Best Practices in Creating Consolidated Financial Statements

Financial consolidation, often referred to as a "roll-up," involves combining financial data from multiple subsidiaries to create a comprehensive set of financial statements for the parent company. This process is crucial for multi-entity companies, as it provides a unified view of the organization’s financial health, enabling informed decision-making and regulatory compliance. However, traditional methods of financial consolidation, such as manual spreadsheets or ERP-centric processes, can be labor-intensive, error-prone, and inefficient. This is where modern financial consolidation software comes into play, offering a streamlined and automated solution that mitigates these issues.

Why Use Modern Financial Consolidation Software?

Relying on ERP-centric consolidation processes or manual spreadsheets presents numerous challenges. While ERP's (Enterprise Resource Planning) are adept at managing financial data for individual entities, they often fall short when it comes to consolidating data from multiple entities. Manual spreadsheets are notorious for errors, lack of scalability, and the significant time investment they require.

Modern financial consolidation software provides a powerful solution, tailored to manage the complexities of consolidating multiple entities. These cloud-based platforms seamlessly integrate with various ERP systems, streamline repetitive processes, and ensure data precision for your consolidated financial statements. Embracing such software empowers businesses to boost productivity, minimize inaccuracies, and attain deeper insights into their financial performance.

Key Features of Financial Consolidation Software

Single Database Integration

Centralizing data from all subsidiaries into a single database,  regardless of the ERP, ensures accurate and efficient financial consolidation, enabling real-time access, streamlined reporting, and informed decision-making for financial executives.

Pain of Manual Process: Manually consolidating data from multiple ERPs or spreadsheets can result in inconsistencies, delays, and errors due to the time-consuming and error-prone process of gathering, normalizing, and validating data from various sources.

Benefit of Automation: Automating the integration of data resolves these challenges, providing a single source of truth for all financial data. This not only saves time but also elevates the precision and dependability of the data, empowering faster and more insightful decision-making processes.

Account Mapping

When subsidiaries use different ERPs or charts of accounts, account mapping becomes crucial. Financial consolidation software offers sophisticated account mapping capabilities, allowing companies to map subsidiary accounts to a consolidated chart of accounts used by the parent entity. This ensures uniformity in financial reporting and simplifies the consolidation process.

Pain of Manual Process: Manually mapping accounts can be complex and error-prone, especially when dealing with diverse ERP systems and accounting practices across subsidiaries. This process can lead to discrepancies and misalignments in financial reports, undermining their reliability.

Benefit of Automation: Automated account mapping ensures consistent and accurate reporting. It simplifies the consolidation process and reduces the risk of errors, providing a clear and accurate financial picture. This automated feature also allows for easier updates and adjustments as account structures evolve over time.

Manual and Automated Eliminations

Intercompany transactions need to be eliminated during consolidation to avoid double counting. Modern consolidation software can handle both manual and automated eliminations, ensuring that intercompany transactions are accurately identified and eliminated.

Pain of Manual Process: Identifying and eliminating intercompany transactions manually is tedious and prone to mistakes, leading to potential inaccuracies in consolidated financial statements. This manual effort can be especially challenging for companies with numerous subsidiaries and complex intercompany transactions.

Benefit of Automation: Automated eliminations streamline the process, ensuring accurate and efficient removal of intercompany transactions. This reduces the risk of errors and enhances the reliability of consolidated financial statements. Automated tools can quickly identify and eliminate these transactions, saving considerable time and effort.

Consolidation Adjustments

Adjustments for reclassifications and other entries are often necessary during consolidation. Financial consolidation software provides tools for making these adjustments seamlessly, ensuring that all financial data is accurately represented.

Pain of Manual Process: Manually making consolidation adjustments can be time-consuming and error-prone, especially when dealing with large volumes of data. This process requires meticulous attention to detail and thorough documentation to ensure accuracy.

