How To Make Financial Consolidation Less Painful

Finance teams

Financial consolidation is a nightmare of inefficiencies, data errors, and low-value tasks. Luckily, things are changing for modern FP&A teams.

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Priyanka Desai
August 28, 2022
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How To Make Financial Consolidation Less Painful

Summary

“Greater automation and more efficient financial consolidation free up valuable time for Financial Planning and Analysis teams to become strategic business partners.” 

Every company wants to grow. It's the nature of business. 

However, expansion is accompanied by the growing pains of complex financial consolidations. 

They span across multiple divisions, subsidiaries, locations, currency translations, accounting and taxation structures, reporting and compliance structures, and disparate and changing regulatory requirements. Financial consolidation complications surpass the capabilities of traditional spreadsheets and standalone accounting systems that companies have used so far. 

As a result, the financial consolidation process becomes chaotic, complex, and time-consuming. Despite these challenges, finance teams are constantly under pressure to meet strict deadlines, report on data in less time, and meet the regulatory compliance standards.

Financial planning and analysis (FP&A) teams need a robust system to meet the increasing demands of business partners and provide a centralized view of the month-end financial close process. 

That’s where financial consolidation comes in. 

What is financial consolidation? 

Financial consolidation is the process of combining financial data from multiple subsidiaries and segments (such as the entities a company controls) within an organization into a single set of financial statements for reporting purposes. 

Since the parent company controls the subsidiaries, it is practical to present the assets, liabilities, equity, cash flows, income, and expenses of the parent and subsidiaries in a financial statement considering they are a single economic entity. 

Specifically, consolidated financial statements provide the stakeholders with a view of the company as a whole. 

  • Regulators and auditing entities use this source to check whether the company is compliant with rules and regulations
  • Investors assess the company’s situation (how the company’s finances, operations and investing activities are being managed, and whether the company is winning or losing in the market)
  • Stakeholders, executives, and high-level managers evaluate their corporate performance based on consolidated financial statements
  • They are used to identify potential risks, opportunities, and high and low-value business segments

Far from the misconception that financial consolidation is simply adding together the assets, liabilities, and equity of the subsidiaries and the parent’s assets, it is a complex process. This is because subsidiaries’ transactions are complex and consolidated financial statements use the trends in the relationship of information within these statements to forecast future performance. 

What are the three financial statements? 

Income statement

The income statement, also known as the profit and loss statement, shows profitability over a specific accounting period. In other words, it shows the company’s revenue, operating expenses, and gross profit. 

Balance sheet

The balance sheet illustrates the business’s present finances (current assets, debts, or liabilities owned). A small or medium business might prepare a quarterly statement, while organizations such as banks that deal with a significant amount of money prepare daily financial statements. 

Cash flow statement

Also called the statement of cash flows, it shows how much cash enters and leaves the business over a given period. Cash flow from operations, investing activities, and financial activities (like bank loans and revenues that are earned but not received) are highlighted in this financial statement. 

The purpose of a consolidated financial statement is to portray the financial position of the company, thereby helping stakeholders know the exact assets and liabilities of both the parent and subsidiaries. This leads to an informed decision-making process. 

Quick step-by-step overview of financial consolidation 

Whether you are a startup opening your first subsidiary or an enterprise organization, the basic steps of financial consolidation remain the same. 

Here are the six steps of the month-end financial consolidation process. 

  1. Collecting data at the subsidiary level: In the first step, each subsidiary needs to go through the process of collection of assets, liabilities, revenue, and expense data. This information is used to generate a GAAP income statement, balance sheet, and cash flow analysis. 

Relevant data from all entities is centralized, before starting the consolidation process. 

  1. Mapping data to a central chart of accounts structure: Subsidiary data, including inter-company loans and allocated corporate overheads, is consolidated into the parent company’s chart of accounts. At both parent and subsidiary levels, entries are adjusted to ensure accuracy. 

  1. Applying FX (foreign exchange) rates: An important part of mapping subsidiary data to the central chart of accounts entails gathering FX rates for currency translations, especially for international financial data. 

For instance, say you are a US-based company with an Australian subsidiary. In this case, you will have to translate actuals in Australian Dollars to USD for the consolidated statement. 

Effective currency conversions require an FX rate for a period end data to translate balance sheet data and the average FX rate for the period to be added to your P&L statement. 

  1. Eliminating inter-company transactions and interests elimination: When it’s time for the consolidation process, have your inter-company accounts set up. Within the inter-company transactions, create elimination entries to zero out that activity. If transactions don’t balance due to FX rate differences, log those discrepancies as CTA (cumulative translation adjustments). 

  1. Verifying that CTAs are reasonable: After creating necessary elimination entries, verify manually that CTAs are within reason. Ensure that there aren’t larger issues in your data to investigate. 

  1. Generating consolidated financial statements: Finally, close out the period for both the subsidiary and parent company, ensuring the consolidation entries meet accounting standards. Finalize the balance sheet, P&L, and cash flow statements and report them to both internal and external stakeholders. 

Financial consolidation is critical for your company’s growth as it allows investors to assess opportunities and provides stakeholders, regulators and auditors with a clear picture of your company’s finances. 

Accounting and finance teams still carry out all the above steps in spreadsheets, making this process error-prone. Here are some of the challenges FP&A teams face during manual financial consolidation. 

What are the challenges FP&A  teams face during financial consolidation? 

Manual data entry is often inaccurate and inefficient

Inaccuracies in finance consolidation reports can be caused by the use of multiple disparate sources. This is further exacerbated when the information is manually entered into these sources: data entry errors, bottlenecks due to cross-checking transactions, or currency translations among many others. 

