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Complexities in Financial Consolidation<\/h1>\n\n\n\n
In the accounting world, \u201cfinancial consolidation\u201d is a well-defined process that includes several complexities:<\/p>\n\n\n\n
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- Collecting trial balance data (e.g., Assets, Liabilities, Equity, Revenue, and Expense accounts) from multiple general ledger systems, and mapping it to a centralized chart of accounts<\/li>\n\n\n\n
- Following specific accounting rules and guidelines, such as U.S. GAAP or International Financial Reporting Standards (IFRS)<\/li>\n\n\n\n
- Foreign currency translation<\/li>\n\n\n\n
- Elimination of intercompany transactions and balances<\/li>\n\n\n\n
- Accounting for partial ownership of the company and\/or assets<\/li>\n\n\n\n
- Enabling traceability of data such that we know where each number came from (usually very difficult to solve using current systems)<\/li>\n<\/ul>\n\n\n\n
Who does Financial Consolidation?<\/h1>\n\n\n\n
In large enterprises, the financial consolidation process is typically handled by the accounting department, which is under the supervision of the Controller or VP of Accounting\/Reporting, while ultimately it is supervised by the CFO.<\/p>\n\n\n\n
However, due to lack of proper standards on how data should be consolidated, we often see Financial Analysts spending more than 50% of their time on data consolidation, and not on strategic financial planning. This is a big problem as the data structures prepared by the Accounting <\/strong>Department are not necessarily useful for the FP&A<\/strong> Department to perform their analysis and provide actionable recommendations.<\/p>\n\n\n\n
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<\/div>\n\n\n\nTools for Financial Consolidation<\/h1>\n\n\n\n
We often see these tools used interchangeably in financial departments:<\/p>\n\n\n\n
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- General Ledger systems<\/strong>. These work well for small companies, or if there is a single ERP system that holds all data from all parts of the company. If there is a need to collect data from multiple subsidiaries\/locations\/systems, this quickly become cumbersome.<\/li>\n\n\n\n
- Spreadsheets<\/strong>. When performing data analysis to make strategic decisions, the data analyst\u2019s job requires flexibility that is only found in spreadsheets. However, to perform data analysis, the analyst must first gather and consolidate the data needed for analysis. This creates a cumbersome process where consolidation is done over-and-over again, periodically, which is time-consuming and error-prone.<\/li>\n\n\n\n
- Custom-made software<\/strong>. For large organizations, especially financial institutions, there are sometimes dedicated teams that are in charge of producing customized software for the organization. While this solution usually provides a reasonable fit to the organizational needs, it is very expensive and time-consuming.<\/li>\n\n\n\n
- Cloud-based solutions<\/strong>. Recently there\u2019s been a surge in cloud-based solutions for many business applications, including for financial data consolidation. However, most solutions require a long time to implementation and very expensive customizations.<\/li>\n<\/ul>\n\n\n\n
The True Key to Financial Consolidation<\/h1>\n\n\n\n
While this all looks quite complicated, the key to true financial consolidation lies in applying proper measures and protocols to make sure that data is consolidated effectively, easily, and periodically (or automatically). <\/p>\n\n\n\n
This is done by consistently applying the same protocols to data consolidation in a way that all data will be available to everyone, in one single repository. This ensures reliability of the data, as we expect all new data to be imported in the same way into our repository. This repository can be a large Excel file (better be careful here), an accounting software, or other software platforms. This ensures easy access for everyone, ranging from finance mangers, financial analysts, and planners from the various departments (supply chain planners, sales planners, inventory planners, etc.).<\/p>\n\n\n\n
To conclude, to truly have all data consolidated properly and save lots of time for your financial team, it is important to hold one central repository, the “source of truth” of the company. This repository will hold all data, and new data will be imported using predefined rules. This will ensure reliability of the data, and allow traceability, such that every number can be traceable down to its source system. To implement such a process is not easy, but certainly doable for any financial team.<\/p>\n\n\n\n
Other Recommendations<\/h1>\n\n\n\n
While you’re building your financial repository, we\u2019ve devised several recommendations on how to better perform this consolidation process, specifically in Excel. Our examples are all in Excel but can be applied to other “source-of-truth” systems. We\u2019ve written several blog posts with actionable tips on these specific issues, such as: consolidation of supply chain forecasts and actuals, consolidation of sales plans, calculating forecast errors in a consistent way, and more.<\/p>\n\n\n\n
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- Spreadsheets<\/strong>. When performing data analysis to make strategic decisions, the data analyst\u2019s job requires flexibility that is only found in spreadsheets. However, to perform data analysis, the analyst must first gather and consolidate the data needed for analysis. This creates a cumbersome process where consolidation is done over-and-over again, periodically, which is time-consuming and error-prone.<\/li>\n\n\n\n
- General Ledger systems<\/strong>. These work well for small companies, or if there is a single ERP system that holds all data from all parts of the company. If there is a need to collect data from multiple subsidiaries\/locations\/systems, this quickly become cumbersome.<\/li>\n\n\n\n
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