Several companies today use Excel or outdated consolidation systems which do not integrate with the accounting systems or support the business’s analysis and reporting needs. This often results in high resource consumption at month-end closing as well as a lack of analysis options and control of processes and data. These challenges are reinforced by complex ownership structures and frequent changes thereto, which underlines the need for a dedicated tool that can handle changes to ownership, consolidation rules, collection of data and can control processes from data entry to finalisation of the books.
In many companies, the consolidation process takes place in Excel, and this is often an adequate solution for simple groups. Most groups will, however, reap many advantages from a dedicated CPM solution that can handle the group’s consolidation process, both in terms of freeing resources and also ensuring central storage and exploitation of data as well as interaction with other tools and processes.
Groups with the characteristics outlined below can often reap extensive benefits from a dedicated consolidation solution:
Complex and/or changing ownership structure
An ownership structure is considered as complex if it contains several levels of groups and entities as well as part-ownership in both controlling and non-controlling entities.
Many involved stakeholders
In large groups, there are often many stakeholders involved in the consolidation process. For example, this could include local finance departments that provide accounts to the individual entities as well as a central corporate finance department that is responsible for the actual consolidation process. In such cases, a dedicated consolidation solution would not only assist in the process of consolidation; it would also contribute with workflow for management of the process across local entities and the corporate finance department as well as improve communication, which today may be taking place via several Excel sheets and Outlook.
Many and/or complex consolidation rules
A dedicated consolidation solution would not only help with the above organisational and procedural complexities, but also in the actual consolidation. The processing of certain consolidation rules, such as internal elimination across several entities, can often lead to problems in an Excel model.
A shift to a dedicated consolidation solution will, based on the above, result in a more streamlined process, which all else being equal, will free resources across all the involved entities. In addition, the data quality will improve since data is being written directly into a central data model with an audit trail, rather than being spread across several Excel sheets, where input errors and alignment are often issues. Furthermore, centralisation of data will allow use of the same data in other models, such as planning and allocation models. For example, a dedicated consolidation option could be used within budgeting, which would ensure an agile approach with respect to future changes and scenario analyses.
The consolidation process
The monthly consolidation process looks different in most companies – however, several sub-processes often recur:
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Administrative input. Including ownership conditions, tax rates, foreign exchange rates and workflow initialisation
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Gathering local accounts
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Review and approval of local accounts
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Elimination. Including internal transaction and investment rules
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Consolidation
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Records
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Analysis and reporting
A typical consolidation process begins by initiating a workflow that defines who is responsible for which sub-processes and determines a deadline. This workflow extends throughout the process and ensures that sub-processes with dependency are not started before the prior sub-processes are completed. This also eliminates manual communication since the parties responsible for the sub-processes are made aware of status changes and have an overview of their own tasks.
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Simple workflow that shows tasks across entities and groups.
After the workflow has started, there are usually a number of central administrative tasks, such as input/import of tax rates, exchange rates and ownership conditions, as well as the determination whether the individual entities should be fully consolidated, partially consolidated or something else. In a dedicated consolidation solution, changes to ownership would be easy since indirect ownership percentages would be automatically calculated across several levels and groups.
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Direct ownership is input and indirect ownership is automatically calculated.
After the administrative input is complete, local data collection would typically commence. For some groups, all collection and validation of data takes places in the central financial function, while with others it is in the individual entities.
If there are many responsible parties for the local accounts, a dedicated consolidation solution will ensure uniform input, a structured process and offer the possibility to look at the local accounts as well as the group accounts that will later be consolidated.
After data has been collected and validated, a number of eliminations will typically take place, e.g. internal transaction. Here the internal transaction of the trading entities is reported and mapped, and any differences due to the currency exchange rate differences are automatically eliminated in the local accounts. Since a dedicated consolidation solution is based on a central database, it will always be possible to see previous eliminations and verify amounts using the in-built audit trail.
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Overview of internal transaction. Each intersection between entities can be unfolded, and internal transactions and currency differences can be reconciled.
Elimination of internal transactions will typically be followed by the actual consolidation, where a number of in-built consolidation rules make sure that, for example, equity interest is eliminated so as to end up with consolidated accounts for the group.
The consolidated accounts can now be viewed for the group, sub-group and local entities. The consolidation process can easily be repeated if there are changes later to either the data or other matters. Alternatively, records can be made that are added to the consolidated accounts and which thus can report separately from the data imported from the ERP system.
Following completion of the process, the workflow is closed, and both pre and post consolidated data can now be found in the central database for further analysis, use in other processes or elsewhere in the organisation.
Consolidated accounts for all groups.
A dedicated consolidation solution would therefore support and improve the efficiency of the monthly consolidation process for the vast majority of companies, which would free up resources for value-creating activities across the organisation. Furthermore, the data quality is strengthened, data will be centralised for use elsewhere and the first step in the journey towards a digital financial function will thus have been taken.
If you are interested to learn more about how twoday kapacity can help manage the consolidation process or one of the other CPM processes that many companies face challenges with, contact us here.