What Is the Financial Consolidation Process?

Published on

It’s that time again. What’s going to sell has been sold. What’s been spent has been spent. No matter the kind of business you’re operating or the kind of customers you’re serving, financial consolidation and reporting is a standard procedure you have to perform with consistency and care for quality data.

The exact moment companies begin the process of consolidating their financial information will vary. Some organizations end their accounting period on a quarterly basis. For other firms, where business conditions may require them to respond more quickly to changes in the market, a monthly consolidation and close makes more sense.

There is also the close of the fiscal or calendar year, which marks one of the most important moments in terms of reporting and forecasting based on the company’s plans. The cadence of the financial consolidation process can affect the depth to which the accounting team will analyze the numbers, which may affect the time it takes for the team to close the books.

Whether they try to get a head start on the process by preparing estimates early on, or simply focus on the actuals at the end of the accounting period, companies need to focus on producing the same kinds of financial statements. These include details around income generated, cash flow, and profit and loss statements.

The better finance and accounting teams handle this process, the more leadership teams are able to take stock of the company’s financial position and make strategic decisions. They’ll know whether they can afford to hire additional staff, for instance. Expanding into a new market or acquiring a new subsidiary will be easier to determine. If the outlook trends are negative following the consolidation and close, they’ll also know that they may need to reduce expenses until they start growing again.

What Are the Rules for Consolidation?

Managing the process of financial consolidation depends in part on the kind of industry regulations that pertain to your organization. There are some differences, for instance, in the requirements for GAAP consolidation rules and IFRS consolidation rules. You might have to change the way you list assets on a balance sheet, for example, or how interest should be classified in your reporting.

The common denominator in all consolidation accounting rules is the kind of data you need to gather from different business functions and systems across the company. Finance and accounting teams need to develop a comprehensive tabulation of all transactions that have occurred during the period covered. That means going beyond outlining all the expenses that have been allocated towards departments like marketing and HR. It also means looking at accrued expenses, where the money has technically been spent but the company is still waiting on payments or even an invoice. Finance professionals need to make adjustments for factors like accrued expenses even as they consolidate more standard information such as sales revenue.

Of course, businesses are never static entities. The most successful are building upon their revenue growth by pursuing M&As that will enlarge their customer base, bring in additional talent, and provide them access to valuable intellectual property. Adding subsidiaries can complicate the consolidation process in accounting, though.

If new subsidiaries are based in another country or continent, for instance, their reporting requirement may vary from that of the parent company. There may be new currencies (and foreign exchange rates) to consider. While some stakeholders will need to have the finance team conduct a group consolidation process, meanwhile, reporting will still have to be broken down into income, equity, assets, and liabilities at the subsidiary level.

Steps for Consolidation

Let’s say you’ve already gathered the information you need from the corporate parent and its entities. You have even produced an income statement, and a balance sheet and centralized the data so that a proper cash flow analysis can begin. There’s still more to do in order to ensure all the accounting consolidation rules have been followed.

Here are some of the key items left on your to-do list:

·    Convert all your currencies: A lot of finance and accounting work involves translating data, particularly between U.S. dollars, Euros, and other currencies. This means looking at the average foreign exchange rate for each currency in the period where you’re consolidating the books. This is a key step in mapping your subsidiaries' data to a chart of accounts structure.

·    Intercompany Transaction Eliminations: Did a subsidiary sell products and services to the parent entity? Did a similar purchase happen the other way around? This needs to be weeded out of your final reporting, for obvious reasons. In some cases, this will be laborious because you also have to factor in the foreign exchange rates again. The end results of these eliminations may not be zero, which is why you have to record cumulative transaction adjustments.

·    Check for loans and additional charges: Not all entities in an organization will have the same needs at a particular time. In fact, one of the benefits of being a subsidiary is the ability to potentially get a financial lifeline from your owner. These intercompany loans all have to be properly logged amid consolidating the books, of course. So do any additional charges, such as the overhead parent entities sometimes allocate to their subsidiaries.

·    Finalize journal entry updates and adjustments: Sloppy consolidation can spell big trouble for organizations, particularly for auditors. That’s why finance and accounting teams have traditionally found themselves working late in the evenings or even on weekends in order to go over their work with a fine-tooth comb before closing the books and producing the final financial statements.

How to Improve the Consolidation Process

Much like paying your employees the proper amount and at the right time, financial consolidation is a process that organizations need to perform regularly and with as few errors as possible. It should also happen in a way that’s straightforward enough that it doesn’t tie up the finance and accounting team for longer than it should.

The risks of a severe mistake are significant – having an auditor find what’s known as a material error threatens the reputation of the entire organization among regulators and shareholders alike. When the consolidation, close and reporting process puts a strain on the finance and accounting team, meanwhile, there’s the risk that good people will elect to explore other career opportunities. Finding a replacement for quality staff then becomes its own burden, as does training them in the nuances of the business.

These issues have given rise to the development of advanced financial consolidation tools. Instead of generic business platforms that are adapted for crunching numbers and producing financial statements, these applications are built explicitly for the purpose of easing the process of consolidation.

When companies choose the best consolidation tools, they start by taking a critical look at how they manage key finance department processes today, and where the propensity for errors or extra work is most likely to arise. At one end of the spectrum is the complexity of monolithic, on-premise enterprise resource planning (ERP) systems, which can pile up within an organization as they take on more subsidiaries.

Zoom in a bit closer to the frontlines of finance and accounting, meanwhile, and you’re just as likely to see tools so simplistic that they simply add time and effort to every stage of consolidation, close, and reporting. Spreadsheets are a perfect example: when they aren’t tied to a more sophisticated suite of applications, spreadsheets force accounting teams to pore over the details of currency conversion and adjustments one row and column at a time.

Which Financial Consolidation Tool Is Right for Me?

If you’re trying to determine which financial consolidation tool is right for you, keep a few basics in mind.

How long will it take to get to value?

From the time of purchase to actually having the team use the technology to tackle finance and accounting processes?

How much of a lift will be required from IT?

If you think CFOs have a laundry list of priorities, their CIO counterparts touch even more parts of the organization, which means their staff may be limited in their ability to manage and update a particular accounting platform.

How much can the tool accomplish?

There are some tools that will address parts of financial consolidation. Others are more focused on closing the books. Still, others are pure-play reporting tools (and not just intended for financial reporting, but other data, like sales and marketing data). Make sure you look for a partner that can automate every phase of the journey.

One technical consideration to bear in mind is that an ideal tool to help consolidate your company’s finances and close the books more easily should be based on a cloud computing model. This dramatically eases the process of maintaining the best version of the platform you use and makes data more accessible and manageable no matter who needs to use it.

Final Thoughts

Think of your plan to improve the financial consolidation process as more than a technology project. It should be an initiative that ultimately aims at helping the business discover new growth opportunities, navigate uncertainty and create a positive employee and customer experience.


Marisa Ruffles
Fluence Technologies

Connect with Fluence

Discover how Fluence can help your organization plan better and close faster with more confidence.