Financial consolidation: Best practices for effective reporting
Financial consolidation is the process of joining together the financial data from different departments, divisions, functions, subsidiaries, or organizational entities within an organization, usually for reporting purposes. Consolidating the diverse financial reports from these different departments into a single financial snapshot gives C-Suite, finance, and other departmental stakeholders valuable insight into the overall financial health of the organization.
Without consolidation, it can be difficult to assess financial performance across different departments.
Consolidated financial statements provide a true view of an organization’s financial health and performance.
Whether a company has a few different branches or is an internationally listed corporation, financial consolidation best practices can be hard to master. Entering new markets means you’re operating multiple entities, so organizations need to think about financial consolidation and how to tackle its challenges.
Why is financial consolidation important?
Financial consolidation helps organizational leaders understand each department’s performance through accurate and consistent reporting. It means data is readily available in a single source of truth, which is vital in today’s world, where growth is accelerating in most sectors due to advances in technology. It keeps global organizations compliant with local regulations because reports can be broken down to regional levels. And being able to generate monthly financial statements helps organizations stay on track with forecasts, budgets, targets, and organizational objectives. Financial consolidation means finance teams can accurately assess risks and opportunities with accurate data from all organizational entities. It also gives investors a clear view of finances.
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Financial consolidation challenges to consider
Financial consolidation gives all stakeholders, regulators, and auditors a clear understanding of an organization’s finances. But, as with any process, it’s important that finance teams understand the challenges they will face when consolidating their financial data.
Inaccurate data
Inaccurate, unreliable data, or siloed data, usually due to human error in manual input, is a massive cause for concern. Manual input is a cumbersome, tedious task and often results in mistakes. Determining the accuracy and integrity of data from multiple sources is almost impossible and can take many hours to rectify if mistakes are spotted. It will lead to missed opportunities, non-compliance, and often costly wasted time, with the potential risk of fines for inaccurate or non-compliance.
Security
When finance teams rely on spreadsheets to track data, it can be manipulated and changed – whether intentionally or not. Tracking the source of data manipulation or fraud can be almost impossible, but organizations need to find ways to prevent it nonetheless.
Interdepartmental transactions
When an organization needs to report on and make adjustments for interdepartmental transactions, such as between two subsidiaries or with a parent company, it can be time-consuming and can lead to bottlenecks in producing reports for consolidation and close, especially with multiple versions of financial consolidation data stored in spreadsheets.
Changes in reporting regulations
Reporting guidelines, statutory requirements, and compliance regulations are continually changing, but they are an essential part of consolidation, so despite it being a challenge, organizations must keep track of these changes.
Currencies and exchange rates
Accounting regulations and standards differ from country to country. Each organizational entity must meet the reporting standards of its country. Making sure this is reflected in the company’s consolidated financial statement can be a challenge if it is done manually.
Best practices for financial consolidation.
Develop consistent standards and processes for data management across the entire organization that ensures the accuracy of data, including consistent naming conventions.
Automate processes to avoid manual data entry.
Carry out regular data quality checks.
Invest in specialized financial consolidation software that integrates smoothly with all other systems and includes financial consolidation. When selecting software, ensure it has been designed with compliance standards in mind.
Ensure the software aligns with global and local accounting standards.
Enable finance teams to provide appropriate audit trails with the right tools and processes.
Keep data management policies current to ensure finance teams are aware of the importance of data integrity.
Limit access to sensitive data and the ability to manipulate it.
Technology for financial consolidation
Best practice financial consolidation requires a rigorous process of collecting accurate data, effective project management across all departments, and compliance with all local accounting regulations, and as an organization grows, consolidation increases in complexity. Nevertheless, many scaling companies still rely on outdated tools, manual processes, legacy systems, and solutions that hinder their growth.
Organizations need to invest in an ERP and FP&A system that gives finance teams an efficient, user-friendly way to consolidate financial data, carry out group reporting, and connect all users in one single system, wherever they are in the organization. An ERP system that includes financial planning and analysis (FP&A) makes intercompany reconciliation easier by handing back control to the entities themselves throughout the fiscal year.
The right software solution will:
Automate data import from various source systems.
Allow web-based data entry.
Be a customizable and multi-lingual application.
Have a built-in process for the prior reconciliation and approval of intercompany transactions based on functional currencies.
Have a predefined consolidation process with automatic aggregations and eliminations.
Use currency conversion based on different exchange rates (closing, period average, monthly weighted average, historical).
Support both IFRS and local GAAPs.
Have a clear consolidation workflow with status monitor, consolidation rules, and role-specific tasks.
Provide an audit trail and automatic consolidation process, including journalization and drill-down capabilities.
Produce consolidated financial statements; IFRS reporting template, including predefined disclosures and cash flow statements.
Integrate charts, graphical analysis, and dashboards.
Integrate with other systems such as MS Office to transfer data to Word, Excel, or PowerPoint.
Have predefined evaluations (e.g., monthly, accumulated) and predefined workflows (e.g., reporting package, intercompany elimination, capital consolidation, and manual consolidation entries).
Ensure compliance with legal regulations.
Build high accuracy, security, and speed into your consolidation process.
Provide transparency and drive better results with well-documented consolidation information.
Deliver efficient external and internal reporting with automatic report distribution and visual design tools.
Give your teams the complete picture so all consolidation data (including all commentary and attachments) can be evaluated directly in your solution.
Open up consolidated data for self-service analysis.
How Unit4 can help your organization
Our intelligent ERP and FP&A software solutions do all of the above. They free your teams to spend more time delivering insights and creating value for the business. We help you understand the numbers more deeply and then turn that insight into action for better business results and accurate consolidation.
You can harness the power of fully aligned teams and Unit4’s intelligent FP&A software to drive success. Our solutions help you by combining automated FP&A, budget management, and financial forecasting with highly interactive dashboards and powerful, pre-configured models.
Our cloud FP&A software solution gives your people better, faster ways to put the numbers to work — through smarter planning, budgeting, forecasting, reporting, visualization, and analytics. Your organization can take a flexible, integrated approach for all your organization’s financial planning needs, whether planning cash flow, managing operational budgets, or forecasting sales, costs, and revenue.
Organizations can better manage their operations with industry-leading software for Financial Planning and Analysis (FP&A), Enterprise Resource Planning (ERP), and Human Capital Management (HCM).
