The process of financial consolidation is both essential and commonplace in the business world. It’s a necessary way of achieving oversight when it comes to the financial performance of the business, something that is difficult to do without the process of financial consolidation. Although financial consolidation may sound simple – adding up the numbers from across the business – there’s actually a lot more involved in the process than there may at first appear to be.
The basics of financial consolidation
The use of this technique provides essential insight into the financial position of a business. It does include a process of adding up numbers – data such as revenue, equity, assets and liabilities is drawn from all across the business and compiled into a centralised set of accounts. The process of financial consolidation then requires that specific rules or guidelines are applied to the data, such as reporting standards or accounting principles. These allow reports to be generated from the collected data that can then be shared with key stakeholders.
Why is financial consolidation necessary?
It creates key financial reports that give both internal and external stakeholders crucial data about how the business is performing. For example, some of the most important reports that are generated by the process include the income statement, cash flow statement and the balance sheet.
Is financial consolidation always the same process?
No, it will vary depending on the organisation and depending on the data. Different calculations and adjustments might be required depending on the structure of the business. For example, where a parent company holds a controlling interest in subsidiary (i.e. more than 50%) then consolidation accounting is used. If the stake held is less than 50% but the parent company still has a significant influence over the subsidiary business the equity method of consolidation is used.
Who handles the process of financial consolidation?
In any business this is usually the accounting department, overseen by management and the Chief Financial Officer (CFO). The process has often been handled manually but as technology has developed there are now many more ways to make financial consolidation more accurate and to speed up the steps involved. Today, most businesses are likely to use one of the following when it comes to financial consolidation:
Many accounting processes today rely on spreadsheets, including financial consolidation. However, spreadsheets have a number of disadvantages such as the need to manually load data from different systems. There can be problems with audit trails with spreadsheets and they can become too large once too many tabs have been used.
A general ledger system
This is only really appropriate where there is a single ERP system.
Financial consolidation software and apps
Able to draw in data from multiple systems, with high security and transparent audit trails – as well as specifically designed functionality – financial consolidation software and apps can make life easier for any business looking to create these key reports and numbers. Most options are available via the cloud, which makes them even more versatile and easy to use.