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Guide to Financial Close & Consolidation

Traditionally, financial close and consolidation was a complex, time-consuming, yet essential, task for finance teams. Add in tight deadlines and error prone manual processes and it was also a notoriously stressful time. Thankfully, many financial consolidation processes can now be automated. This saves businesses time and money, as well as giving a much needed boost to team morale. This guide looks at the main challenges associated with traditional financial consolidation and close processes. It then shows how modern financial management software can help reduce stress, improve accuracy and free-up resources.

What is financial consolidation?

Financial consolidation is the process of collecting and combining data from different business activities, departments, locations or entities. That data is then consolidated into group-wide financial statements, such as the income statement, balance sheet and cash flow statement. 

What is the financial close process?

Closing is when the finance team closes their books. It’s a confirmation that the business has recorded all transactions, reconciled balance sheet accounts, and reviewed incomes and expenses. The finance team will also prepare financial statements and management reports for the leadership team to review in the context of the overall business strategy.

Effectively, each close acts as a regular check or internal audit that all financial transactions are accounted for. This gives a picture of the company’s overall financial position.

When does financial consolidation and close take place?

Normally, the financial consolidation and close takes place at the end of an accounting period. This could be the end of the month, quarter or calendar or fiscal year. However, one of the benefits of automating this process is that finance teams can produce consolidated accounts quickly and easily at any time. 

What's the difference between a month-end and year-end financial close?

Month-end and year-end financial close processes are closely related, with monthly closes contributing to the overall accuracy of year-end procedures.

Month-end financial closes are processed at the end of each month and track the financial performance of the business for that month. They can be useful to companies as it becomes easier to catch errors before they accumulate over the year – causing massive issues when it comes to the final financial close.

Year-end financial closes are a lot more comprehensive and require reflection on all business transitions within the fiscal year.

Having month-end and year-end closes that work in harmony can make your financial close and consolidation processes smoother and more accurate.

Why is financial close and consolidation important?

Consolidated financial statements are a requirement for most large companies. They are an essential high-level overview of the company’s financial performance for management teams, shareholders, investors,  lenders and financial journalists. Auditors also use these statements to ensure the organisation is complying with legislation and regulations. 

 Accurate and timely consolidated financial reporting is about much more than compliance. This data plays a crucial role in ensuring important business decisions are based on evidence rather than gut feel or guesswork. It gives leadership teams a detailed view of, for example, the best and worst-performing business units or products, and can help them to identify risks and opportunities.  

What are the steps involved in financial close and consolidation?

Traditionally, financial close and consolidation was a highly complex, manual and time-consuming process – especially for large, multi-entity organisations. The exact process and steps involved would vary across companies, but normally the finance team would need to:   

1. Collect the data

This will include the trial balance data from all subsidiaries and divisions, as well as assets, liabilities, equity, revenue, and expenses. This will be time consuming if that data is stored in multiple general ledgers, perhaps with different Charts of Accounts and in different currencies.

2. Calculate currency conversions 

This would be necessary in a multi-entity group with cross-border operations to align all local currencies to the main group currency.

3. Account for intercompany reconciliations

In many group companies, different entities or branches may trade with other parts of the group. In these situations, the finance team needs to take account of any products or services that are bought and sold between different group entities.

4. Take control of eliminations and adjustments

The finance team may also have to make manual or automated adjustments. Manual adjustments could be necessary to correct errors or account for last-minute changes.  They may also need to deal with duplications on intercompany investments, equity, and dividends, to ensure the figures are consolidated rather than aggregated.

5. Compile management reports

Reporting requirements vary widely between different organisations. However, finance teams are expected to deliver a clear view of the company’s accounts and overall financial position to both internal management and external stakeholders. They may also be required to produce more detailed and granular reports to show financial performance by, for example, region, product line or individual customer.

Many finance teams still use spreadsheets for their financial consolidation processes. That’s probably because they are seen as a low-cost option, with which practically all accountants are familiar and comfortable. However, the downsides of spreadsheets for consolidation are the high risk of errors and duplications during data entry, or when manipulating data across multiple, complex spreadsheets, and the time it takes to collate, verify and present the data in a user-friendly format.  

What are the challenges of financial consolidation and close?

The most common issues with financial consolidation and close are:

  1. Manual processes: if companies are still manually inputting data across multiple databases, there’s increased chances of late reporting and inaccurate data.
  2. Lack of data integration: entities within businesses often use different systems and processes to deal with their financial consolidation. This can make transferring data challenging and often leads to complications when it comes to bringing the final reports together.
  3. Insufficient audit trails: failing to provide clear audit trails can lead to issues with internal verification of figures and delays in sign-off from external bodies and regulators
  4. Changing reporting demands: management teams and external stakeholders may have evolving data requirements as the company grows, or have to adapt their processes to meet the demands of a constantly changing business environment.

How can you improve your financial consolidation and close process?

 The good news is that finance teams can now leave old-fashioned and manual processes and error-prone spreadsheets behind. Financial consolidation software enables you to collate, evaluate and update all your subsidiary information, quickly and accurately. That also means you can consolidate your financial data as often as you wish – there’s no need to wait until month-end to get the figures your leadership team needs to run the business effectively and make good decisions.

Here are just some of the ways financial consolidation software can improve your consolidation and close:

  • Automated multi company and multi-entity group consolidation gives you access to real time, accurate data
  • No more frustrating manual workarounds or spreadsheet reconciliations
  • Close fast and share financial reports more quickly – leadership teams won’t have to wait until the manual, consolidation spreadsheets are reconciled, audited and processed
  • Better management reporting – you can report on Key Performance Indicators (KPIs), not just financial records
  • Consolidate as often as you wish for near real-time data to inform rapid and better decision making
  • Reduce costs - manual data capture and consolidation of results from multiple subsidiaries can be highly labour intensive
  • Centrally manage FX and sophisticated inter-company transactions
  • Boost finance team morale by reducing most of their repetitive, manual tasks.

What to look for when choosing a financial close software 

Here are eight key features to look for in financial consolidation software:

  1. The ability to consolidate multiple subsidiaries (including sub groups)
  2. Automatic recognition of Minority Interests liability, if the ownership is greater than 50% but less than 100%, and creating relevant postings in the consolidation entity
  3. Foreign currency consolidation – the ability for subsidiaries to operate in their own base currency and have the results translated into the base currency of the consolidation entity, using stored exchange rates for each reporting period
  4. Central control of exchange rates - to automatically propagate rates to all related subsidiaries
  5. The ability to roll up budgets, revised budgets, actuals and variances from subsidiaries to group level for an overview of group performance and trends
  6. Detailed, granular group-level business intelligence reporting and user-friendly dashboards
  7. Straightforward inter-company charging and the ability to make adjustments at group level to eliminate inter-company profits at group level without affecting subsidiary figures
  8. The ability to add new entities quickly and easily as your business grows. 

Learn more about: Automated multi-company and multi-entity group consolidation

Find out more about financial close and consolidation management

AccountsIQ’s financial consolidation software provides all the group financial data you need, in real-time. In addition, you can quickly and easily drill-down to subsidiary level to monitor, analyse and benchmark performance across your group.

Learn more about: Accounting rules for consolidation.

Read our blog: How to prepare group consolidated accounts.

Watch our Multi company accounting and consolidation webinar.

Download our report: Untangling the intricacies of group financial management.