Optimizing your cash repatriation by translating Cash Flow from Management Reporting into Legal Entity Views
Pierre Bellieres
C-Suite Executive | Group CFO | Board Member | People Leader | M&A and Group Exit | Corporate Strategy | Organization Development & Transformation | Multinational & Private Equity-backed firms | MBA
The Financial Planning & Analysis (FP&A) department in most companies dedicates significant time and resources to predicting future business scenarios. These predictions typically span short-term forecasts (monthly and quarterly), mid-term budgets (annually), and long-term strategic plans (5-10 years).
The forecasting process begins with assessing the product portfolio, considering factors like product aging, new launches, pricing, historical sales volumes, route-to-market strategies, distribution models, manufacturing capacity, and supply-and-demand analysis. These evaluations are typically done on a country-by-country basis.
Through detailed computations and discussions, companies can estimate the expected sales, market share, revenue, production costs, and supporting costs—ultimately arriving at EBITDA projections for each country.
Understanding EBITDA by country is crucial for anticipating earnings, capacity requirements, resource allocation, and inventory planning. In short, it enables more accurate business planning.
However, in addition to EBITDA, it is equally important to understand your cash flow requirements and how these needs align with the structure of your various legal entities. This insight drives key decisions such as cash flow planning, intercompany loans, banking requirements, cash repatriation, dividend distribution, tax scenarios, and optimization strategies.
In straightforward legal entity structures, such as a single entity operating within one market, the translation of management reporting to legal entity views is relatively simple. But in more complex setups—such as those involving cross-border production, principal entities, and intercompany flows to optimize taxes—the process becomes more intricate.
To visualize your legal entity flows, consider a structure that might include:
领英推荐
Once you have the management reporting broken down by country and have mapped out the legal entity flows, you can begin allocating P&L line items (such as Sales, Royalty, COGS, SG&A) across the various legal entities at an aggregated level.
For instance, in a country with two entities—one that produces and sells and another that acts as a buy-and-sell entity—the transfer pricing method might involve market-minus pricing, with a 20% or less profit margin allocated to the buy-and-sell entity. In this case, the full sales revenue would appear in the buy-and-sell entity, with intercompany sales calculated to leave the agreed-upon profit margin. The production COGS would be assigned to the producing entity. The intercompany sales and COGS offset each other and do not appear in the country’s management reporting.
By setting distribution rules based on percentages rather than fixed amounts, you can create dynamic models that apply consistently across financial cycles with minimal overhead. This approach allows you to allocate the entire P&L down to EBITDA by legal entity with relative ease.
However, complexity arises when including tolling flows, intercompany royalty payments for trademarks, cost transfers (whether at true cost or cost-plus), and minimum profit conditions for buy-and-sell entities. These factors complicate the allocation process but are crucial for accurate reporting.
Once you’ve allocated EBITDA by legal entity, you can move forward with cash flow projections. This involves examining balance sheet accounts and non-cash items that will impact your true cash flow, ultimately ensuring that your financial planning is robust and aligned with legal entity structures.
?Kind regards,
Pierre Bellieres