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Financial Consolidation: What it is and Why Midsize Corporations are Getting Left Behind

published on
February 26, 2020

When it comes to evaluating tech, we seem to have two different sets of expectations—the same discerning iPhone buyer who won’t take anything less than a triple lens 3D camera and an A14 chip is perfectly happy to accept that at work, there are inherent ‘trade-offs’ between what a system can do and how cumbersome it needs to be.

Consumers expect cutting edge technology that’s fast, intuitive, and powerful. Business users are accustomed to work-arounds, manual processes, and IT involvement for seemingly small requests. They’ve accepted that complicated work requires a complicated solution.

Financial consolidation is high on the complexity scale, requiring dozens of different types of calculations. Most small corporations can manually consolidate in Excel or directly in their ERP, but once they grow beyond a certain threshold and start acquiring other corporations, managing multiple legal entities, working in multiple currencies, or looking at going public, financial consolidation changes from a manageable manual task into an enormous data project with financial and strategic risks.

The midsize enterprise disadvantage

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Global 2000 enterprises are equipped to sink resources into bespoke solutions and to commit specialized IT teams and expensive consultants to running them.

Mid-market companies are more resource constrained, but their needs are no less complex. Walmart, grossing $500 billion per year, a $500 million manufacturing company, or even a $50 million software company all have very similar functional requirements.

Without correspondingly large budgets and headcounts, CFOs at midsize enterprises are stuck trying to balance the two sides of the equation. They end up automating some of the work, but hesitate to take on the burden required for the most complex and labor-intensive processes, like consolidation.

Knowledge is power

Middle-market businesses are more resilient than their smaller competitors and more agile than their larger ones. They have the highest annual growth rate of any segment and account for roughly one third ($5 trillion to $6 trillion) of the total US private-sector GDP.

Yet Executive Director of the National Center for the Middle Market, Thomas Stewart, points out that midsize corporations don’t inherently have a competitive edge. Instead, it’s only the most self-aware that are able to use their size as an advantage. He says:

“The best among them set themselves apart by how well they understand how they want to grow. Whether it is evidenced in their strategy for investing or their penchant for cost cutting, they are in tune with their own strengths, weaknesses, and appetite for risk. They use this knowledge to devise customized recipes for growth and shape their decisions about markets and initiatives.”

For this cohort, access to information is everything—and in many ways, financial consolidation is the linchpin that aggregates the crucial numbers and gives a jumping off point for the corporate performance analysis that Stewart speaks to.

Consolidation and the complexity conundrum  

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According to leading industry analysts, only about five vendors actually provide a complete cloud-based financial consolidation engine.  

By and large, these platforms are intended for the world’s largest enterprises. These solutions might be powerful, but they often need customization and are extremely complex to own and maintain, requiring specialized skills to operate both on the finance side and the IT side. Beyond that, a typical license can cost more than a midsize company’s entire annual application budget. Truth be told, a mid-market enterprise would be challenged to use a system like that. It's like driving a finishing nail with a sledgehammer—it'll work, but it’s not exactly the right tool for the job.

A number of other vendors have recently come out with ‘consolidation-light’ feature sets—usually tacked on to a larger platform already being used for other financial functions. Many of these solutions have evolved out of Financial Planning and Analysis platforms (FP&A). They roll up numbers to give a total at the top of the house, but they can’t manage all the nitty gritty detail around foreign exchange, intercompany eliminations, cash flow, and transfer pricing. This type of application is very effective for planning purposes, but falls short when asked to become the official book of financial record for the company.

This presents midsize companies with a conundrum. They can buy an expensive and complex solution or they can look to a more manageable and affordable option that lacks the functionality they truly need to close their books. Companies opting for the latter often end up closing their books (at least partially) in Excel. In fact, a study by BPM Partners found that  84% of organizations using an FP&A platform still end up working in Excel.

This is because consolidating actual transactions is much more complex than consolidating plan data.When dealing with foreign exchange balance sheet accounts, assets and liabilities get translated following a different methodology and different rates than P&L accounts. One side of a journal entry from the UK, for example, may hit the P&L and then other side hits the balance sheet. They get translated at different rates and now your journal entry doesn’t balance.You can deal with this manually but it takes time. Most FP&A systems don’t handle this complexity but a proper consolidation solution will deal with this out of the box.

The cost of manual processes

I remember one corporate controller saying:

“As long as I can get my intercompany out of balance number below $5 million – I’m good”.

Granted they were a large company but this type of situation highlights the reality for most midsize enterprises– they use a mixture of Excel and email to close their books. It’s time consuming, lacks accuracy and transparency, and presents huge error risks.

The reality is, most mid-market companies still use standalone Excel spreadsheets for statutory consolidation, even though almost 90% of spreadsheets contain errors and automation speeds up the process by 50-70%. This means that a large enterprise is getting faster and more accurate data than its mid-market competitor, every single month—leading to better decisions and better insight into what drives performance.

The cost of system complexity

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There’s no doubt that using standalone Excel for financial close is error prone and inefficient. While users like Excel because it’s easy-to-use and flexible, it was never designed to be used as a strategic, mission-critical enterprise application. Many software vendors in this space have spent time and energy building a user interface that mirrors the experience of working with Excel, but without the same data and security risks and manual requirements.

Beyond the finance grid, most vendors have created an entirely bespoke eco-system with custom workflows, reporting mechanisms, and integration frameworks. In fact, about half of development budgets are dedicated to re-engineering this type of standard functionality.

This creates a costlier end product. It also creates a steep learning curve for users. I’ve had the same conversation with numerous large enterprise CFOs. They say:

“You know, John, I love having a financial consolidation solution and it drives a ton of value. I just wish that my employees didn't need a PhD in the platform to make it work. Because when I get turnover, it takes me six months to bring someone up to speed and develop the skills.”

One such CFO had thousands of finance users and 15 specialized system administrators. While turnover is always painful, a team of this size can manage the transition, but it becomes untenable at a midsize corporation with one system administrator and a smaller finance user base—especially considering that midsize businesses are already under substantial pressure to stay ahead of the curve as technology advances. Respondents in a Deloitte survey of the mid-market note that ‘keeping pace with technological change’ and ‘technical complexity’ are two of their top three 2020 challenges.

Comprehensive and (not or) intuitive

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I’ve joined forces with some of the only people in the world who intimately understand financial consolidation to help midsize companies get ahead by challenging the long-held notion that easy-to-use and robust can’t go hand-in-hand.

We’ve uncoupled the consolidation engine from the generic functional components that are needed to operationalize it. Instead of reinventing the wheel, we’ve embraced Excel as a front-end grid and as a lens into critical financial data. This makes the application itself much more streamlined, while still proving a secure, multi-dimensional database with workflows, audit trails, and integration capabilities. It lets users work in familiar tools and bypass much of the learning curve associated with other technologies. Maybe most importantly, it allows us to put the majority of the development budget into things that are specific to consolidation and that add end-user value.

This creates a ripple effect that culminates in making top tier information accessible to all companies, regardless of size.  

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Suddenly, automating the financial consolidation process no longer requires a bespoke implementation, multi-million-dollar budget, and significant internal resources. It can be implemented out of the box and managed by a lean finance team, while still providing the deep insights into company performance and market conditions that were once reserved for the largest enterprises.

We all know that the right information can change the playing field. What will it look like when mid-market corporations bring an enterprise-caliber bat to the ballgame?

John Power
Chief Executive Officer
Fluence Technologies

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