Financial statements are important documents that outline the financial activities of a business. Businesses use these reports to track income and expenses and plan for their future financial needs. Therefore, no wonder how to consolidating financial operations statements is necessary for a business. It can help businesses that operate with multiple divisions or subsidiaries keep track of their total financial activity without thousands of different reports.
This article will show you what a consolidated financial statement is, how to create one, and outlines what a consolidated financial statement looks like. For more details see the following paragraphs about how to consolidate financial operations.
About Financial Consolidation
In essence, financial consolidation involves merging the financial information from a business’s segments and subsidiaries. It is such as the companies that the corporation owns, into a single set of financial statements. The assets, liabilities, equity, income, costs, and cash flows of the parent and its subsidiaries should be reflected in a financial statement. It should be as if they were one economic entity since the parent firm controls its subsidiaries.
Steps on How to Consolidating Financial Operations
Separate Parent and Subsidiary Entities
Determine which entity is considered a subsidiary of the parent company. This includes any business in which the parent company owns the majority of shares. Other holdings will be considered as subsidiaries if the parent company owns; majority voting rights, the ability to cast a majority vote, the parent company has control to remove or replace a majority of the board, or the power to govern subsidiaries. Once you understand which entities to consider, collect all of the financial statements of each entity.
Check Fiscal Period
If an entity uses a different timeline than the parent company, it is wise to modify the entity to match the parent company. Although this is usually the case during acquisitions, but not always. Therefore, checking the fiscal period is one of the important steps how in consolidating financial operations.
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Create a consolidated balance sheet
Create your consolidated balance sheet that reflects the pre-determined amounts. It is now undergoing an intercompany elimination process for each entity that transacts with each other. Use this data to prepare consolidated income statements and cash flow statements. When you’re done, review all the sheets to make sure none of them contain duplicate values including assets or liabilities between companies and money flowing between them.
Select Analysis Method
Another thing to consider is how to consolidating financial operations is to select the most suitable analysis method. In general, there are several approaches to conducting the financial consolidation analysis and its reporting. But each company might have its specific preference on how to perform this activity. Some of the common methods to select are described in the following points.
Using Spreadsheets
The most popular method includes manually combining and processing data exported from several financial systems using spreadsheets. Its benefits including in the near run, it is the quickest and least expensive option. It is also a well-known user interface. However, it’s a high likelihood of administrative mistakes producing false data. Version control problems Long-term costs of more time and money spent on the close.
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Use ERP Systems
Another option how to consolidating financial operations is by utilizing the general ledger section of their current ERP system. Its benefits include enabling companies to utilize current technologies and does not call for retraining of workers to utilize the system. However, larger businesses with various ERP systems and charts of accounts could find it difficult to use. Furthermore, it has limited capacity for reporting.
Use Specific Software
Since businesses with different systems are merged through a mapping process, using specialized closure and consolidation software offers a quick path to uniform financial consolidation and reporting. Core financial systems and data centers that are currently in place are unaffected, and such a tool may be implemented quickly with no resource effect.
Its benefits include a high degree of default functionality, flexible reporting options and integration with other ERP systems is simple. However, its negative aspect is it might be challenging to select the ideal instrument in a fairly crowded industry.
Make Sure the Reporting Date is the Same
In preparing the consolidated reports, it should be noted that the reporting date of the financial statements of the parent company and the subsidiary company is the same. If the reporting period of the subsidiary is different from that of the parent company, it is necessary to make adjustments for the subsidiary. Adjustments will be in terms of transactions during how to consolidating financial operations.
And it should also be taken into account that the difference in the reporting period between the parent and subsidiary companies should not be more than three months. While preparing consolidated reports, uniform accounting policies were used in preparing this report.
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Closing and Conclusions
Finance experts are aware of the importance of how to consolidating financial operations. It is vital, according to 70% of mid-market professionals. Business success and experience are crucial to the company if they want to be recognized inside their organizations as effective, strategic leaders. Therefore, consolidate your financial operations into a single platform that works in unison with all of your other business management tools and current business procedures. So that through a suitable way on how to consolidating financial operations, it can lead to better results and management.
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