Deep Dive into Financial consolidation
Updated: Aug 10
The role of the finance department in companies has changed in recent years. It's far more strategic and critical to the overall success of the business. They are no longer solely focused on traditional tasks such as bookkeeping and financial reporting. Instead, they have transformed into strategic partners that drive decision-making, provide insightful analysis, and contribute to the company's long-term growth and profitability. But that's easier said than done, they have to juggle numerous administrative tasks and generate time-taking reports while having to also drive strategic financial decisions. One of those tasks and reports is Financial consolidation, a necessary yet complex undertaking that is more difficult and time-consuming than required.
This blog looks at what multi-entity financial consolidation in accounting involves and why it's important. We also discuss how this task can be modernised and automated to help reduce errors, accelerate time to insight, and free CFOs and finance leaders to drive strategic financial decisions.
Understanding Financial Consolidation Financial consolidation refers to the process of combining the financial statements of multiple entities or subsidiaries within an organisation into a single set of financial statements for reporting purposes. These include ledgers like income statements, balance sheets, and cash flow. The procedure involves following legal regulations and guidelines (including IFRS and U.S. GAAP) and integrating several complex procedures like currency conversion, inter-company eliminations, journal entries adjustment, and partial ownership considerations.
As essential as financial consolidation is for large organisations, it is full of complexity and outdated processes which is why organisations today are beginning to change their approach.
Importance of Financial Consolidation
Consolidated financial statements are mandatory for most large companies and are used for a variety of purposes. Firstly, auditors utilise them to verify an organisation's adherence to the latest laws and regulations. Furthermore, they offer a high-level overview for companies and investors looking to make well-informed decisions for acquisitions and investments. Essentially the consolidated statements allow finance leaders to make informed decisions as it allows them to get accurate and actionable insights into the organisation's best and worst-performing business units. It's allowing financial leaders to identify risks and opportunities.
Breaking down the complexity of Financial consolidation?
Let's break down the complexity of financial consolidation, there are essentially 6 key steps in creating consolidation reports.
Data collection: The first step in any organisation is to collect the right data. Finance teams will require trial balances from subsidiaries and divisions, as well as assets, liabilities, equity, revenue, and expense accounts. However, the challenge lies in collecting this data as it lives in various general ledgers with different charts of accounts and a variety of currencies. Some of the ledgers will be in different formats as different countries are required to meet different accounting standards.
Conversion: To ensure consistency and uniformity across different currencies, it is essential to carry out currency conversion. This process enables the alignment of all local currencies with the group's designated currency.
Inter-company Reconciliation: One branch has to act as a seller to the other, possibly in multiple locations, when products move from one branch to another.
Adjustments: Manual adjustments are standard in accounting to allow business users to adjust or correct something due to last-minute changes. As a manual process, this needs to have controls in place to prevent human error.
Eliminations: Besides manual adjustments, there are automated adjustments or journals which follow predefined rules. This automation clears up possible duplications of intercompany investments, equity, and dividends, so figures are consolidated instead of aggregated.
Reporting: Finance departments have to report results to both internal and external stakeholders. These reporting requirements will typically vary by region.
For many organisations, getting all the documents and numbers in line is a massive huddle. They have to go through a large extent of spreadsheets and the time taking process of assembling all these together before they can even begin the reporting process. With so many moving parts, it should be no surprise that the processes can be slow, frustrating, and susceptible to error.
How are companies tackling Financial consolidation
Finance departments around the world are known for using Excel spreadsheets for all things finance, so it comes as no surprise that the same goes for creating financial consolidation.
There are advantages to using spreadsheets
They are low-cost
They don’t require financial professionals to learn anything new, they are already used to spreadsheets.
However, the disadvantages of using spreadsheets far outweigh the inconvenience of change. The risk of error, the chance of duplicated work, and expensive close processes are just something organisations cannot afford at a time of tighter regulations around filing deadlines and disclosures. It is not all spreadsheets, though. Some companies use their Enterprise Resource Planning (ERP) systems to provide the data for financial consolidation, resulting in some improvements and efficiency gains. However, this may not be an option for large companies with numerous ERP systems, and limited reporting capabilities can make this solution less ideal.
What are the most common problems with financial consolidation?
The most common issues we encounter with financial consolidation 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 requires many resource-intensive tasks like eliminating intercompany transactions and calculating group ownership. These things take time, and when reporting deadlines are tight, time is not a commodity finance teams have in abundance.
A lack of automation: Many financial consolidation processes can be automated. If automation exists even at the basic level, it can help accelerate processes and eliminate mistakes. But often, this is an area in which companies 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 constantly evolving and growing in complexity, and consolidation processes must adapt as a result. For companies that work across multiple geographies, it can be challenging to keep up with changes.
Data manipulation and fraud: Spreadsheet-based close processes can leave organisations open to data manipulation and fraud, which can have severe consequences—both financially and in terms of reputation.
The role of finance departments in today's business landscape has evolved significantly, becoming more strategic and crucial for overall success. They are no longer limited to traditional tasks but have transformed into strategic partners, driving decision-making and contributing to long-term growth. However, financial consolidation remains a complex and time-consuming process.
Financial consolidation is essential for companies, providing accurate insights and compliance with regulations. To overcome its challenges, organisations are adopting modernisation and automation.
Mensari's multi-entity consolidation tool offers automation, centralisation of data, and robust reporting capabilities. It streamlines the consolidation process, reduces errors, and empowers finance leaders to make informed decisions. With our tool financial consolidation becomes a seamless process, enabling organisations to drive growth and profitability confidently.