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Whereas financial planning is considered as one of the most manual tasks of the finance department, financial consolidation and reporting are equally challenging. Both are musthaves for organisations with multiple subsidiaries and activities all over the world. But depending on the level of sophistication of your financial consolidation process, it can really be a struggle to get your figures right. How come?
What is financial consolidation and why is it so vital?
Financial consolidation and reporting is communicating your group results to the public, after eliminating internal transactions and costs. This external reporting is done following national or international reporting standards.
The consolidated results are also vital to gain insight in the total performance of company activities, product groups, countries, etc. Hence, also budgets and forecasts need to be consolidated to provide valuable information about your company and activity performance.
Most companies consolidate every month and publish their corporate results once a year in their annual report. This is mandatory for listed companies. In addition, companies have growing liabilities towards stakeholders such as lenders, investors, shareholders, tax authorities, and bodies like CBS, DNB and ESG.
Not meeting all these regulations means putting the continuity of your company at stake. And running big risks, such as no more financial loans, share value decrease, customers who start questioning your sustainability or even leave you, less turnover, or questions from the tax office.
Various consolidation and reporting scenarios
The financial consolidation process is usually better designed than the budgeting and forecasting process. In general, we can distinguish the following scenarios:
- Low sophistication: companies still using Excel for their financial consolidation, often supported by an interface to a central BI or data warehouse environment.
- Medium sophistication: companies using their ERP system or FP&A tool for their (partial) financial consolidation, followed by manual eliminations.
- High sophistication: companies using a consolidation tool of cpm platform to automatically consolidate their actuals, budgets and forecasts.
Common struggles in your financial consolidation process
Too many data sources
Many companies with a lot of entities worldwide do not have central ERP systems. Most entities use their own system and data source. This makes accumulating all separate information into one central definition hard or even impossible.
Too many people involved
The bigger the organisation, the more people are involved in the financial consolidation process. For multinationals, it can easily be more than 100 people. Without a solid workflow and clear instructions, it can be challenging to gather and process the required information.
Different reporting standards
In The Netherlands, companies usually report following Dutch GAAP or IFRS (for listed companies). However, a Brazilian entity may use other reporting standards. This makes providing the right figures and converting them to Dutch GAAP complex.
If you consolidate and report in Euros, but you have subsidiaries in Brazil, USA or Asia, you have to work with different currencies. This means not only converting Brazilian Reals to Euros, taking into account the various exchange rates, but also complying to all kinds of accounting regulations.
Intercompany reconciliation and elimination can be time-consuming because it comprises more than aggregating all data to one GAAP and one currency. All intercompany shipments and services will have to be matched on both sides of the book. This is even more complex if entities are not included in the same system.
Limited or no drill-down options
Most data provided by your subsidiaries are subconsolidated results without the underlying figures. This makes it difficult to trace the assumptions and adjustments on which the information is based. Yet, having the possibility to drill down by country, entity, business unit or even by activity is very important in case your auditor starts asking questions or your CFO asks for clarification.
What is written in the books must also be present in the system. Including adjustments, intercompany and other eliminations. Make your financial data auditable by keeping the full trail visible, from GL entry to consolidated results.
Governance and control issues
Does your financial consolidation process comply with governance and control regulations? Can you guarantee that all validations and checks are done? The control mechanisms applied to your figures must be transparent to the board of directors, supervisory board and (internal) auditor. After all, what could be worse than having to rectify your figures later on?
Lack of agility
Organisations are dynamic: mergers and acquisitions, sales and reorganisations happen on a day-to-day base. Assessing the impact of such structural changes is of great importance. So is analysing various scenarios as a part of the forecasting process. In Excel, this is complex and time-consuming. In consolidation systems, most common scenarios can often be predefined.
Automation makes your financial consolidation process easier
Financial consolidation and reporting are vital for your company reputation. But the reporting process requires more flexibility and agility every day and regulations and expectations constantly rise. You can no longer keep up by data crunching in Excel and hotlining local managers. In the current tight labour market, this will make you also less attractive for new employees. Investing in technology and automating your financial processes really pays off. For example by implementing a cpm platform to facilitate easy and reliable consolidation and elimination.
How do other organisations deal with their financial planning and consolidation struggles? What has made their lives easier? You can read it in our next blog post.