Important Facts Every Businessman Should Know About Financial Consolidation
It can be tough running multiple businesses. While it’s easy to keep operations going, the tough part comes when you finally need to make financial reports and statements for all of your companies. Even if you have financial secretaries doing the job for you, it’s still a big challenge for them to keep track of all the numbers and data.
Any businessman worth his dime should focus on trying to simplify and streamline the various processes inside the company. When it comes to reporting finance documents, it should be easy to report all of the crucial data.
The best way to do this is through financial consolidation. This might be a term that you’re not yet familiar with. However, it’s time that you learn more about this crucial process. Here’s everything you need to know about consolidation in the world of business and finance.
What Is Consolidation?
The term consolidate comes from the latin word, consolidated which means “to combine into one body.” It’s a general term for many purposes but it has a lot of implications in the world of finance.
To consolidate your finances means to combine assets, liabilities, and other financial items. Basically, you’re turning two or more entities into one. You can often find the process done in companies that are large and which have sister companies. In cases like these, subsidiaries report under the umbrella of a parent company.
A lot of companies do this process to simplify the processing of financial documents. However, there are more benefits to it than you think. If your company has begun opening or launching new subsidiaries, it might be time to consolidate them. Unless you are okay with a lengthy process when it comes to managing financial assets.
How Is It Done?
When it comes to business management, consolidation is done when a business combines with another to form a new identity. This is a lengthy process often spearheaded by the executive and financial departments of a company. The duration of the consolidation process entirely depends on how the two companies merge.
For example, if businesses are looking to combine all of their assets with one another, the process can last for up to a year. However, for a simple financial consolidation, the process can be done in just a few weeks or months. Regardless of what type of consolidation it is, the goal is to combine assets as properly as possible.
Consolidating Finances – A Deeper Look
The common misconception is that to consolidate finances, all companies need to do is combine financial statements and numbers. The truth is that it is much more complicated. There are specific calculations and adjustments that both companies need to make from the subsidiary level right to the parent company level.
There are many aspects to consider for consolidating finances. These include foreign currency translation, adjustment of journal entries, partial ownership accounting, and the elimination of intercompany balances as well. The process can have more complications if there are a lot of companies in the consolidation deal.
Traditionally, financial consolidations are done manually. Often with the help of the finance department of all the companies within the process. It’s a lengthy process that requires a lot of paperwork and time too.
The good news is that there are new ways through which consolidation can be done at a more accurate and faster rate.
The Different Types Of Consolidating Finances
There are also different types of consolidation when it comes to finances. The type of consolidation process you need to do depends on the strength of the parent company’s control or influence over its subsidiaries. Those three types are full consolidation, proportionate consolidation, and the equity method.
- Full Consolidation – this means transferring all of the subsidiary’s assets, liabilities, and equity, to the parent company. This also includes all the revenues and expenses which are sent to the parent company’s income statement. All of the assets by the subsidiaries will then be under the parent company’s control, giving it more voting rights over the subsidiary.
- Proportionate Consolidation – to transfer the accounts of joint ventures, assets, and liabilities to the parent company’s balance sheet, this is a proportionate consolidation. The merging assets should be proportionate to the parent company’s interest in the joint venture.
- Equity Method – this method consists of replacing the number of shares in an equity affiliate account with the corresponding portion of the associate’s shareholders’ equity. If the parent company wants to get significant influence over the operating and financial policy of its associate, then this is the best consolidation method to choose. It’s purely consolidation. In it, all party’s investments and aggregate profit are reassessed annually.
There’s A Solution For It
Consolidating can be a complex matter. The truth is that it needs to be done properly so that the parent company and its subsidiaries don’t get the short end of the stick once the finances are combined. Ideally, each company should have the same assets that they have entered once they are leaving.
There are many ways to consolidate a company’s assets. The most popular method to do so currently is with the use of digital solutions. These digital solutions combine the assets of the company automatically. Thus making the process not just more accurate, but also at a faster pace.
Investing in such consolidation solutions is a must if you are expanding your business. Remember, consolidation is done regularly if there are new subsidiaries joining the parent company. As such, investing in these solutions might be worth it in the long run.
Asset consolidation is not something you should skip out on if you want to streamline your businesses. It’s a good means to make various processes easier for your company and your finance department too. If it’s too much of a challenge for you, you definitely need a solution to get the job done.