The power of consolidated financial statements

In the dynamic landscape of modern business, where companies often operate separate legal entities, departments or revenue streams within a group structure, understanding the overall financial health becomes a strategic necessity. Consolidated financial statements play a pivotal role in this regard, offering a comprehensive view that goes beyond individual company snapshots.

By streamlining financial reporting across multiple entities or a group of companies, consolidated financial statements provide an essential tool for strategic decision-making. However, achieving this level of clarity isn't without its challenges, especially when done manually. You’re sifting through countless Excel spreadsheets, pulling data from different systems, and trying to make sense of it all. It’s time-consuming, frustrating, and prone to errors.

Let's explore the intricacies of consolidated financial statements, the hurdles of manual consolidation, and how automated solutions can transform your financial reporting.

Demystifying consolidated financial statements

Consolidated financial statements are financial reports that combine the results of a parent company and its subsidiaries into a single set of financial statements. This process involves consolidating the balance sheet, income statement (also known as the profit and loss statement), and statement of cash flows, among others. The purpose is to provide a comprehensive overview of the financial health of the entire group, as if it were a single economic entity.

These statements serve dual purposes:

Enhanced transparency: They offer stakeholders, such as investors, regulatory bodies, and management, a clear picture of the group's financial standing.

Holistic performance analysis: By presenting a consolidated view, these statements help you assess the collective financial performance and stability of your business entities, enabling better decision-making.

But while the benefits of consolidated financial statements are clear, the journey to producing them can be fraught with challenges—especially if you're relying on manual methods.

Manual consolidation

Traditionally, creating consolidated financial statements is a meticulous process often carried out using spreadsheets. This approach may seem straightforward, but it can quickly become overwhelming due to the sheer volume of data involved. Finance teams can spend hours navigating through endless worksheets, gathering and consolidating financial reports from each subsidiary, adjusting for intercompany transactions, and ensuring compliance with accounting standards. The process is not only time-consuming but also susceptible to errors, as the complexity of spreadsheets often leads to miscalculations and inconsistencies.

Error-Prone: Manually combining data from multiple entities increases the risk of errors. Miskeyed figures, overlooked intercompany eliminations, or incorrect exchange rates can lead to inaccuracies.

Time-Consuming: Manual processes can take weeks to complete, delaying the availability of crucial financial insights.

Lack of Agility: In a fast-paced business environment, waiting for manual consolidation hampers quick decision-making and the ability to respond to market changes.

Here’s a breakdown of what the manual consolidation process typically involves:

1. Define the scope and purpose
   Before diving in, it's crucial to understand why you're consolidating financial data. The goal of consolidated financial statements is to offer a clear and comprehensive view of the financial position of an entire group of companies. This means combining results from the parent company and its subsidiaries into one unified report. It’s about ensuring your stakeholders, from investors to internal management, get a true reflection of the group’s overall financial health.
2. Review and confirm all entities to include
   You must determine which entities fall under your consolidation umbrella, including separate financial statements for public companies. It’s not just about counting your majority-owned companies. Even entities where you hold significant influence but don’t own outright may need to be included, like joint ventures or special-purpose entities that may require consolidation based on accounting standards like US GAAP (Generally Accepted Accounting Principles) or IFRS (International Financial Reporting Standards). This process involves carefully examining ownership structures, minority interest, voting rights, and any contractual agreements. Missing out on any reporting entity can lead to incomplete financial statements, impacting the accuracy of your reports.
3. Compile and standardize financial information
   Once you know which entities to consolidate, it’s time to gather all their financial information. The data-gathering phase is labor-intensive, requiring finance teams to pull together trial balances, general ledgers, income statements, and cash flow data from each subsidiary. Each entity might use different systems, foreign currencies, or even accounting methods, so it’s critical to align all this information to the parent company’s accounting policies.
4. Remove intercompany transactions
   A key part of consolidation is eliminating any internal transactions that happened between entities in the group. These could be sales from one subsidiary to another, loans, or even internal service charges. For example, if one entity owes another for goods or services, these receivables and payables need to be offset so they don’t inflate the group’s aggregate financials. Failure to properly eliminate these transactions can result in misleading financial results.
5. Unrealized gains or losses
   Intercompany transactions can also create phantom profits that don’t exist outside the group. For instance, if one subsidiary sold goods to another at a markup, that gain (or profit) isn't "real" until those goods are sold to an external customer. Therefore, adjustments are needed to strip out these unrealized gains to avoid overstating net income. Proper adjustments ensure that these internal gains or losses do not distort the consolidated financial statements.
6. Consolidate financial statements
   After adjusting for intra-group transactions, you must combine the financial statements; balance sheet, income statement, cashflow statement into one consolidated statement. This involves aggregating assets, liabilities, revenue, and expenses while ensuring consistency in accounting policies. For businesses operating in multiple currencies, exchange rate conversions add another layer of complexity.
7. Provide transparent information
   Finally, consolidated financial statements aren’t complete without the necessary disclosures. This includes details about accounting policies, ownership interest, the consolidation process, any significant transactions, and contingencies. Disclosures are critical for meeting regulatory standards like US GAAP or IFRS and ensuring transparency with stakeholders. Without thorough disclosures, your consolidated financial statements may fall short of compliance standards.

