Imagine a piece of string that is connected to something you can’t see, but you can hold one end. You pull it and, more string magically appears. You pull it again and, lo and behold, there is even more string.
You can go on like this for ever. There is no end to the piece of string.
Financial Consolidation is like the piece of string. It may at first sight appear simple, just aggregating data from a number of operating entities. But then you realize these operating entities all use subtly different Charts of Accounts. And then you realize you need to make adjustments. And then….it never seems to stop.
When accounting for a single legal entity, the rules are pretty well established and familiar to most finance professionals. However many people are less well acquainted with financial consolidation; and they start using spreadsheets because they are available.
The point at which you stop pulling the string is your decision. To be confident about pulling the string until materiality kicks in, you need CPM software like Prophix.
3 Myths about Financial Consolidation
Myth # 1: “Financial Consolidation is only about Financial Reporting”
Financial Consolidation is usually used for Financial Reporting. However, many companies also apply it to Management Reporting and Planning. Financial Consolidation software like Prophix can be used to model the effect of planned acquisitions and divestitures on the consolidated company financials.
Myth # 2: “Financial Consolidation is Hierarchical”
Corporate ownership structures are usually presented as hierarchical. However, Prophix can be used to perform Financial Consolidation on entities that may not necessarily be related through ownership structures. For example, even if the ownership structure is based on geography, it is easy to consolidate all retail operating entities for management reporting purposes. When partial ownerships are included in the mix then even the ownership structure can cease to be hierarchical.
Myth # 3: “Financial Consolidation is only for Large Companies”
This may have been true in the past, but in the modern world, even relatively small companies will want to expand their markets, grow through acquisition or move labor intensive work offshore. This is especially true outside North America, where, for example, opening a sales office in another EU country can require incorporation of a new legal entity.
Please see our latest white paper titled, Financial Consolidation: Get a true picture of company financials and performance.