Benefit of Automation: Automated adjustment tools simplify this process, ensuring that all necessary adjustments are made accurately and efficiently. This enhances the accuracy and reliability of the consolidated financial statements, allowing for real-time adjustments and quicker turnaround times.

Comments

Adding comments to financial data is essential for providing context and explanations. Modern consolidation software allows users to attach comments to specific data points, enhancing transparency and understanding.

Pain of Manual Process: Manually adding and managing comments in spreadsheets can be cumbersome and difficult to track, leading to potential miscommunication and lack of clarity. Comments can be lost or overlooked in extensive spreadsheets, reducing their effectiveness.

Benefit of Automation: Automated commenting features ensure that all relevant information is easily accessible and clearly documented, enhancing transparency and facilitating better communication among stakeholders. This feature helps in maintaining an audit trail and provides context for future reference.

Currency Conversion

For companies operating in multiple countries, currency conversion is a critical aspect of financial consolidation. Modern software solutions offer automated currency conversion, ensuring that all financial data is consolidated accurately in the reporting currency.

Pain of Manual Process: Manually converting currencies can be complex and error-prone, especially when dealing with fluctuating exchange rates and multiple currencies. This manual effort requires constant monitoring and updating of exchange rates, which can be both time-consuming and prone to errors.

Benefit of Automation: Automated currency conversion ensures accurate and consistent conversion of financial data, reducing the risk of errors and enhancing the reliability of consolidated financial statements. Automated systems can quickly update and apply exchange rates, streamlining the process and ensuring consistency.

Workflow and Consolidation Process Checklist

A structured workflow and consolidation process checklist are essential for ensuring that all steps in the consolidation process are completed accurately and on time. Financial consolidation software provides tools for creating and managing workflows and checklists, ensuring a streamlined and efficient process.

Pain of Manual Process: Managing the consolidation process manually can lead to missed steps, delays, and inconsistencies. Without a structured workflow, there is a higher risk of errors and oversights, which can impact the accuracy and timeliness of financial reports.

Benefit of Automation: Automated workflows and checklists ensure that all necessary steps are completed accurately and efficiently, reducing the risk of errors and ensuring a timely consolidation process. These tools provide a clear framework and timeline for the consolidation process, enhancing accountability and control.

Full User Security

Controlling access to financial data is critical for maintaining data security and integrity. Modern consolidation software offers robust user security features, allowing companies to control who has access to what data and which features.

Pain of Manual Process: Manually managing user access and security can be challenging and time-consuming, leading to potential security risks. Ensuring that the right people have access to the right data requires constant monitoring and updates, which can be cumbersome.

Benefit of Automation: Automated user security features ensure that access is controlled and monitored, enhancing data security and integrity. These features provide granular control over user permissions, ensuring that sensitive data is protected and access is restricted to authorized personnel only.

Roll-Up Hierarchies

Defining roll-up hierarchies is essential for accurate financial reporting. Financial consolidation software allows companies to create flexible roll-up hierarchies, defining which business units roll up to different divisions and the parent company. This can be based on functional (legal) or operational (e.g., by geography) criteria.

Pain of Manual Process: Manually defining and managing roll-up hierarchies can be complex and prone to errors, especially in large organizations. Keeping track of the various hierarchies and ensuring they are accurately reflected in financial reports can be a daunting task.

Benefit of Automation: Automated roll-up hierarchy features ensure accurate and flexible reporting, simplifying the consolidation process and enhancing the reliability of financial statements. These features allow for easy adjustments and updates to the hierarchies as the organization evolves.

Pro-Forma Consolidations

Pro-forma consolidations allow companies to model the financial impact of potential new business units before they are officially included in the consolidated financials. This feature is particularly useful for companies involved in mergers and acquisitions, providing valuable insights into the potential financial outcomes of these activities.

Pain of Manual Process: Manually performing pro-forma consolidations can be labor-intensive and complex, requiring extensive data gathering and analysis. This manual effort can slow down decision-making and reduce the accuracy of the projections.