Automated consolidation

In the era of digital transformation, innovative solutions like Phocas Financial Statements software are reshaping traditional processes. Phocas frees finance teams from the tedious task of manually importing and reconciling data by automating the process of financial consolidation, ensuring accuracy, efficiency and compliance with reporting requirements.

Direct integration with ERP systems

The financial planning products within the Phocas platform; Financial Statements and Budgets & Forecasts are anchored by a Business Intelligence foundation - this product is called Analytics within the Phocas platform. This means that financial and operational data is automatically pulled from your ERP and consolidated into one set of accurate numbers that will then populate your financial statements and budgets and forecasts.

One of the standout features of Phocas is its ability to directly integrate with ERP systems like Epicor, Infor, Sage, SAP and Netsuite, as well as other business systems. This seamless integration ensures that data flows smoothly from your subsidiaries into a central database, eliminating the need for manual data entry and reducing the risk of errors.

User Empowerment and enhanced efficiency

Phocas empowers finance teams by automating the data consolidation process, allowing you to focus on strategic analysis rather than getting bogged down by spreadsheets. You can generate consolidated balance sheets, income statements, and statements of cash flows with just a few clicks. The self-serve nature of the software allows decision-makers, regardless of their technical background, to freely explore consolidated financial statements and quickly grasp insights, facilitating data-driven decision-making.

"Automating our financial statements was a major step for our company and is saving time and resources. Executives now have access to dashboards that give them a snapshot of what is happening with the business, including one-day, month-to-date, year-to-date sales; gross profit percentages; and average sales per invoice, among other data points."

Dennis Karpinski, Director of E-commerce and Business Analysis - Eastern Industrial Supplies

Multi-currency capabilities

In the ever-expanding global marketplace, Phocas goes beyond traditional financial consolidation by introducing multi-currency functionality. This provides benefits such as the ability to compare a subsidiary's results in both their local and reporting currencies. This side-by-side analysis of reporting currency and local currency highlights the impact exchange rates can have on the group's consolidated overall performance. Something that is often outside the control of the subsidiary.

Phocas ensures that financial reporting reflects the global landscape accurately. Profit and loss and specified balance sheet accounts such as equity are converted into reporting currency at the transaction rate or average rate. Other balance sheet accounts are converted based at the period end spot rate. Phocas automatically calculates the foreign currency gain or loss on consolidation reserve account.

This meticulous approach to local currency conversion provides users with a holistic view of their global financial standing. Phocas not only provides the functionality but also ensures that users understand and account for these nuances in financial reporting.

Streamline your financial reporting, with Phocas

Consolidated financial statements are not just a regulatory requirement—they’re a strategic tool that offers a bird’s-eye view of your organization’s financial health. However, the manual consolidation process can be a significant drain on resources. By leveraging automation with Phocas, you can achieve greater accuracy, save time, and unlock deeper financial insights, empowering your business to thrive in a complex marketplace.

Switching to automated financial consolidation is more than just a technological upgrade; it's a strategic move that aligns your financial reporting with modern business demands.

Ready to leave the complexities of manual consolidation behind? Check out the quick demo below on financial consolidation with Phocas.

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