The Importance of Financial Consolidation: An Introduction

Many businesses are growing through mergers and acquisitions, and this has created an increased need for consolidation, reporting and analytics solutions. The acquisitions are usually financed by either debt or equity from private investors or through public offerings, which dictate requirements for financial reporting within very tight deadlines and under uniform framework (e.g., IFRS, US GAAP etc.).

The only way to get accurate, relevant, and timely consolidated information for a medium growing business or for a large group is to have it automated using one of the software tools available on the market.

As mentioned above, consolidation is extremely important for any medium and large businesses and is critical for those, which attract debt or equity finance. CFOs often admit that the consolidated numbers are the only numbers that really matter, because in many organizations they are the only numbers that are published or communicated to the outside world. Private companies do have to publish other information to the outside world, although they still need to provide the information to their shareholders. However, every public business in the world in which equity or debt is traded on a stock exchange must produce a set of consolidated financial statements, according to the prevalent generally accepted accounting principle (GAAP) for the jurisdiction that it is listed in and quoted on whatever stock exchange. This is the main way that people from the outside can see how a business is performing from a financial point of view and assess the company’s financial health. For instance, in the UAE, preparation of the financial statements (mostly, consolidated) in accordance with IFRS is required for the companies listed on NASDAQ Dubai, Dubai Financial Services Authority (DFSA), Dubai Financial Market and Abu Dhabi Stock Exchange. It is required by the major free zones, like DMCC and DIFC, certain industries (like, banking) and is highly recommended for all the growing businesses.

The consolidated financial statements are often externally audited. It is important that they are audited because while making investment decisions, stakeholders need to be able to trust the numbers coming out of a business. There are many examples of poor financial governance in respect to external reporting including Enron in the USA or Wirecard in Germany, where the numbers were not reliable. This caused investors to lose a significant amount of money and lawsuits ensued. Finally, because of Enron the US security authorities introduced a very strict regulation for the financial reporting (SOX). Therefore, the stakes are very high when it comes to consolidated and external financial reporting.

It is not just about external reporting. The consolidated data are nearly always used for internal decision-making at the board or C-suite level. As mentioned before, the consolidated data deals with strategic-level data. Organizations are not looking at what an individual supplier is paid, or how much a single business trip costs, or how many stocks are at a single warehouse. It is about how much cash is being generated based on each type of activity (operating, investing and financial), how much profit is being made depending on the cost involved (gross, operating, net), how business segments are performing and how much assets or debt they are allocated and so on. This is big, strategic-level financial data that is coming out of a consolidation system combined with forward-looking tools such as planning, budgeting, and forecasting products; it is generally what the C-suite is using to manage the business. The information of such level should be accurate, relevant, uniform, and timely.

Finally, the Chief Financial Officer's (CFO) credibility is dependent on the speed and the accuracy of getting those consolidated figures out. Many large businesses will publish well in advance the date on which they are going to announce financial figures. They cannot just say they are going to be a week late. That would cause significant issues; the share price might even be affected by the lack of delivering its results in the time frame expressed. As a result, credibility is really on the line, making it important that in consolidation, companies can deliver accurate results when they say they are going to, and display the true value of the business and its performance.

In the next article we will further elaborate on the quantitative benefits of the automation of the financial and management consolidation.