Typical Challenges and Best Practices in Financial Consolidation
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After working in the Corporate Performance Management space for over two decades and being involved in hundreds of financial consolidation projects, we have seen just about every challenge that these projects will present and have identified some of the best practices to help you manage project risk.
We 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 very large company but this type of situation is the reality for most companies – they use a mixture of excel and email to identify and resolve intercompany out of balance positions and never quite get things completely aligned and end up happy if they can get close. Not only is this time consuming but it presents huge error risks and potentially opens you up to transfer pricing issues.
Best Practice - Applying work flow capabilities and automated matching, reporting and eliminations can dramatically improve controls, reduce errors and accelerate time to complete by up to 70%. Leveraging Fluence and Vena allows finance professionals to leverage Excel to report, analyze and respond but adds the control and transparency of a centralized data store and automated workflow – let’s get you that 70% savings.
Approximately 80% of companies over $50 million in revenue utilize standalone Excel spreadsheets to perform their financial consolidation. This approach can present a significant data integrity risk when it comes to data collection. It is estimated that close to 80% of all large standalone spreadsheets have at least one major unidentified error. Data collection often involves the emailing of standalone spreadsheets and manual effort to combine data from multiple sources/spreadsheets – a time consuming and error prone exercise.
Best Practice - There will be a common theme to many of the best practice recommendations – Automation. All data movement should be automated through certified connectivity – certainly between source applications like your General Ledge and your financial consolidation application. The solution should also manage the process utilizing a work flow engine. Fluence addresses both of these critical elements leveraging the Vena CPM platform.
Another data integrity risk is often presented in the equity reconciliation process. When organizations consolidate utilizing standalone excel they often do not capture historic data and it is not unusual for prior period opening balances to change in the GL. If such changes are missed it is highly likely that there will be errors in the Consolidated Owners Equity section of the financial statements.
Best Practice - Ensure that data collection processes capture the required level of granularity and automated validation routines and workflow can ensure that all equity reconciliation and equity movement reporting is accurate.
Most companies have experience with business combinations or asset transfers. These transactions are eliminated in the books over an extended period of time. Again – stand alone spreadsheets are only as effective as the memory of the user who needs to remember and document the appropriate eliminations. If the impacted entities have different account rules, this can result in manually calculating depreciation amounts and present further timing delays and risks of errors.
Best Practice - The use of a dedicated consolidation platform and performs automated elimination calculations will not only dramatically eliminate errors but accelerate the overall closing process.
Reporting and Data Consumption
While Financial Statements provide the basis for most of an organization’s performance management reporting they are far from everything you need. Aside from a broader spectrum of financial data and KPI’s, non financial operational data (HR and sales metrics to start) there is a need for historical financial and non financial information. If an organization is closing their books in Excel it is very likely that this information is not readily available and not reconciled to your core financial reporting. Aside from the effort and risk involved in gathering and reporting on all this information using standalone spreadsheets many organizations find inconsistencies in their reports and end up sending mixed messages to the consumers of this information.
Best Practice - A consolidation and management reporting infrastructure that is based on an integrated database of information, available through the cloud, provides the ease of access and maintenance as well as consistency and integrity of information that is required to optimize performance.