Navigating Financial Consolidation
Financial consolidation is the process of unifying a parent company’s financial reports with its subsidiaries, creating a single statement that is much easier to interpret.Download NowWatch Now
Learning how to navigate financial consolidation is essential for any company that wants to scale. Unfortunately, financial consolidation has been marred by a multitude of mishaps: from a fundamental human error to inefficient automation, FP&A teams have consistently struggled in their quest to create a concise snapshot of their company’s financial reports.
But these issues don’t need to perpetuate themselves. Modern automation and data integration have created a pathway out of the old problems and into a new, efficient means of reporting.
- What is Financial Consolidation?
- Methods of Financial Consolidation
- Financial Consolidation through Spreadsheets
- Financial Consolidation through ERP Software
- Financial Consolidation through Specialized Software
- Commonly Occurring Issues with Financial Consolidation
- External Issues
- Internal Issues
What is Financial Consolidation?
Financial consolidation is the process of unifying a parent company’s financial reports with its subsidiaries, creating a single statement that is much easier to interpret.
While the parent company is separate from its subsidiaries, they operate under the same umbrella. Shareholders, executives, regulators, and prospective investors all want to see the entire picture at once. That’s why it makes sense to combine assets, cash flows, equity, expenses, and liabilities in one easy-to-read statement.
It isn’t simple addition and subtraction, though, subsidiaries’ transactions are separate from their parent company’s, making their integration an arduous and often complex process.
Methods of Financial Consolidation
There are three main methods of consolidating an organization’s finances: using spreadsheets (like Excel), ERP (Enterprise Resource Planning) software, or specialized software (closing and consolidation software).
Each method has its strengths and weaknesses, depending on the size of the company.
Financial Consolidation through Spreadsheets
The first and most simple way to navigate financial consolidation is to use a basic spreadsheet program like Microsoft Excel. Spreadsheets work well for smaller to mid-sized companies, as it is not particularly complicated program and is simple and effective in its application.
Where spreadsheets falter is in their use for larger companies, as there is plenty of room for human error. If a parent company owns many subsidiaries, each with its own financial reports, it can be hard to integrate such a large amount of data correctly.
Put simply, spreadsheets may be good in the short term, but their margin of error may be too big for large companies in the long term.
Financial Consolidation through Enterprise Resource Planning Software
ERP software may be more effective as a company expands, gaining a larger amount of subsidiaries.
One of the main benefits of using ERP software lies in its familiarity — most FP&A teams that use ERP software for financial consolidation also use it for their day-to-day planning.
But, that may also be a downside to using ERP software for financial consolidation, as its intended use is for simple day-to-day accounting. ERP software can’t go into the same amount of detail as other methods, leaving key pieces of information out of the picture.
ERP software for financial consolidation also falls short when a parent company controls a large number of subsidiaries. Each subsidiary usually uses their own, sometimes unique, ERP software, and integrating them all into one concise financial snapshot can be difficult to say the least.
Financial Consolidation through Specialized Software
Closing and consolidation software is often the best way to go about financial consolidation. As the name suggests, this is software designed almost entirely for financial consolidation.
Specialized software works in tandem with the same ERP software FP&A teams use every day. It’s flexible and makes integrating large amounts of data easy.
While it may not be cost-effective for smaller companies, closing and consolidation software is the best method of financial consolidation for large companies with many subsidiaries.
Commonly Occuring Issues with Financial Consolidation
Even with state of the art software, there are still problems surrounding financial consolidation.
These problems don’t just reside within software, human error is a major factor to consider when dealing with large amounts of data as well.
There are two main areas in which issues occur within financial consolidation: internal and external.
External issues are responsible for many of the roadblocks and barriers FP&A teams face when trying to create succinct financial statements.
Regulations surrounding financial consolidation are numerous and ever-changing, creating a wide variety of rules that FP&A teams need to adapt to quickly.
The public demands more transparency than ever from large companies and corporations. Shareholders and prospective investors alike want to see exactly what’s going on behind the scenes in real-time, making financial consolidators slow down more than they would like to.
Environmental impact reports are also emerging as an important issue both financially and socially, producing yet another barrier.
Minority interest is also something executives should take into consideration. It is included within a financial consolidation sheet as equity, but it shouldn’t be confused with the equity the parent company controls.
This equity can change too; a company can regain some of it through a stock buy-back program or issue more equity in order to raise capital.
Internally, human error can account for a large portion of mistakes made in the pursuit of financial consolidation as well.
Poor data collection and integration can lead to a bevy of issues down the line. Some of these issues are hard to blame, as companies with numerous subsidiaries are attempting to turn a considerable amount of data into succinct statements on an annual, sometimes quarterly, basis.
When using simple programs like Excel at scale, problems are bound to happen, making specialized software even more valuable to sizable businesses.
Not all human error is accidental, as intentional fraud can occur when using manipulable programs like Excel as well.
Intercompany transactions make up a decent percentage of issues for FP&A teams as well. While intercompany transactions certainly have their own space on the final report, their integration needs to be taken into special consideration.
If two subsidiaries of a parent company do business with each other, their books will change, but shareholders and executives need to remember the value of the parent company doesn’t.
No intercompany transactions should be recognized in the final financial consolidation reports, unless a third-party or external company is involved.
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