Israeli startups are frequently eager to expand into North America, especially the U.S. The financial opportunity is well understood by most startups, but what many fail to appreciate are the plethora of financial ramifications associated with opening an office in the U.S.
For companies with an existing ERP system such as NetSuite or Priority, the infrastructure is already in place for the business. However, with international expansion, this infrastructure needs to be designed with a more careful methodology because of the complexities involved.
The other major challenge is not merely “entering” the U.S. market, but also creating a scalable financial infrastructure that will support growth across the various jurisdictions, entities, and reporting frameworks.
The beginning point is an established ERP.
Most of the companies I’ve worked with have been on either NetSuite or Priority for years before they enter into the U.S. or North America. These systems afford the start-up:
Structured financial information
Integration with operations (inventory, billing and supply chain)
Multi-entity functionality
Robust reporting and analytics
Systems that serve one country’s need during its start-up phase usually require a restructuring of that operation to accommodate a global operation.
The next question must be:
Is your existing ERP structure able to accommodate that international growth with:
(1) no compromise to your accuracy and compliance
(2) visibility into your numbers.
To bring an ERP system to an entity for the U.S. operation creates requirements that.
(1) Multi-Entity Structuring: Start-up companies must define “how” their U.S. entity will fit into their company structure: this might require defining entity hierarchy, ownership structure and intercompany relationships as well as reporting lines.
For an ERP System to provide the ability to consolidate efficiently, it must represent the entire organizational structure.
(2) Multi-Currency and Reporting Hierarchies: With a company doing business in both Israel and the U.S. will require accounting for money in both currencies (ILS and USD) as well as understanding how to accurately determine the conversion of amounts for consolidation and provide compliant with both U.S GAAP and with investor reporting requirements and the standards by which information may be presented to the Board.
To achieve these results, the ERP system must have the proper configuration to ensure consistency of reporting across all three of these frameworks.
- Integration of Taxes and Compliance
Financial systems must include:
Tax compliance for U.S. federal and state taxes
Tax implications related to Israel
The system should support your transfer pricing
It needs to handle sales tax / VAT.
When financial systems are not aligned properly, compliance becomes manual and prone to errors.
Differences between NetSuite and Priority When Using both Systems for Cross Border Transactions
Both NetSuite and Priority can be used to support international operations; however, these systems have different roles when used in practice.
NetSuite: Global Financial Standardization
NetSuite is best suited when it comes to:
Compliance and reporting for the U.S.
Consolidation in real time
Visibility of the financial operation for investors
Structure for the financial operation (such as controls).
Companies that want to be aligned with U.S. standards generally utilize NetSuite as their primary financial system.
Priority: Flexibility and Operational Strength
Priority is still effective in supporting:
Management of the operation (inventory, logistics, and production)
Synchronization between multiple companies using a single database
Flexibility in adapting to different business processes.
When a company is operationally complex, Priority continues to provide critical support for the company as financial demands become more sophisticated.
Hybrid Solutions: Utilizing the Best of Both Systems
In many cases, the best solution does not involve fully migrating to another system; a Hybrid Architecture could work best.
The Hybrid Architecture may include:
Keeping Priority for operational transactions
Using NetSuite (or external financial systems) to consolidate all financial transactions and provide U.S. compliance
Integrating the two systems (through APIs or similar methods)
Utilizing one source of information for all financial transactions.
The intent is for a company to avoid unnecessary interruption while achieving global scalability.
Building a Scalable Financial Infrastructure for Future Growth
The most common mistake that companies make is treating their financial infrastructure only as a compliance requirement rather than as a strategic asset.
When financial systems are designed properly, the following improvements will happen:
Shorter closing cycles
Real-time visibility of the company’s transactions across all entities
Better decision making
Increased investor confidence
Reduced risk to the company.
This requires that the systems be designed in a proactive manner and not just react to needs.
CFO Requirements for Building a Scalable Financial Infrastructure
Having a scalable financial infrastructure is not only dependent on technology.
The CFO’s requirements to implement this type of infrastructure are that:
The company is utilizing an ERP system that supports the company’s business strategy
The company has standardized its financial processes across all business units
The company’s reporting is meeting both operational and strategic requirements
The company is prepared to go through an audit and/or raise additional capital for expansion.
For many start-ups that need to establish this level of expertise, they typically do so through the use of a CFO as service so that they can build a strong financial infrastructure without the cost of an in-house CFO.
Most Common Problems to Avoid
When a U.S. company is expanding into another country (such as Israel), there are many issues that can occur, including:
Misalignment of the entity structures in the ERP system
Manual consolidation
Lack of intercompany agreement between the two subsidiaries
Inconsistent reporting between both locations
Underutilization of the financial system.
All of these problems can be avoided with proper planning and executing your plan.
Conclusion
When companies expand from Israel to the U.S., it is not just a major geographical change; it is a change in how complex their financial transactions, and the expectations of the financial transaction.
Companies that treat their financial infrastructure as part of their growth strategy will be successful.
With the right ERP architecture in place, a good financial reporting structure, and strong CFO leadership, start-ups can successfully expand their operations internationally and maintain control of their financial processes so they can turn financial complexity into a strategic advantage.