The after-effects of manual data entry is even more taxing. Consolidating from multiple sources is both time and resource-intensive. Additionally, spreadsheets are inefficient as it is equally difficult to know where inaccurate data came from and where to correct it. 

Automating processes wherever possible avoids manual data entry errors. Centralizing data management prevents errors when transferring data between different databases or to parent entities. 

Using tools that may not be integrated with each other

It is not uncommon for each department, including FP&A, to use a different reporting tool. This can be problematic as these tools or software may not integrate. Imagine the difficulties faced by those responsible for consolidating information into a single report. 

The most efficient FP&A teams use financial planning software that integrates with your current systems and centralizes your workflow. 

Making adjustments for inter-company transactions

There are three kinds of transactions that happen between entities of the same company: 

  1. Lateral transactions between subsidiaries in the same company
  2. Upstream transactions from subsidiary to parent company
  3. Downstream transactions from parent to the subsidiary company

To get a fair view of the parent company’s financial health, you need to adjust for these transactions, which is a complex process that can cause significant delays in the close cycle. 

Automate matching, reporting, and eliminations from complex inter-company transactions. 

Ever-changing reporting requirements

For fast-growing companies, reporting guidelines, statutory requirements, and compliance regulations are continually changing. Keeping on top of the changes can be challenging. 

Implement financial planning software specifically designed with compliance standards in mind. 

Security (data manipulation and fraud)

One of the major risks of using spreadsheets for financial consolidation is security. It is easy to change or manipulate data, whereas tracking the source of said change is nearly impossible. 

Invest in software that prioritizes security, allows you to manage access rights, and keeps a track of all versions with the audit trail feature. 

Financial consolidations across countries are complicated

Accounting standards, reporting standards, and compliances vary from country to country. 

Each entity consolidating financial statements has to meet reporting standards of its country. Next, the information has to be remediated in the parent company’s consolidated financial statement. 

What’s more, currency and exchange rates are often manually converted and imported into spreadsheets, which can lead to errors. 

Invest in financial planning software that connects all your data for live calculations across different financial models. 

How can financial planning software ease the pains of consolidation? 

From budgeting to forecasting models, formulas, what-if scenarios, and workflows, finance is evolving to automate several processes. What is the benefit of automation, you may ask?

Through the financial lens, automating the financial consolidation process saves your FP&A team’s time, which is better spent on impactful analyses to drive business decisions. 

Here’s how finance planning software eases the pains of financial consolidation:

Automate data flow with scheduled imports 

Pigment allows for automated data flow with scheduled imports. You can set up scheduled imports from your ERP or CRM solutions, schedule the time of import, and select the frequency of the import. Receive alerts in the form of an email in case of errors during the import or if the schedule fails.

scheduled imports in Pigment

With the scheduled import feature, data is automatically refreshed right within your modeling platform.

Bring all your data together with integrations 

Data preparation does not have to be time-consuming for your FP&A teams. Pigment for finance teams brings together data from multiple data sources including accounting and billing systems, ERPs, CRMs, BI tools, and HR systems (Netsuite, Xero, Sage Intacct, Stripe, Chargebee, Excel, Google Sheets, and more). It lets you clean and enrich data instantly, within seconds.

Pigment integrations for finance teams

Develop better analytics and scenario planning

Know exactly how your business is doing by connecting business cases across the organization in real-time. Build stunning consolidated financial reports, plans, and forecasts for a 360-degree picture of your business.

reporting for finance teams on Pigment

Pigment allows you to run what-if scenarios in minutes - compare scenarios and easily change assumptions using visually appealing tables and waterfall charts.

scenario planning in Pigment

Use the right technology 

With the expanding scope of analysis, the need for larger data sets from multiple sources grows proportionally. That’s where having the right tech simplifies the data preparation process and frees up the time for FP&A teams to become key strategic business partners influencing critical decisions. 

Pigment makes financial teams more efficient by: 

  • Modeling faster - Get flexible models up and running in a matter of hours, instead of days. Autocomplete formulas and calculated items speed up the process. 

financial modeling faster with Pigment

  • Connecting the dots - Create shared capital efficiency metrics for all your teams, stop rebuilding financial models from scratch every quarter and implement data in real-time across all applications, making your financial model up-to-date and scalable.

financial metrics

  • Avoiding errors - Spreadsheet cell-based modeling can be painful. Pigment’s powerful object-based modeling speeds up your financial consolidation process.

object-ased modeling on Pigment

  • Gathering inputs - Instead of juggling multiple spreadsheets and sorting through email threads, Pigment’s powerful collaboration workflow gets data from your colleagues painlessly.

collaboration for finance teams

  • Understanding your data - Pigment’s drill-down feature identifies components of your formulas and manages and tracks different versions to identify input or model changes.

Key integrations for consolidated financial reports 

Rely on a single source of truth by collecting accurate data in real-time. Pigment integrates with your existing tech stack to free up your FP&A team from time-consuming data consolidations and data transfer errors. 

  • ERP and accounting software like Netsuite, Sage Intacct, and Xero 
  • CRM like HubSpot, Salesforce, Pipedrive, and Dynamic 365 
  • Billing and payment systems like Stripe and Chargebee 
  • Spreadsheets including Excel and Google Sheets 

Automate financial consolidation using financial planning and analysis platform Pigment 

FP&A teams find the path to becoming strategic business partners only when unencumbered by time spent on low-value tasks.

Moving all financial statements and data to Pigment makes the time-consuming financial process quicker and easier for FP&A teams. Financial planning and analysis software Pigment integrates data for companies with complex, multi-entity business structures to present valuable insights that drive growth. 

This unified platform encompassing multiple subsidiaries and business units within a single instance gives real-time visibility into your company’s financial health and results. 

Looking to learn more about how Pigment streamlines your financial consolidation process? Book a personalized demo.

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