The Importance of Subsidiary Management
Most large corporations are on the hunt to expand globally, diversify, and enter new markets…of course, without the financial risk! So, the most sensible way to take business operations to new heights is to open subsidiaries.
Even though subsidiary management is a great way to grow your business, if you haven’t done your research, you may be looking at penalties and other issues along the way. However, we’ve covered the seven best practices to ensure you’re on the right path.
This article will cover the following topics:
- What is a subsidiary?
- What is subsidiary management?
- 7 subsidiary management best practices
- What makes subsidiary management successful?
What Is a Subsidiary?
Large corporations, known as parent companies, will acquire or create subsidiaries to take on new ventures. You might ask why? The large corporation already has a name and reputation. Why try again? The management of subsidiaries assists:
- Breaking into new sectors
- Cut out competition
- Develop existing products
- And more.
The aim is to gain profits with minimal risk. A prime example is Mark Zuckerberg, who quickly snatched up Instagram to secure his position for years to come!
Even though subsidiaries file their taxes under the parent, they are still separate entities.
What Is Subsidiary Management?
Leading a company always poses challenges, and subsidiary governance is no different! Subsidiary management involves reporting back to the parent company. You might question, as a separate entity, why is it important? The subsidiary's finances are recorded under the parent company's financial records, known as consolidation.
A subsidiary manager must operate as a separate company without losing sight of the parent. This means that the director/manager must juggle reaching the subsidiary's goals while keeping the parent's goals in mind. We have listed the seven best practices to make this achievable.
7 Subsidiary Management Best Practices
1. Set the Standard for Subsidiary Governance
Large corporations with subsidiaries abroad can not watch the activity 24/7. Therefore, it’s paramount that the framework is in place from the get-go, so no matter where the subsidiary is based, it has the parent core values.
In order to avoid disputes, you should provide managers with the following:
- A manual containing policies and procedures
- An action plan for each issue
Managers can then stick to the parent objectives and keep everyone on the same page. By setting the standard with clear guidelines, you avoid the worst-case scenario of being sued!
2. Follow Local Laws
When the parent decides to open a subsidiary, they must choose whether it will have a separate board. Sometimes it’s mandatory due to laws set by the state or country. Be sure to research, as there are penalties for not doing so!
The purpose of subsidiary governance is to meet its own goals while matching the core values and strategic direction set by the parent. The key stakeholders want to know that the company and its subsidiaries have the same standard. For board effectiveness, the subsidiary needs to stand on its own two feet rather than mimic the parent.
3. Clear Communication
Communication is key! Especially when your business is multifaceted. Thus, holding regular board meetings assists the management of subsidiaries with certifying that targets are met. Moreover, you can keep the main stakeholders updated and tackle employee concerns. Employees should be aware of the hierarchy for decisions.
4. Management of Subsidiaries Without Being Overbearing
The parent should exert control over the subsidiary, but not so much that the subsidiary lacks independence. Subsidiary governance is effective when it has the same values and ethics as the parent. The subsidiary needs to be informed of the processes and systems that the parent requires. Not doing so can cause economic risks. Hence, 65% of companies elect the same director for the parent and subsidiary boards.
5. Subsidiary Management With PayEm
Businesses may opt for decentralized management of subsidiaries if they have experienced growth and opened subsidiaries.
It seems sensible as going overseas requires dealing with local and state laws.
However, even though the subsidiary has its tax ID, the finances are still under the parent company. Therefore, subsidiary governance is required, and without it, you may encounter the following:
- Losing track
- Poor cost management
- Inefficient decision-making
- And most of all, financial discrepancies.
For example, when you are involved and, the subsidiary needs assistance, you are there to help.
Subsidiaries of management entail having the equipment to guarantee your next venture has all it needs to succeed. As a parent, you can’t physically oversee the finances and how the business is doing. Therefore, apps such as PayEm are cloud-based, letting you be in touch from wherever you are from the palm of your hand. You can easily open the dashboard and view money spent by each subsidiary, even down to which department.
PayEm is simple to use and becomes your right-hand man due to the following benefits:
- Set budgets to reduce the risk of going over, and view spending in real-time by the subsidiary, department, etc.
- Automates approvals when employees' receipts are uploaded
- One platform to manage subsidiaries' transactions
- Avoid discrepancies with transparent reconciliation
- Eliminate wasted time and one with one centralized solution
- Clear dashboard with actionable insights into spending
- Close books fast and efficient
- Sync easily with ERP systems
- Track savings and forecast
As PayEm easily integrates with Netsuite and a variety of resource management software. Automation eliminates errors that are not evident with manual processes.
Find out how your management of subsidiaries can benefit from using PayEm. Contact PayEm to speak to one of their experts, who can provide the answers at a no-cost demo.
6. Choose the Right Personnel
This may seem obvious, but it isn’t! Your staff are the face, voice, and reputation of your company. Furthermore, directors in the subsidiary must have sufficient training in order to perform their day-to-day tasks. Always remember they are the first port of call to your investors, key stakeholders, etc. Hence, they must be up-to-date with all financials for the parent and subsidiary.
7. Keep Up-To-Date With Your Finances
The subsidiary manager is responsible for keeping track of transactions. If the books aren’t balanced, and there are inaccuracies in the cash flow of the subsidiary, you could face tax penalties! Moreover, you will have no subsidiary governance over how well the subsidiary is performing and can’t provide help.
If the subsidiary involves stock, there could be an overload, as the books show the past quarter being profitable when they made a loss. A system is necessary to keep track of vendors, suppliers, and lines of credit.
What Makes Subsidiary Management Successful?
To ensure that subsidiary management is successful and on the right path, you should implement the following KPIs.
1. Revenue Reviews
Your profits will tell you if the subsidiary met its targets and is managed successfully. It’s imperative that you track monthly sales. From recorded sales, you can secure that spending is under control.
Subsidiary governance includes budgeting correctly. You need to look at the spending for each month and see if you are on track. If you are still manual, this can often be a difficult task. PayEm is a solution that assists you in budgeting and sticking to your budget. Once the limit is reached, you can not spend more. You need to calculate the ratio between revenue and expenses to understand if you can cut or improve expenditures.
Management of subsidiaries should remember that they are part of a larger company. In order to achieve success, subsidiary governance is essential. Contact PayEms' team of experts for a free demo and learn how it's easily achievable.
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