Netting – what is it and why do organizations do it?
Netting, also known as clearing or group clearing, basically means that organizations settle their payables and receivables internally between the individual entities. With netting companies can actually realize enormous cost savings. Instead of effecting credit transfers for each individual invoice, for which bank fees would have to be paid, clearing the company-wide payables and receivables means that only one amount, namely the remaining balance, has to be physically transferred. The remaining amount is paid on a previously defined due date. Companies, however, have to keep in mind that this form of netting is not permitted in all countries.
Is netting still relevant today?
In the light of the increasingly global character of both economy and companies, netting is as relevant as ever before. Particularly, organizations with multiple subsidiaries in different countries can profit from an effective netting and save costs.
ERP systems are continuously improving – do I still need a dedicated netting solution?
ERP systems are covering more and more areas and functions and also support netting processes. Our experience shows, however, that this is often only a simplified netting. This is fine as long as there are no disagreements in the process and all participating entities book in conformity. As soon as a netting partner rejects an invoice or the payables and the receivables have to be cleared in different currencies, existing ERP systems reach their limits. This is especially true if the system landscape is heterogeneous and consists of many different ERP systems. In such cases, a central and effective netting is no longer possible.
Next generation netting solutions can provide the necessary functions to resolve disputes expediently and largely automatically. They can usually handle more complex processes as well. Data from different source systems can be processed in the central netting platform so that a global overview is available at all times. All companies participating in the netting process have access to the netting platform so that processes are efficient and transparent for all netting partners. Such netting solutions also provide organizations with the option of defining which exchange rates are to be applied to the netting, current exchange rates or pre-defined ones. A due date monitor allows all participating entities to see the netting dates and know which actions they have to take, e.g., by when they have to enter payables and receivables, when the netting result is published and when payments are made.
Netting – benefits for organizations
In summary: netting simplifies intercompany reconciliation and allows companies to optimize their entire finance processes. Transaction costs and, especially, exchange rate differences are reduced significantly. Currency risks are centralized and thus more transparent. At all times, the head office has a detailed overview of volumes, settlement times and currencies of payments and can thus ensure settled accounts at the defined times.
Also possible – external netting
Additionally, netting system can usually also facilitate an external netting, i.e., the netting with external contract partners with whom close business relationships exist. In principle, external netting works just as internal netting, it also saves transaction costs and optimized processes. An external netting function can be set up step by step and can be the foundation for additional opportunities, such as a complete Supply Chain Finance solution.