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Not every organisation has multiple legal entities, thus requiring Group accounts to meet regulatory requirements. However, for those that do, financial consolidation is one of the key processes, alongside planning, analysis and reporting.

In our recent article “Achieving a best practice financial consolidation” we touched on the role of technology. As we always point out, every organisation has different requirements and no one solution will fit all. The task is to identify the solution that fits your needs. In this article, we look at this subject in more depth and set out the points to consider.

The platform alternatives

I have been involved in financial consolidation technology for over 20 years and, when I sat down to think about this subject, I identified four platform types or approaches. Below we have set out the pros and cons of each with other points of note.  

Excel

This is likely to be the starting point for many as their organisations grow. This would normally involve the creation of Excel workbook templates that are centrally created and maintained and completed by subsidiary finance teams. Once submitted, consolidation will take place in a myriad of linked Excel workbooks.

Pro’sCon’s
Leveraging of current skillsets – everyone knows ExcelDiscipline and control of model maintenance and governance
Strong reporting and presentation capabilityLack of process control and visibility
Strong modelling and calculation functionalityLack of auditability of data and consolidation adjustments
 High level of manual tasks
 Poor multi-user collaboration
 Poor enterprise-wide security functionality

In our experience, Excel consolidation models work at a low level of complexity. However, there comes a point where increased complexity results in a slow and cumbersome process that impacts tight deadlines and an increased level of risk.

Other points of note:-

  • Source ERP data can be easily modified in Excel without detection. This can create a disconnect in the audit trail.
  • There is a high risk that model design and functionality reside with one or few individuals.

ERP solution

ERP vendors have always been bullish about their ability to perform various processes using their solutions, and financial consolidation is one of those.

To enable this to work, all companies would need to use the ERP solution, and a standardised chart of accounts would be required. For those with foreign subsidiaries, multiple currencies and translation would also be required. Dummy companies would normally be utilised for consolidation adjustment postings.

Pro’sCon’s
Maximises the ROI on ERP technologyStandard chart of accounts restrictions
Strong data lineage (as it all resides in a single platform)All companies are ‘forced’ through the ERP (more difficult to integrate acquisitions)
One technology to maintainLimitations beyond financial data e.g. cash flow notes to the accounts
 Narrative/comments cannot be collected
 Lack of process control and visibility
 Limited FX translation functionality
 Weak auto-elimination functionality

An ERP based process can work efficiently where the process is more of an aggregation process i.e. a low number of subsidiaries and one currency. Even then, a single-ERP approach can be limiting to growth and should be carefully evaluated. Beyond this, overcoming the limitations quickly results in workarounds and inefficiencies.

Other points of note:-

  • Excel is likely to be required to collect and consolidate non-financial information and notes to the accounts and calculate indirect cash flow.
  • An ERP solution is built for ‘transactional efficiency’. What is required for efficient reporting and analysis is a solution built with this in mind.
  • User licences will be required for those involved in the consolidation process.

Financial Consolidation software

There are a handful of solutions that are primarily aimed at financial consolidation, as opposed to other processes (see CPM software below).

Pro’sCon’s
Full process control and visibilityCost of the solution
Strong data integration capability (ETL) – enabling disparate ERPsAnother solution to learn and maintain
Extensive FX translation functionalityMore complicated data lineage
Strong auto-elimination functionality 
Can collect non-financial data e.g. cash flow, notes to the accounts 
Narrative/comments can be collected 
Strong auditability of data and consolidation adjustments 
Multi-user collaboration 
Strong enterprise-wide security functionality 
Ability to deal with structural change 

These solutions will deliver all the expected consolidation tasks as configurable, out-of-the-box functionality. This includes Excel interoperability to enable use for reporting and, in most cases, data loading.

The major benefits of a solution are the ability to deal with structural change, such as organic or acquisitive growth, and the level of task automation that can be achieved. In addition, information beyond the trial balance can be collected and validated within the solution.

Other points of note:-

  • Integration with the planning and management reporting processes needs to be considered as these will be on separate platforms.

CPM software

A growing number of vendors have developed solutions that cover the needs of the FP&A team. Many of these are primarily designed to focus on planning, reporting and analysis. Financial consolidation is a secondary design consideration.

Pro’sCon’s
Full process control and visibilityCost of the solution
Strong data integration capability (ETL) – enabling disparate ERPsAnother solution to learn and maintain
Variable FX translation functionalityMore complicated data lineage
Variable auto-elimination functionality 
Can collect non-financial data e.g. cash flow, notes to the accounts 
Narrative/comments can be collected 
Variable auditability of data and consolidation adjustments 
Multi-user collaboration 
Strong enterprise-wide security functionality 
Ability to deal with structural change 

Financial consolidation is commonly offered as a pre-built model or set-of functions. It is far more likely that this will require a higher level of development and ongoing support to maintain. As a direct result, the functionality is likely to more restrictive and less capable in complex areas.

However, there are benefits of a ‘single platform’ approach. The first is cost and convenience with only one solution required. The second, and more important, is the integration with the planning and management reporting processes.

This type of solution works well where there is a simplistic level of consolidation, without complex ownership and corporate structure.

Making the right choice

All the options highlighted above are viable. However, they have differing impacts on efficiency and the level of risk.

Firstly, and most importantly, consolidation is strongly related to the other key financial processes and should not be considered in isolation. This is a mistake that many organisations make, do not fall into this trap.

Secondly, the benefits that derive from financial consolidation are roughly the same regardless of the option taken (i.e. regulatory compliance). Therefore, concentrate on the costs. One way of approaching this exercise is to compare the options side-by-side, breaking this down into key tasks/risks and calculating the financial impact of each. Much of this will relate to the time taken to complete the tasks by the subsidiary contributors and the group consolidation team.

Finding the right solution for your organisation is the first step to achieving a best-practice financial consolidation.

On 24th June Generation CFO’s Christopher Argent will be joined by MHR’s Mike Jeffery, Head of Financial Performance Management, to discuss what a best-practice financial consolidation process looks like and how this can be achieved in practice – register here.

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