7 common financial consolidation challenges that companies face

Published on: September 15, 2020

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 Despite this, many growing companies still rely on outdated tools and processes. In this blog, we will set out the most common financial consolidation challenges companies face.

The 7 most common financial consolidation challenges  Compiling list of 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.

The best practice is to introduce processes that ensure the accuracy of data from input to normalization. Otherwise, you will face issues across the board, including data entry errors and bottlenecks caused by cross-checking transactions.

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.

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.

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.

Team makes adjustments for intercompany transactions

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.

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.

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.

Starboard Group overcame the challenges of financial consolidation

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