One of the most crucial processes in managing a company’s finances is financial consolidation. However, despite its importance, many companies struggle with various issues when it comes to financial consolidation. Whether you are a small business or a large corporation, these issues can significantly affect your financial stability and growth. In this article, we will discuss the top nine issues in financial consolidation and provide practical solutions to overcome them. Let’s go!

What is Financial Consolidation?

Financial consolidation is the process of combining the financial data of multiple entities within a company or a corporate group, culminating in the production of consolidated financial statements. In other words, it is the process of adding up all the financial information from different departments, subsidiaries, or divisions to show a complete and accurate view of a company’s financial position.

These statements reflect the company’s overall financial health as if it were a single entity, accounting for all assets, liabilities, income, and expenses. This process is not just about adding numbers together; it involves meticulous adjustments to ensure that the final statements adhere to generally accepted accounting principles (GAAP) and provide a clear, unified view of the company’s financial standing.

Why Does Financial Consolidation Matter?

Financial consolidation is crucial for businesses as it provides a comprehensive overview of their financial performance. It allows companies to understand their overall financial health and make informed decisions based on accurate data. Let’s look into three areas in the consolidation process:

Decision-Making

With accurate, consolidated financial statements, businesses can make informed decisions about their operations and investments. This is especially important for multinational companies with multiple subsidiaries and business units. Consolidated financial statements provide a complete picture of the company’s performance, enabling management to identify which areas are performing well and which ones need improvement.

Strategic Planning

Consolidated financial statements are crucial for strategic planning. By looking at the overall financial performance of the company, management can identify opportunities for growth and expansion, as well as potential risks and challenges that need to be addressed. This information is essential in developing a long-term strategy and setting realistic goals for the company.

Compliance

Consolidated financial statements are also necessary for compliance purposes. In most countries, companies are required to provide consolidated financial statements in their annual reports. These statements must follow specific accounting principles and regulations to ensure transparency and accuracy in reporting.

If you need a more in-depth look at why these things are important, check out our blog on multi-entity accounting.

The Financial Consolidation Process

The journey toward creating consolidated financial statements involves several key steps. If you are part of a company that is going through this process, it’s essential to understand each stage and the role they play in producing accurate and reliable reports:

Collecting Trial Balances

The process begins with gathering trial balance data from each entity within the corporate family. This is foundational for ensuring that all financial statements start from a point of accuracy. Trial balances include all assets, liabilities, revenues, and expenses of each entity.

Currency Conversion

For companies operating in different countries, currency conversion is vital. It ensures that all financial data is presented in a single currency for a consistent financial analysis. This step involves converting all financial information into a common currency, usually the home currency of the parent company.

Intercompany Reconciliation

Intercompany transactions between entities within the same company must be identified and reconciled. This step is crucial for eliminating any double-counting of revenue or expenses. It involves comparing the financial data of each entity and eliminating any intercompany transactions to present an accurate picture of the company’s overall financial health.

Making Adjustments

Adjustments are made to align the accounting policies and practices across all entities, adhering to the principle of consistency in financial reporting. This ensures that all financial information is presented accurately and can be easily compared between entities. This may look like making adjustments to inventory values, depreciation methods, or revenue recognition policies.

Eliminations

This involves removing the effects of intercompany transactions among entities to prevent artificial inflation of revenue and expenses. You can do this by eliminating transactions such as sales or purchases between related entities, which can skew financial results. Eliminations are crucial in providing a true representation of the company’s performance and avoiding misinterpretation of financial statements.

Consolidated Financial Statements

After making necessary adjustments and eliminations, the final step is to consolidate all the individual financial statements into one comprehensive document – the consolidated financial statement. This statement reflects the overall financial position and performance of the entire company, taking into account all subsidiaries and their respective activities. It provides a clear picture of the company’s operations and allows for better decision-making by stakeholders.

Reporting Results

Finally, the adjusted and reconciled data is used to prepare the consolidated financial statements, offering a comprehensive view of the company’s financial status. An accurate report will look at the company’s assets, liabilities, revenues, and expenses, as well as any changes in equity. This information is typically reported on a quarterly or annual basis.

Common Financial Consolidation Issues

Despite its strategic value, the consolidation process is fraught with challenges. Let’s look at some of the most common problems. Later on, we will explore a solution that simplifies the process.

1. Data Quality and Errors

Financial consolidation is a data-heavy process, relying on accurate and up-to-date information from various sources. This makes it vulnerable to errors, such as incorrect data entry or missing data. These issues can cause discrepancies in the final consolidated financial statements, leading to inaccurate judgments and decisions. Nothing is more important than the accuracy and reliability of financial data, making this a critical issue for businesses.

2. Bad Audit Trails

Auditing is a crucial element of financial consolidation, ensuring that the process follows regulatory and accounting standards. However, due to the complexity and vast amounts of data involved, it can be challenging to maintain a clear and easily traceable audit trail. This can lead to delays in audits or even invalidations, resulting in legal and financial consequences for the company.

3. Intercompany Transaction Adjustments 

Intercompany transaction adjustments can present a significant problem for businesses during financial consolidation. These are transactions that occur between different entities within the same company, and they must be eliminated to avoid double-counting or misrepresentation of financial data. If they aren’t accurately recorded and eliminated, it can create discrepancies in the consolidated financial statements.

