One of the most common balance sheet failures we have encountered, across every sector we have worked in, is in the intercompany loan accounts. This is often not because they are technically difficult, but because they are technically easy to ignore.
The root cause of this is almost always the natural growth of groups. More entities, more balances, more opportunities for error. Without tight intercompany discipline, the discrepancies compound into something that no one wants to pick apart.
We call it the intercompany black hole. Once it forms, it only surfaces in an audit, a refinancing or an acquisition.
We have worked with groups of varying sizes and complexity. Here are the most common intercompany failures we encounter, and some practical fixes to stop them from recurring.
1. Cash That Doesn't Follow the Legal Map
This is the inevitable outcome of the operations of a group. An invoice needs to be paid now, but there isn’t enough cash in the entity’s bank; pay from another and sort the bookkeeping later. The complication lies in the legal structure of the group, not the commercial requirement. If the receiving entity sits in another subgroup or there is a management/loan agreement, which means it has to pass through an intermediary.
Cash flows as required from Company A to Company C. The underlying legal and, therefore, accounting flow involves Company B. It is the Company B legs that often get missed. The real problem is that this doesn’t create a consolidation issue or even a variance on the matrix. The balances net off, but that just hides the discrepancy, letting it grow unattended until a restructuring or a potential sale highlights the missing transactions, which are now wrapped up in other loan accounts and difficult to extricate.
The fix is having all the legal flows mapped and built into the reporting framework. If any transaction between A and C needs to involve B, set up a dimension to automatically tag these transactions so a monthly correcting journal can be posted. Hold separate nominals for legal transfers and operational ones. The perfect process is to post all legs when the payment happens, but knowing that this isn’t always going to be feasible, you need to build a reporting fallback so these can’t vanish if missed.
2. Recharges That Exist on Paper But Not in the Ledger
Most groups have some form of intercompany charges. Either staff work across multiple entities, or services are billed to a single entity and need to be redistributed. This is often covered by an agreement stating the arrangement: how it is billed, the value and the frequency.
What occurs in reality is that the recharges are often forgotten, mostly until year-end but sometimes indefinitely. The performance is reported at a group level, meaning the missing postings are not picked up. To the group controller, this is irrelevant; to the decision-makers in the individual entities, this means they are working from incomplete data.
The reasons for the omissions vary: fixed service fees that don’t seem a priority for closing group accounts, cost-plus recharges that need more analysis than the team has time for at month-end. As time passes, though, the complications only compound. The recollection of what actually happened becomes hazier, and it gets harder to ensure the required adjustments are complete and accurate. The knock-on effects are several: misleading P&Ls, misaligned balance sheets, transfer pricing risks.
To make sure this doesn’t happen, you need to remove the friction. When the values are the same monthly, set up repeating transactions that will do it automatically. When the issue is complexity, create a thorough template where you can drop the entity trial balances, have it run the calculations and prepare the adjustment. Although the calculation might be difficult, it will be the same every month. When the process is straightforward, it is much easier to get people to follow it. Just make sure you review any template or recurring posting periodically.
3. Interest That Never Gets Booked
Most intercompany balances have an interest implication. Some have a fixed rate applied, and some have an implied rate to ensure arm’s-length agreement; however, often these rates are known but remain unrecognised until the year-end.
The structure of the interest can sometimes be complex, with different rates on different transfers. For example, Company A cash-flowed a pay run for Company B for convenience; the balance is interest-free and will be repaid within a few months. In the same year, Company A formally lent Company B £500k at 7.5% for 3 years. Both sit within the same intercompany balance but need different treatment, as it is not as simple as applying a fixed rate to the closing balance; it gets left as an annual adjustment.
Implied rates are also ignored; it is intercompany and likely to never be paid, so why recognise it in the books?
The problem is that without recognising the interest, you can never get a complete financial position. Single-entity gearing or covenant reporting is skewed; the FD ends up applying an estimate of an effective rate when feeding back, which means decisions are being made without clarity. It is not feasible to have perfect numbers, but when you are resorting to assumed rates, you open yourself up to actual covenant breaches, management-letter points from the audit or having to ask your bank to allow a breach, even if only temporarily.
The complexity doesn’t come from the actual transactions, but from conflating the transactions and not having clear documentation. Each intercompany transfer has an interest rate; for most, it may be zero, but build the rates into your intercompany reconciliations. Each month, bucket transactions by interest rate and build your template to give you the adjustment needed across the group.
4. Write-offs That Hide the Real Error
It is natural for intercompany balances not to match. Bank charges applied to transfers, different exchange rates. There will always be something creating discrepancies between different entities’ books, and it is not practical to resolve every minor difference. There will and should be write-offs; however, what needs to be watched is when it turns from the occasional minor write-off to a culture of write-offs.
This is dangerous because what’s needed is judgement to determine what is an acceptable write-off, and often this shouldn’t be based on value. The unfortunate reality of double-entry bookkeeping is that a minor balance can be made up of many different transactions, as long as they roughly net off. Where you run into problems is when the offsets for those transactions are different. The net in intercompany may be £500, but what sits behind the net could be £7,500 in Debtors and £7,000 in Revenue.
A lot of this can be resolved by timing the intercompany reconciliations. In my view, it should be one of the very last balance sheet reconciliations you do. This means that any stray transactions in other balance sheet accounts have already been identified and resolved. Also, be practical about when you need a reconciliation and when you need the balances to match. If the issue is thought to be a timing difference, but you are unsure, does it need to be adjusted? Can you leave it until next month to see if it resolves itself? If it doesn’t, then you know further investigation is required.
What This Adds Up To
What we see with groups, where the issues above have not been addressed, are circular balances that no one can explain, whether these are significant balances across groups that consol to nil but sit in the wrong entities, or known shadow intercompany balances that have not been recognised.
The result is the same: intercompany noise that pollutes any real analysis and can hide much larger problems. Cash may have been extracted from an entity and never returned, costs may have been misallocated, or genuine commercial disputes may have been buried in the mess.
When intercompany balances start to slip, they quickly become the dumping ground for everything that is difficult to explain, anything that will be sorted out later.
This is dangerous from a controls point of view, but also risks the rest of your trial balance. The fix when this has happened is not easy, which is why so many businesses put it off. You need to revert to the last intercompany reconciliation you can trust and rebuild on a transaction basis. This can be near impossible to do alongside business as usual, which is where we can come in.
What We'd Do
If you no longer trust your intercompany, here is how we can help:
The Balance Sheet Tidy-Up
We understand that no group can be fully confident in their numbers if their intercompany is a mess.
We provide a focused diagnostic with a 30-day money-back guarantee. We will work through every balance in every entity: intercompany reconstructions, creditor and debtor reconciliations, loan account verifications, and control account reconciliations. We identify the discrepancies and present you with the variances and our proposed fixes for them.
The Process Review
Clean numbers are the start, but often maintaining them can be an even bigger burden. We will work through your balance sheet issues to identify where there are system failures or processing issues. We will build a roadmap to easy-to-maintain, clean numbers.
We dig into your reporting frameworks and your required outputs to understand how your finances should be structured. Then we document every process, reviewing as we do the efficacy and practicality. At the end, you will have a clear map of internal processes, including triggers, timings and outcomes, so you know what to do when, ensuring your numbers stay clean without requiring an annual rescue mission.
About Us
We built Brick Accounting specifically to solve these problems for groups. If your finance team is producing a balance sheet that balances, but no one wants to defend it line by line, we’d welcome a chat to see if and where we could help you get back to focusing on what’s important: growth.
