Beyond Borders: Why we need Specialized Finance Tools for Multi-Entity Companies

Picus Capital
9 min readMar 5, 2024
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Tl;dr
We believe there is an opportunity for founders to build financial solutions tailored to the unique needs of mid-market multi-entity companies (companies with operating entities in more than one country). These companies face unique challenges across all business segments, of which finance is the most underserved so far. Accounting, treasury, and compliance/tax operations for multi-entity companies are still painfully manual, time-consuming, and fragmented processes for the majority of companies. This is the case for both “traditional” companies as well as for startups expanding outside of their home country. If you are a founder building in this space, we’d be happy to get to know you!

Historically, it was predominantly large enterprises that operated globally, while mid-market companies mostly kept their operations domestic. Over the past 5–10 years, however, we have seen a strong push of mid-market companies to expand and operate (i.e. multi-entity companies) globally as well (US, Germany). Despite recent macroeconomic and geopolitical tensions, we believe that this trend will continue (see also The Company of the Future is Default Global).

These developments are interesting for investors and builders alike as multi-entity companies face unique challenges in their daily operations and data management. While large enterprises are often (well) prepared to deal with these complexities by leveraging enterprise-grade systems such as Netsuite or SAP which provide multi-entity support, most mid-market software is not built to deal with the complexities of global operations. Thus, we believe that there is a growing class of mid-market companies with increasingly global operations that are running on software systems that are ill-equipped to deal with their global ambitions.

We have seen great progress in global software solutions for mid-market companies across various business functions including in HR (Employer of Records like Deel, Papaya, or Workmotion, insurance and benefit solutions like Kota or Safety Wing, global mobility solutions like Localyze, and many more), logistics (digital freight forwarders like Forto, Flexport or Zencargo enabling transparent, flexible and easy access to containerized freight shipping, visibility solutions like Project44, Tive or Beacon enabling affordable real-time tracking of freight), and business software (next generation virtual collaboration solutions like Gather and Roam or project management solutions like Awork and Spinach). Financial operations, however, remain a major pain point for most mid-market multi-entity companies.

To better understand these pain points and further solidify our hypothesis, we spoke with 30+ companies (e.g., industrial businesses, software companies, hospitality companies, Series A+ startups) with at least one international operating entity. More than 80% of them stated that the complexity of managing their global finance operations has, in fact, continuously increased over the last years. Finance teams today deal with more bank relationships, payment methods, different accounting/tax regimes, complex approval flows, and tools than ever before (to the point where a majority of CFOs are looking to bundle their tech stack again).

On top of that, the demand for real-time financial analysis and risk management has surged due to recent macroeconomic and geopolitical events (interest rates, trade tensions, supply chain disruptions, wars, etc.). However, accounting, treasury, and compliance/tax workflows are still highly manual, fragmented, and time-consuming for most multi-entity companies, causing delays and preventing true real-time insights. Based on our interviews, this also includes plenty of larger companies (500+ FTEs).

Therefore, we see a clear opportunity for founders to build financial solutions focused on the unique needs of multi-entity companies.

  • We believe that there is a clear need for new tools that improve multi-entity financial orchestration and create seamless workflows from procurement to payment (P2P) and order/sales to cash/collection (O2C). We think there is a need for new solutions to optimize the flow of money between entities, manage currency risks, comply with regional regulations, and automate cross-border transactions and reconciliations.
  • Moreover, we are excited about integrated platforms creating a single source of truth for financial data across entities. Connecting financial data across entities facilitates consolidated reporting, and compliance and allows for true real-time financial visibility.

Let us dive deeper into some sub-segments within the realm of finance operations in which we see the biggest need to innovate and opportunities.

A. Accounting

Multi-entity companies face several key challenges when it comes to accounting workflows, including year-end consolidation, finding transactions across entities, getting data ready for group-level controlling in time, or reconciliation of transactions across companies.

Among these complexities, consolidation was the most severe pain point that we identified in our research. Corporate structures spanning more than one accounting standard typically add countless hours and grey hairs to the work of accounting professionals.

  • Imagine a typical (but hypothetical) German Mittelstand company, GerCo, with subsidiaries in the US and the UK. Each subsidiary operates under different accounting standards: US GAAP, HGB, and UK GAAP, respectively. The year-end consolidation process is not just aggregating numbers but a complex translation exercise that involves aligning unstandardized charts of accounts and currencies into a cohesive financial statement.
  • Next to consolidation, multi-entity companies often have regular intercompany transactions that add complexity to accounting and reconciliation processes. As one treasury director in the hospitality space put it: “Inter-company reconciliation is always where sh*t happens and things break.” This challenge is further compounded by the fragmented market for SME accounting systems. Most accounting solutions are not designed to work across multiple jurisdictions, resulting in a status quo where companies typically use different, siloed accounting systems for each entity. This leads to a labyrinth of data reconciliation and compliance difficulties, as financial information must be consolidated from disparate systems, each tailored to local standards and regulations.

How multi-entity accounting currently works

Source: Picus Capital

Our example German Mittelstand company, GerCo, uses DATEV for its German operations, with a UK entity using Xero and a US entity using Quickbooks. The fragmented financial systems lead to manual work and inefficiencies everywhere. Reconciling transactions leads to mismatches, consolidating data becomes complex, currency conversions cause inconsistencies, document retrieval takes longer, standardizing accounts and inter-entity communication is tedious, and reporting faces redundancies.

Source: Picus Capital

In short, mid-market multi-entity companies have unique accounting needs and complexities that current accounting systems are not well equipped for. As a consequence, these companies either tie together local solutions but deal with issues of unifying the data and workflows or upgrade to a global solution designed for larger businesses (like Netsuite) and thereby incur higher costs and the need for migration, training, etc. Several companies that we interviewed chose to prematurely upgrade to Netsuite, mainly to use it as a general ledger for consolidation but disregard most other product features that they are paying for. Most highlighted their openness and desire for a more straightforward solution.