4. No Automation 

Financial consolidation is notoriously laborious. Not having automations in place can lead to errors, inconsistencies, and delays in the process. Manual data entry and calculations are time-consuming and prone to human error. This can result in incorrect financial statements and a lack of confidence in the accuracy of the numbers.

5. Lengthy Reconciliation Process 

Accounting and finance teams spend a significant amount of time reconciling intercompany transactions. This involves comparing financial data from different entities within the same company to ensure they match up and are accurately accounted for. Without automation, this process can take days or even weeks to complete, delaying the overall financial consolidation process.

6. Not Using the Right Tools 

Many organizations rely on manual processes, such as spreadsheets and emails, to manage their intercompany transactions. While these tools may have been sufficient in the past, they are no longer efficient or reliable enough to handle the growing complexities of global business operations. Without proper technology in place, errors and delays are inevitable. We will talk later on about how financial consolidation software can solve so many of these issues.

To learn more about the basics of managing accounting across multiple entities, check out our blog that is the ultimate guide to intercompany transactions.

7. Fraud 

One thing that manual processes lack is security. Without proper controls in place, there is a higher risk of fraud within the financial consolidation process. This can be especially problematic for larger organizations with multiple subsidiaries and departments handling sensitive financial information. With outdated tools, it’s easier for dishonest employees to manipulate data and cover their tracks. Financial consolidation software not only streamlines the process but also provides built-in security measures to prevent fraudulent activities.

8. Changes in Reporting Requirements

As regulations continue to evolve, so do the reporting requirements for businesses. This means that companies must constantly adapt and update their financial consolidation processes to comply with new standards. Manual methods can be time-consuming and error-prone, making it difficult to keep up with changing requirements. On the other hand, financial consolidation software is regularly updated to stay in line with current regulations, saving valuable time and resources for businesses. It also provides a reliable audit trail for compliance purposes.

9. Efficient Workflow

The traditional method of manual consolidation requires multiple parties to be involved in the process, including accountants, auditors, and finance teams. This can lead to miscommunication, delays, and ultimately a slower closing process. By using financial consolidation software, all parties can access the same data and work collaboratively in real time. This not only streamlines the workflow but also reduces the risk of errors or discrepancies between different team members.

How Technology Can Streamline the Financial Consolidation Process

Something like financial consolidation is too important to leave it open to human error or the pitfalls of manual processes. This is where technology comes in to streamline and automate the financial consolidation process. Sage Intacct, a leading financial management software, is just one example of a solution that can significantly improve the efficiency and accuracy of financial consolidation. Let’s explore why:

Advanced Currency Management

For businesses operating internationally, managing currency conversion is a critical aspect of financial consolidation. Sage Intacct offers advanced currency management capabilities, automating the conversion process and ensuring that financial statements accurately reflect the global operations of a company. This feature supports a wide range of currencies and exchange rates, making it easier to consolidate financials across different countries.

Intercompany Transactions and Eliminations

Handling intercompany transactions can be one of the most challenging aspects of financial consolidation. Sage Intacct simplifies this process by automatically identifying, reconciling, and eliminating intercompany transactions within the consolidated financials. This ensures that financial statements accurately represent external operations without the distortions caused by internal transactions.

Compliance and Financial Controls

Sage Intacct is designed with compliance in mind, ensuring that consolidated financial statements adhere to generally accepted accounting principles (GAAP) and other regulatory requirements. The software incorporates robust financial controls to maintain the integrity and accuracy of financial data, providing peace of mind for businesses concerned with audit trails and regulatory compliance.

Scalability and Integration

As businesses grow and evolve, their financial consolidation needs can become increasingly complex. Sage Intacct is built to scale, accommodating new entities, more complex organizational structures, and additional regulatory requirements without a corresponding increase in workload. Additionally, Sage Intacct’s integration capabilities mean it can seamlessly connect with other business systems, ensuring a unified approach to financial management across the company.

Customizable and User-Friendly

Beyond its robust technical capabilities, Sage Intacct is praised for its user-friendly interface and customizable features. Finance teams can tailor the system to meet their specific needs, from custom reporting to personalized dashboards. This adaptability enhances the user experience and ensures that Sage Intacct can effectively support a business’s unique financial consolidation requirements.

Final Thoughts

Financial consolidation is a complex but critical process for businesses operating across multiple entities. We’ve gone through why it is important and some common pitfalls of financial consolidation, as well as shown that software like Safe Intacct can help streamline and improve this process. By automating tasks, providing real-time data, and offering customizable options, Sage Intacct allows finance teams to efficiently consolidate their financials and gain valuable insights for strategic decision-making. For further reading, check out our blog on Sage Intacct for multi-entity accounting.

At BCS ProSoft, we are experts at guiding businesses implementing software solutions like Sage Intacct. We understand the challenges of managing multiple entities and can help your organization achieve accurate and timely consolidated financials. Contact us today to learn more about how we can support your business’s unique requirements and improve the overall user experience with Sage Intacct.

Check out our blog on centralized purchasing next!

Frequently Asked Questions