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 looks at what financial consolidation in accounting involves and why it’s so important. It also discusses 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 cash flow. The process requires adherence to statutory rules and guidelines (including IFRS and U.S. GAAP) and incorporates various complex processes such as currency 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in most large organizations, but one that’s often rife with complexity and hindered by disparate data sources and outdated processes.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, auditors use them to ensure an organization’s compliance with the latest legislation and regulations. They also 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 its most simple level, though, there are six key steps. 

1. Data collection: Finance departments have to collect trial balance data from subsidiaries and divisions, as well as assets, liabilities, equity, revenue, and expense accounts. This data lives in various general ledgers with different charts of accounts and a variety of currencies. Other data formats are also used in different countries to meet multiple reporting requirements.  
2. Conversion: Due to the various data, currency conversion is crucial to align all local currencies to the group currency. 
3. Intercompany reconciliation: One branch acts as a seller to the other, possibly in multiple locations, when products move from one branch to another. 
4. 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. 
5. Eliminations: Besides manual adjustments, there are automated adjustments or journals which follow predefined rules. This automation clears up possible duplications on intercompany investments, equity, and dividends, so figures are consolidated instead of aggregated. 
6. Reporting: Finance departments have to report results to both internal and external stakeholders. These reporting requirements will typically vary 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, getting all of this 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 should be no 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 two significant advantages to this: 

1. They are low-cost, especially when compared to rolling out software across a large organization. 
2. They don’t require financial professionals to learn new things, which can be time-consuming and sometimes 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. 

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 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 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 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 the Office of Finance. This digital initiative means 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-intensive tasks 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 
• fully automated 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 for modeling actuals, budgets, and forecasts  
• multiple, customizable closing periods 
• a comprehensive audit trail 
• self-service analysis to deliver business insights. 

With the right consolidation software, you can ensure that data and reporting are aligned, business activities compliant, and decision-making is led by the most 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 processes and how to develop a comprehensive, multi-faceted vision of your financial consolidation process that reaches across departments and embodies high expectations, download our ten key requirements whitepaper.