Management of performance and efficiency of a company
Along with the increasing number of acquisitions of organisations, the importance and application of financial consolidation processes are growing. Financial consolidation is a necessary means of managing the performance of holding companies. Without functional financial consolidation, other processes in holding company performance management are significantly weakened, because, only on the basis of consolidated reports with eliminated business relationships within the holding company, the owners of the holding company can correctly assess its efficiency...
Data consolidation is the process by which data from heterogeneous structures are converted into a single data structure. As part of this process, data must often be transformed from a local chart of accounts and cleaned so that data of different origins have the same narrative value in the consolidated accounting structure.
A fundamental requirement in financial consolidation is the easy and flexible definition of the holding company's ownership interests in the individual organisations it owns. On the basis of the defined ownership interest, the proportional shares of the results of the holding company or its parts are included in the results of the owned organisations. Different consolidation methods are also used for different ownership ratios.
The elimination of transactions within a holding company is the key and most challenging process of financial consolidation. In principle, elimination can take place at the level of individual transactions or at the aggregate level of turnover in the financial accounts. Elimination at the transaction level is certainly more precise, but also more complicated. It is often so costly to extract detailed information from the accounting systems of individual organisations that this method of elimination is not efficient. In any case, both methods should lead to the same result. For transaction-level elimination, a combination of automated and manual approaches is necessary given the volume of data to be processed. The automated approach must be able to capture the vast majority of eliminations based on defined rules and constraints. The basic constraint is the application of accounting rules that define exactly what items can be automatically eliminated against each other. Another key issue that financial consolidation software tools must effectively address is the translation of transaction amounts between different currencies when the accounts of individual organisations within a holding company are maintained in different currencies. As transaction amounts are key to automating elimination, in addition to transaction identifiers, these must be accurately converted. At the same time, however, it must be possible for business users to flexibly set tolerance levels for automatic exclusion and automatically create entries to compensate for differences in paired transactions.
As in the case of holding company transactions, the aggregated general ledger data obtained in the data consolidation process requires the application of asophisticated model to convert values in different currencies.
The primary output of the financial consolidation is the consolidated statutory and management reports. The profit and loss account, balance sheet, cash flow statement, etc. must be able to show information on the performance of individual organisations before and after excluding transactions within the organisational structures of the holding company, in the original currency or in the currency of the holding company. At the level of the holding company as a whole, the information after elimination of transactions within the holding company, after conversion to a common currency and after taking account of ownership interests must be shown.