7 common financial consolidation challenges that companies face (with solutions)

Multi-Entity Management

Published on: June 17, 2022

Understanding the most common financial consolidation challenges will give you the power to avoid them. Start by asking yourself these questions:

  • How will you show compliance without a consolidated financial statement?
  • Will you be able to accurately assess risks and opportunities without accurate data across all entities?
  • What happens when an investor can’t get a clear picture of your finances?

As these questions make evident, financial consolidation feeds into many aspects of your company’s growth. It allows investors to assess the opportunities and gives stakeholders, regulators and auditors a clear understanding of your company’s finances.

Effective financial consolidation is a rigorous process requiring accurate data, expert project management across all entities, and compliance with accounting regulations.

As you scale, consolidation increases in complexity. Despite this, many growing companies still rely on outdated tools and processes. This blog outlines the most common financial consolidation challenges companies face and best practices to avoid them.

The 7 most common financial consolidation challenges

1. Low quality or inaccurate data caused by manual data entry

Unreliable data is one of the most common hurdles companies face. Inaccuracies can be due to the use of multiple disparate sources. Often information is manually inputted into these sources, which is a cumbersome task that results in human-error.

Consolidating multiple sources and judging the accuracy of the data can become an almost impossible task, sinking resources into a process that may take months to resolve. It can be hard to know how inaccurate data arises and where to correct it. A failure to address this issue will result in companies facing issues across the board, including data entry errors and bottlenecks caused by cross-checking transactions.

Best practices to help avoid this challenge

  • Introduce consistent standards and processes that ensure the accuracy of data from input to normalization
  • Adopt the seven best practices for effective data management across all entities
  • Develop consistent naming conventions across all entities
  • Automate processes wherever possible to avoid wasting time on manual data entry
  • Centralize data management to avoid errors when transferring data between separate databases
  • Perform regular audits and quality checks on data (this is only possible once you automate cumbersome workloads)

2. Failure to automate consolidation processes

One of the most common financial consolidation challenges is failing to automate time-consuming processes. As you’ve seen above, manual data entry eats up time and resources. It can create more problems than it solves. It’s possible to implement an effective consolidation process by investing in automation to reduce errors and free up time and resources.

Best practices to help avoid this challenge

  • Invest in software that specializes in the financial consolidation of multi-companies
  • Check that solution fully integrates with all systems to enable smooth operations
  • Look for solutions that specialize in the complexity of streamlining intercompany transactions
  • Focus on centralized solutions to avoid losing time and effort when transferring data to parent entities

3. Using inappropriate tools and systems

Many companies make the mistake of using multiple systems without checking if they integrate fully. As you can imagine, this results in a headache for those responsible for consolidating all this information into one system. It’s not uncommon for each branch of a company to use a different reporting tool, which is problematic.

You need to invest in a single ERP system that creates a chart of accounts adhered to by all entities. For best results, look for one that integrates with your current tools and processes. It’s also wise to consider those specifically built for your industry. For example, hospitals should look for solutions that focus on healthcare materials management. Similarly, SaaS companies may want solutions designed to handle the complexities of subscription billing models.

Best practices to help avoid this challenge

  • Invest in an ERP that specializes in financial consolidation for multi-companies
  • Focus on solutions that integrate with current systems and centralize workflows
  • Look for industry-specific software that fits the demands of your company

Security assessment in mergers | common financial consolidation challenges

4. Making adjustments for intercompany transactions

Another of the most common financial consolidation challenges arises when companies try to record and make adjustments for intercompany transactions. These transactions happen between entities of the same company and include three categories.

  1. Lateral transactions: between two subsidiaries in the same company.
  2. Upstream transactions: from the subsidiary to the parent company.
  3. Downstream transactions: from the parent to the subsidiary company.

You need to adjust for these transactions to give a fair view of the group’s financial health. Making these adjustments can be a time-consuming process that leads to significant delays in the close cycle.

Best practices to help avoid this challenge

  • Automate matching, reporting and eliminations from intercompany transactions
  • Invest in software that handles the complexity of intercompany transactions
  • Implement a consistent chart of accounts across all entities

Complete guide to financial transformation

5. Changing reporting requirements

Reporting guidelines, statutory requirements and compliance regulations are continually evolving. As a company scales, it can be challenging to keep on top of all the changes to best practices. Compliance is an ongoing hurdle for most companies, one that is integral to financial reporting and consolidation. Look for an ERP system built to handle compliance as you scale.

Best practices to help avoid this challenge

  • Partner with software companies who are aware of global accounting standards and compliance
  • Invest in an ERP that is specifically designed with compliance standards in mind
  • Task someone with the duty of keeping an eye on accounting regulations and accounting standards
  • Maintain awareness of fluctuating standards as you grow and update data management policies regularly
  • Enable your team by providing them with the tools and processes required to provide audit trails

6. Data manipulation and risk of fraud

One of the most significant issues with using spreadsheets for financial consolidation is security. It’s much easier to manipulate and change data. If it does occur, it is hard to track the source of fraud or data manipulation. One of the easiest ways to circumnavigate this challenge is to invest in software that makes security a priority, allowing you to control access and automate data input—making financial statements much harder to manipulate.

Best practices to help avoid this challenge

  • Automate data input to reduce the amount of information that humans can manipulate
  • Regularly perform checks on data entry and financial statements to weed out inconsistencies
  • Outline data management policies to ensure teams are aware of the importance of data integrity
  • Invest in software with advanced security features and control functionality across entities
  • Limit access to sensitive data and the ability to manipulate it using security access controls

7. Complications arise between countries

Accounting standards vary from country to country, as do currencies. Each entity must compile a financial statement that meets the reporting standards of its country. These different reporting standards can make consolidation difficult, as you will need to remediate this information in the parent company’s consolidated financial statement.

Currencies and exchange rates are sometimes converted manually and imported to systems, but this is an error-prone process. The only way to accurately handle financial consolidation across multiple countries is to invest in a system built to handle the complexities of different accounting standards and currencies.

Best practices to help avoid this challenge

  • Partner with software companies that understand the complexities of accounting across borders
  • Check that the software aligns with global accounting (rather than local) standards
  • Look for a solution that allows you to switch between currencies where appropriate

Starboard Group overcame the challenges of financial consolidation

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