In a fast growing company, setting up operations in another country is a fact of life – another day, another country. In 2011, for example, Uber was expanding to a new city every month – and then to a new country also each month in 2012 and 2013.
But without a detailed program management blueprint, this speed of expansion can drive a company into utter chaos.
Top companies have found that it is important to have a set “New Geography Playbook” that governs how different functional teams execute for each new country launch. Each execution of the plan is very similar to the last iteration – but perhaps with some improvements from lessons learned via a feedback loop to the global operation office.
Incorporate the new entity well in advance. If you don’t do this, it will be difficult to move capital from the home country to finance start-up activities and get in funds to support the start-up team
The COO will be in charge of producing and updating this playbook, with inputs from the C-suite in different functions, including finance. The playbook is a program of projects synchronizing how different company functions knit together at different points to form a new operating company on the ground.
Dependencies, triggers and offsets between functions are highlighted in a coherent schedule:
- Finance is set up first, so HR can hire staff
- Tech deploys the ERP system, so Finance can track country finances
- Legal incorporates a company, allowing Finance to open bank accounts and pay local employees and satisfy other obligations
Simply put, Finance being set up will allow the company to do business. What are the early services you would need?
Even before you incorporate, you will have colleagues in the new country doing research, initial sales and setting up partnerships – the “recon unit,” so to speak, before the full ground assault.
The company’s current employee travel policy will cover these costs, more often than not, unless the recon team needs to spend large amounts such as a deposit for rented premises. In which case, you either need to pay directly from the parent company or send the executives a float to cover the expenses that they will reconcile against.
If you need to send sizeable float amounts to a country, you would need to have bank accounts already set up, or you risk struggling with employees using personal bank accounts. Again sequencing of events is vital.
How to incorporate? Branch or limited company? 100%-owned or local partnership? Limited company structure or another structure?
The answer will often depend on your overall global tax optimization plan. In some countries there is little difference between setting up a branch or a subsidiary, while in others, it can affect everything from taxation to how to bring in set-up funds to hiring.
The CFO should also set a plan to optimize tax and transfer pricing for services from the parent company. Much of the transfer pricing arrangements will be according to your company transfer pricing policy. If you don’t have one, you have to form one pretty soon and before your next reporting period.
Incorporation and ERP
Here is a summary of items to sequence in relation to setting up the finance function in a new country and advice on how to go about each step.
How do you hire local finance talent quickly? Often it is best to get a recommendation from your chosen auditor for initial hires. They often know proven people who are ready to move
Incorporate the new entity well in advance. If you don’t do this, it will be difficult to move capital from the home country to finance the start-up activities and get in funds to support the start-up team. No company, no bank accounts.
You will need expert advice in the first instance on how to get capital in. Debt is preferable to be tax-efficient on repatriation, once profits come in. But beware of capitalization rules that require a minimum equity requirement.
If you are not incorporated, it will be difficult to hire staff on local currency contracts. It is not advisable to set up local employment contracts in your home currency. You could fall foul of employment law, especially in African countries.
Even linking locals salaries to a foreign currency can be problematic. It can be a great perk for employees in countries with weakening currencies, but it is difficult to implement.
Set the ERP tech-up early. You need your tech team on point well in advance to have an accounting system ready to be populated. Expect tech project delays. Deployment will always take longer than expected, especially if you have in-house add-ons that must be ported to the off-the-shelf ERP.
This is not a time to try anything new. Set up with the same chart of accounts and cost center structure, which should be common across all subsidiaries. Work back an offset from the “Go Live Date” and be sure to put in enough slack for tech glitches, especially if the tech team is busy supporting launches in several areas simultaneously.
Decide what modules you need and when in the accounting system. Sequence the deployment. You may need the inventory module to build up supplies ahead of the e-commerce module for selling.
Hiring the Right Finance Talent
You can always look at running your head office finance team as a shared service office and have a light or almost non-existent accounting team in the new country. An admin scanning and some local compliance expertise can do it.
Regardless of where you run accounting (as a shared service from head office or in-country), you will still need some in-country expertise mainly around tax, compliance and inter-company charges.
The decision of whether to insource or outsource will be based on cost comparisons, how paperless you can go and how quickly, and the complexity of the accounting.
You can use your chosen audit partner to provide interim resource while you prepare to hire. In particular, I would outsource tax and compliance advice for the first 12 months to ensure compliance and education.
How do you hire local finance talent quickly? Often it is best to get a recommendation from your chosen auditor for initial hires. They often know proven people who are ready to move. If not, get your local employment agent to work, really work, instead of mindlessly scanning CVs.
Create an Excel template with scoring categories for the agent to map chosen CVs into. These should not be subjective categories. The categories should be along the lines of “Worked for > 2 years in a company with > 300 employees.”
For ease of inter-company reconciliation, I would set up the chart of accounts the exact same way in each country. If you have five subsidiaries, have five sub-ledgers under each inter-company GL type (asset and liability)
Global accounting standards
Make sure each new country complies with global controls and procedures. There should be checklists and procedures for:
- Month end processes
- Compliance activities – create a local calendar for taxes, filings
- Budgeting process
- Internal audit checks and controls
- Finance policies
- Revenue recognition policy
- Approvals matrix
- Payables processes
For ease of inter-company reconciliation, I would set up the chart of accounts the exact same way in each country. If you have five subsidiaries, have five sub-ledgers under each inter-company GL type (asset and liability). Each should have the exact same numbering.
At this point, from a finance point of view, you are up and running. So to summarize, Finance has now:
- Set up a local entity to take in revenue, hired local people, and contracted for services
- Set up bank accounts and brought in capital in the best tax-efficient manner from the parent company to pay employees and for goods and services
- Put a team and processes in place to book-keep all of the above in relation to your parent company
Now you can do business and make some money.
About the Author
John Rowland is Managing Partner at strategic advisory White Lake Group and is currently engaged as consultant CFO with Bridge International Academies in Kenya.