For some companies, consolidation is a “necessary evil”; they have to do it once a year simply because the auditor requires it. Other companies consolidate because they want or need to steer monthly based on those figures. They may need to report to the bank, or they may be involved in acquisitions and want to understand their financing capacity. After an acquisition, they want to continuously monitor how the new entity is performing and what impact the acquisition has on the group’s overall figures.
So consolidation can be far more complex than simply adding numbers together. Besides acquisitions, you may also deal with foreign currencies, normalizations, minority interests, different chart-of-accounts structures and source systems, different consolidation scopes, and much more. In addition, consolidation is often performed because information needs to be shared. Consolidation therefore frequently forms a critical part of the management information provided.
So what should you consider when optimizing your consolidation process?
One of the first things you need to determine carefully is: what exactly do I want to be able to see? What level of detail do I need? Are you only looking at a P&L, or also at a balance sheet and cash flow statement (including or excluding movement schedules, and what are the implications)? And when looking at the P&L, do you also want to analyze cost centers, general ledger accounts, or even drill down to transaction level? It is often advisable to drill down as deeply as possible into your source data, because this helps with numerical analysis and the next steps in your consolidation process.
In addition, many organizations today must consider how they want to deal with acquisitions. Legally, newly acquired entities must often be included from the moment of acquisition, while other stakeholders (such as banks) may want a like-for-like report covering the previous twelve months.
The next important question is whether you want to consolidate centrally or decentrally. Consolidation is typically centralized when the control function is centralized, a single ERP system is used, and tasks such as intercompany reconciliation can easily be handled. After all, if there is a difference, you can quickly coordinate with the colleague responsible.
However, imagine being located in Asia while the invoice in question relates to America. In that case, coordination becomes much more difficult. You might try calling your colleague, but due to time differences that often does not work. As a result, you end up relying on email exchanges, which is inefficient. In such situations, it becomes very important that decentralized intercompany reconciliation is properly supported by a tool.
With modern ERP systems, it is often relatively easy to connect directly to the ERP system to retrieve data. The advantage is that this can often be done at transaction level. You can then immediately determine intercompany relationships based on debtor and creditor information. For this to work well, it is important that intercompany transactions are invoiced properly and not simply posted manually.
If you cannot connect directly to the source system, you will often have to request a trial balance from subsidiaries. Because you then miss the transaction level, you will also need a breakdown of your intercompany relationships. After all, you still need to know which entities have intercompany relationships in order to perform a proper consolidation.
For some items, you will still need to work with a reporting pack. Movement schedules, for example, are often difficult to retrieve directly from ERP systems, and information such as FTE numbers or specific year-end disclosures is often easier to collect through a reporting pack than by connecting multiple systems together.
It is also helpful to define early on what you want to validate. Your first instinct may be to apply validation rules everywhere. While this sounds appealing, it can become frustrating for the people who have to explain small differences — for example, an intercompany difference of just a few euros.
Moreover, excessive validation rules can slow down the consolidation process. It is therefore often advisable to start with high-level validation rules and gradually refine them over time. Of course, this requires a tool in which validation rules can easily be adjusted.
Flexibility is therefore extremely important. Every controller needs a tool that acts as an extension of their knowledge and skills, without constantly relying on a consultant. In today’s dynamic environment, organizations must be able to adapt quickly. You therefore want a tool that allows you to remain in control.
Or, to quote Confucius: “Give a man a fish and he will eat for a day. Teach him to fish and he will feed himself for life.”
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