Today, the expectation is on finance teams to play a more strategic role in the business; in the wake of the COVID-19 pandemic, this is increasingly the case. But finding the time to do that while juggling numerous administrative and reporting tasks can be a big ask. One of those tasks is financial consolidation and close, a necessary yet complex undertaking that, for many, is more difficult and time-consuming than it need be.
This blog looksat what financial consolidation in accounting involves and why it’s so important.It alsodiscusses how modernization and automation can help reduce errors, accelerate time to insight, and free your finance leaders to drive strategic value within your organization.
What is financial consolidation?
Financial consolidation is the process of aggregating and consolidating trial balance data contained in the various general ledgers of subsidiaries to create financial reports. These include things like income statements, balance sheets, and cashflow. The process requires adherence to statutory rules and guidelines(including IFRS and U.S.GAAP) andincorporatesvariouscomplex processessuch ascurrency translation, intercompany eliminations, journal entry adjustments, and partial ownership considerations.
Financial consolidation is an essential procedure in most large organizations, but one that’s often rife with complexity and hindered by disparate data sources and outdated processes. That’s why organizations today are beginning to change their approach.
Why is financial consolidation important?
Consolidated financial statements are a requirement for most large companies and are used for a variety of purposes. Firstly, auditorsuse themto ensure an organization’s compliance with the latest legislation and regulations. Theyalso provide a top-level overview for companies and investors looking to make informed decisions about acquisitions and investments.
Vitally, they act as a valuable internal resource to inform decision-making at the very top of a company. They place accurate and actionable information at business leaders’ fingertips, provide a view of the best and worst-performing business units, and help to identify risks and opportunities.
What steps are involved in financial consolidation?
In the largest organizations especially, financial consolidation can be a complicated and sprawling affair. At itsmostsimplelevel, though, there are six key steps.
- Data collection:Finance departmentshave tocollect trial balance data from subsidiaries and divisions,as well asassets, liabilities, equity, revenue, and expense accounts. This data lives in various general ledgers with different charts of accounts and a variety of currencies.Otherdata formats are also used in different countries to meetmultiplereporting requirements.
- Conversion:Due to the various data,currency conversion iscrucialto align all local currencies tothegroupcurrency.
- Intercompanyreconciliation:One branchactsasa seller to the other, possibly in multiple locations, when productsmovefrom one branch to another.
- Adjustments:Manual adjustments arestandardin accounting to allow business users to adjust or correct something due to last-minute changes. Asamanual process,this needs to have controlsin placeto prevent human error.
- Eliminations:Besidesmanual adjustments,there are automated adjustments or journalswhichfollowpredefined rules. Thisautomationclearsuppossible duplicationson intercompany investments, equity,and dividends,so figures areconsolidated insteadof aggregated.
- Reporting:Finance departmentshave toreport results to both internal and external stakeholders.Thesereporting requirements willtypicallyvary by region.
Although it may not sound like it, this is a simplified summary of financial consolidation and close. Throughout this journey, various calculations and adjustments are made, including foreign currency conversion and the elimination of intercompany transactions. Depending on the controlling stake a parent company has in a subsidiary, different methods are required.
For many organizations, gettingall ofthis inline can feel like climbing a mountain of spreadsheets, hoping to make the summit to gain a clear, uninterrupted view of company accounts. With so many moving parts, it shouldbeno surprise that the processes can be slow, frustrating, and susceptible to error.
How are companies tackling financial consolidation today?
As with many other things in finance, departments often use spreadsheets for their financial consolidation processes. There are twosignificantadvantages to this:
- Theyare low-cost, especially when compared to rolling out software across a large organization.
- They don’t require financial professionals to learn new things, which can be time-consumingandsometimes met with resistance.
However, the risk of error, the chance of duplicated work, and drawn-out and expensive close processes are all disadvantages that vastly outweigh the inconvenience of change.
This is especially true at a time when tighter regulations regarding filing deadlines and disclosures are placing more pressure on finance departments to close quickly and provide greater transparency into their company’s inner workings.
Itis not all spreadsheets, though. Some companies use theirEnterpriseResourcePlanning (ERP) systems to provide the data for financial consolidation, resulting in some improvements and efficiency gains. However,this may not be an option for largecompanies with numerous ERP systems, and limited reporting capabilities can make this solution lessideal.
What are the most common problems with financial consolidation?
The most common issues we encounter with financial consolidation and close are:
- Data quality and collection errors:Entry errors caused by manual processes, late reporting, a lack of validation controls, and a lack of integration across close processes can all lead to problems. Like any other process, financial consolidation can only be as good as the data it’s built on.
- Slow reconciliation:Financial consolidation requiresmanyresource-intensive tasks like eliminating intercompany transactions and calculating group ownership. These things take time, and when reporting deadlines are tight, time isnot a commodity finance teams have in abundance.
- A lack of automation: Many financial consolidation processes can be automated. If automation exists evenat thebasic level, it can help accelerate processes and eliminate mistakes. But often, this is an areain whichcompanies fail to invest.
- Insufficient audit trails: Insufficient audit trails can cause issues with the internal verification of figures and impact sign-off from external bodies and regulators.
- Changing reporting requirements:Financial reporting requirements from governments and industry bodies are constantlyevolving and growing in complexity, and consolidation processes must adaptas a result. For companies that work across multiple geographies, it can bechallengingto keep up with changes.
- Data manipulation and fraud:Spreadsheet-based close processes can leave organizations open to data manipulation and fraud, which can have severe consequences—both financially and in terms of reputation.
What does a modern approach to financial consolidation look like?
Today, forward-thinking companies are embracing digitalization in theOffice ofFinance. Thisdigital initiativemeans taking financial consolidation to the next stage with specialized financial consolidation software. These solutions can automate disclosure at the click of a button, replacing manual,labor-intensivetasks and leaving more room for finance departments to focus on their strategic responsibilities.
Financial consolidation solutions provide an all-important single view of the truth, allowing both legal and financial consolidation to be executed quickly and with confidence. A good solution will also include vital business intelligence and performance management tools that reduce or remove manual processes and deliver actionable business insights into financial and operational metrics to improve efficiency and decision-making.
By taking this route, you can get everything you need for the multi-level consolidation of complex group structures and reporting, including:
- robust standardization of processes through inbuilt workflows
- fullyautomated features for disclosure and currency conversion
- intercompany, investment, and dividend eliminations to streamline processes
- statutory, management, segment, and cash-flow reporting
- intercompany reconciliation
- scenario management capabilities formodelingactuals, budgets, and forecasts
- multiple, customizable closing periods
- acomprehensive audittrail
- self-service analysis to deliver business insights.
With the right consolidation software, you canensure that data and reporting arealigned,businessactivities compliant, and decision-makingisled by themost accurate and timely business insights.What’s more, with automation,finance teams can wave goodbye to the days of poring over spreadsheets for consolidation purposes, which means they have more time to deliver the strategic insights expected of them.
To learn more about transforming your financial consolidation processesand how to develop acomprehensive, multi-faceted vision of your financial consolidation process that reaches across departments and embodies high expectations,download our ten key requirements whitepaper.