Benefit of Automation: Automated pro-forma consolidation features streamline this process, allowing companies to quickly and accurately model potential scenarios. This enhances decision-making by providing timely and reliable insights into the financial impact of new business units.

Flexible Report Writer

A flexible report writer is essential for producing key financial reports. Modern consolidation software offers robust reporting tools, allowing companies to create a wide range of reports that cater to different needs. Let’s delve into some of the key reports you can generate:

Control Reports: Control reports, including trial balances, ensure that all subsidiary entities have been correctly loaded into the consolidation software. These reports provide a high-level overview of the financial data, highlighting any discrepancies or issues that need to be addressed.

Intercompany Matching Reports: These reports help identify and reconcile intercompany transactions, ensuring that all intercompany activities are accurately recorded and eliminated during consolidation. Automated intercompany matching reports simplify this process, providing a clear view of intercompany balances and transactions.

Input Forms for Manual Adjustments: Input forms for manual adjustments allow users to make necessary adjustments to the consolidated financial data. These forms provide a structured way to capture and document adjustments, ensuring they are accurately reflected in the financial statements.

Consolidated Reports: Consolidated reports aggregate financial data from all entities into a single set of financial statements. These reports provide a comprehensive view of the organization's financial performance, enabling stakeholders to make informed decisions. Here is an example.

Consolidating Reports: Consolidating reports present each entity side-by-side, along with an elimination column and a consolidated total column. These reports provide detailed insights into the financial performance of each entity and the overall organization, highlighting intercompany eliminations and adjustments. Here is an example.

Drill-Down Reports: Drill-down reports allow users to see the underlying data behind the consolidated figures. These reports provide a detailed view of the transactions and adjustments that make up the consolidated financial statements, enhancing transparency and accountability.

Recommended Steps for Evaluating Financial Consolidation Software

When evaluating financial consolidation software, it’s important to consider several key factors to ensure that the solution meets your company's needs. Here are some recommended steps:

1. See Demos from Each Vendor: Ensure that the software is flexible, user-friendly, and contains key features such as single database integration, account mapping, eliminations, adjustments, comments, currency conversion, workflows, user security, roll-up hierarchies, and a flexible report writer.
2. Strong Integration with ERP Systems: Ensure that the software integrates seamlessly with your existing ERP system(s). This is critical for ensuring accurate and efficient data consolidation.
3. Easy to Add New Subsidiaries: Choose a solution that makes it easy to add new subsidiaries to the model, accommodating growth and M&A activity.
4. Experienced Implementation Team: Ensure that the vendor or partner has an experienced implementation team that understands both consolidations and the recommended setup of the financial consolidation software.
5. Bonus: Budgeting and Forecasting Integration: Consider solutions that also include enterprise-wide budgeting and forecasting capabilities, allowing the parent company to manage both the monthly financial consolidation process and budgeting and forecasting in the same software.

Key Takeaways

Automating and streamlining the financial consolidation process is essential for multi-entity companies looking to improve efficiency, accuracy, and insights into their financial performance. Modern financial consolidation software offers a robust solution, providing a range of features that simplify the consolidation process and reduce the risk of errors. By adopting a cloud-based financial consolidation solution, companies can enhance data accuracy, improve reporting, and make more informed decisions.

The investment in financial consolidation software should easily provide a return on investment within a year or two, including saved labor costs, saved time for each monthly consolidation process, better financial analysis, and easier integration of future business units that helps the company grow. For controllers and CFOs, the benefits of automating financial consolidation are clear, making it a valuable investment for the future.

By following the recommended steps for evaluating financial consolidation software, companies can ensure they choose a solution that meets their specific needs and provides the features necessary for effective financial consolidation. Ultimately, automating and streamlining the financial consolidation process can transform the way companies manage their financial data, providing greater insights and enhancing overall financial performance.