in real-time and integrate it into the accounting system.

Assume that $20,000 of marble is posted as a material expense on the Jones home project. The detailed bid for the Jones project does not include marble as a material cost. 

The accounting manager notices the exception on the 20th of the month, reviews the purchase order, and reclassifies the expense to the Smith project. The adjusting entry is posted when accounts are reconciled at month's end.

‍Did you know? Data from Rho Card transactions and AP payments processed using our platform provide a real-time view of how money moves in and out of your organization, helping you resolve issues early. 

Compliance with GAAP reporting guidelines

Determine each transaction’s compliance with GAAP reporting requirements before month's end. For example, GAAP has five principles that must be followed to recognize revenue. 

The accounting staff must apply these principles to each revenue transaction. If a sale does not meet all five principles, the accounting staff should investigate the transaction and post adjusting entries before the month's end. 

Eliminate entries for intercompany transactions

Intercompany transactions across multiple entities can create unnecessary complexities with tie-outs. 

You can significantly reduce this pain by pairing intercompany entries in the ERP and automating the elimination within an intercompany and elimination ledger. 

ERPs usually have intercompany and reconciliation modules to review potential differences within intercompany accounts. 

Many ERPs support automatically ingesting foreign exchange rates, categorizing intercompany accounts, and running elimination entries when you’re ready to consolidate, sometimes reducing a multi-hour process to under 5 minutes.

The case for standardizing your portfolio’s systems

Consolidating and integrating your finance operations requires time and careful planning, but the benefits are substantial.

Speeding up decision-making

When you streamline financial operations, managers get accurate data and make informed decisions faster. 

Say, for example, that you’re assessing a potential acquisition and must decide on pricing for the company. If you can perform analysis quickly, you may be able to take advantage of the opportunity and acquire the business.

Reducing the risk of error

If a business uses fewer financial tools and the tools are integrated, the risk of error is reduced. 

When you reconcile cash, the accounting staff often uses data from a third-party payroll company and credit card statements to complete the reconciliation. If payroll and card data is integrated with the ERP, matching or posting these transactions can be automated or simplified, reducing the risk of error sharply.

Companies with multiple bank accounts will see an even bigger benefit.

Productivity will increase

Integrating your financial operations also frees up your staff’s time. With integration, the accounting department doesn’t have to input or review data from manual reports. 

Your team can use the time to provide more useful analysis for better decision-making. Streamlining operations allows the business to scale without adding large accounting staff. 

Learn how Willet + Cumro Innovations consolidated all of its portfolio companies' AP and card spending to Rho. 

Wrap-up: Make multi-entity accounting easier with Rho

Rho’s platform equips CFOs to maximize value on exit by automating accounting and financial operations. With Rho’s multi-entity accounting solution, your staff has more time for strategic analysis that can uncover business opportunities. 

Manage corporate cards, commercial banking, expense management, and accounts payable with Rho.

Interested in opening a Rho account? Get in touch today.