Interesting early-stage companies that tackle certain problems in this sub-vertical include Translucent, which specifically focuses on SMEs stuck in the gap between cloud accounting systems like Xero/Quickbooks and Netsuite, Campfire, which provides a modern general ledger for multi-entity accounting and automates revenue processes, our portfolio company Inkle which automates tax, compliance, and bookkeeping for businesses headquartered in the US with international subsidiaries and our portfolio company Klarity, which helps accounting teams to automate document-centric processes as an alternative to oftentimes outsourced and inaccurate labor.

B. Treasury & Working Capital Management

The vast majority of mid-market companies run their treasury operations in Excel. Even when speaking to companies with comparably simple treasury needs, we learned that the average company spends up to 30 minutes per day to manually track their cash positions across bank accounts and hours every month on treasury reporting, accounting, and reconciliation. This approach might suffice for companies only operating in one country but it becomes unmanageable as companies stretch across jurisdictions and currencies.

For simple cash positioning (i.e. understanding how much money is available across the company’s global bank accounts), we have closely tracked the emergence of innovative software solutions over the past few years (e.g. Agicap, Trovata) but are still noticing awareness problems holding back wider adoption in the industry.
For more complex treasury operations like cashflow forecasting, liquidity management, and cashflow optimization, however, multi-entity companies still face unique, unmet challenges, which is why we see tremendous potential for more integrated and holistic treasury solutions for mid-market companies.

Many companies we spoke to, like GerCo, still struggle to find answers to seemingly simple questions like “At which entity level do I need how much cash and when?” The consequences are typically additional transaction costs, unwanted and poorly managed exposure to foreign currencies, and inefficient liquidity management. For instance, if GerCo knew that it needed 50,000 USD in 14 days to cover operational expenses within its US entity, it could get significantly cheaper terms at its house bank for a transfer from the German HQ to the US entity. In reality, however, GerCo often only knows its exact capital needs and available cash positions a few days in advance. As a result, it keeps large cash buffers for each entity, exposing itself to elevated currency risk and weak liquidity and cash flow management which, if solved, could be used and invested more effectively.

Overall, we see many mid-market multi-entity companies struggle to manage their cash flow, working capital, and capital needs efficiently across entities while keeping an eye on currency risks and their global banking relationships.

An interesting trend we saw in companies with more advanced treasury operations was the convergence of treasury, accounting, and FP&A (financial planning and analysis). When done right, a strong treasury operation can (almost) act as the single source of truth to fuel and increasingly automate accounting and FP&A processes, significantly reducing the workload on finance teams.
As an example, instead of waiting (often 10+ days) for data from accounting, many controllers have already started using bank statement data for their analyses. Modern treasury solutions like Embat offer an advanced auto-reconciliation function, which automates the mapping of transactions to accounting categories, which in return enables controllers to work with real-time data and saves dozens of hours for the accounting teams. The cost-saving potential on the accounting side and the net benefit of having real-time data for company-wide controlling analyses is significantly larger for companies with spread-out, global operations.

In summary, we believe there is an attractive opportunity for modern treasury solutions that not only provide real-time visibility and control over cash positions but also automate postings and focus on intercompany transactions, currency management, and liquidity management across entities.

C. Tax & Compliance

As companies expand to new jurisdictions, we routinely see tax and compliance become exponentially more painful. Indirect taxes like VAT and GST turn complex when reconciling across entities. In our experience, most mid-market companies either use legacy local tax solutions that almost always require the additional support of tax advisors or manually calculate and track their tax obligations for each jurisdiction using spreadsheets. While tax filing software exists in each region, truly automated reconciliation connecting these systems across borders rarely does.

Likewise, proving arm’s length transfer pricing requires extensive manual documentation that leaves lots of room for error without software support.

We’ve seen select software emerge to solve certain parts of the problem (e.g. Anrok and Fonoa which offers automated global sales tax solutions for (not necessarily multi-entity) companies selling software products internationally or our portfolio company Inkle which supports internationally operating companies in the US with their tax & compliance needs). However, there are still opportunities for broad solutions that encompass indirect tax automation, streamlined transfer pricing docs, and unified compliance workflows for global operations.

We believe non-localized solutions with breakthroughs in accuracy and automation can still save countless hours wasted navigating regional tax and compliance complexity manually. The value creation potential for multi-entity tax simplification remains substantial.

D. Financial Planning & Analysis

Financial planning and analysis workflows struggle with many of the same fragmented data issues that also complicate multi-entity accounting. In the case of FP&A, however, we have already seen a wave of new innovative solutions tackling this problem.

Companies like Pigment, Mosaic, Abacum, and Causal have cropped up to offer powerful spreadsheet replacement next-generation FP&A solutions, while others like Aleph (Picus Capital portfolio company), Cube, and Datarails help companies to superpower their spreadsheets by adding collaboration and workflow features on top of MS Excel and Google Sheets.

The case of next-generation FP&A tools has already been much discussed. We recommend taking a look at Activant’s view on 3rd Generation FP&A Tools or Born Capital’s FP&A Tool Guide as more comprehensive reads on this topic.

Authored by Florian Reichert, Daniel Niklas and Alexander Worbs

At Picus Capital, we continue to be excited about financial solutions that drive efficiency across core finance workflows. If you are a founder building in this space or someone who experienced the mentioned problems firsthand, please don’t hesitate to reach out. And if you disagree with some of our thinking, definitely reach out! We’d love to chat.

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Picus Capital

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