Automated Eliminations

by | Sep 28, 2021

Automated elimination within a financial reporting tool – surprisingly quite an elusive term.

In a perfect world, at the click of a button, an organisation would achieve a required result and focus its energy on data analysis instead of the compilation of reports.

Why does this outcome feel so unattainable, when in theory, the concept of elimination is so simple?

Let us pause here to reflect on where exactly in the reporting journey the organisation may be:

  • In completing consolidated results in a manual excel pack, the Group controller has consolidation journals set out on a single Excel tab.  Some logic is applied to identify intercompany transactions, but this is manual capture, relying on another lookup to each base entity’s excel trial balance (TB). Of course, there are sense checks built into this process, and the document is auditable as far as Excel can allow, but there is no denying that it is a time-consuming process, and with any manual compilation, human error is always a concern.
  • The organisation has an existing Enterprise Performance Management (EPM) tool, performing the aggregation of base entity data into a single set of consolidated accounts. Some automated consolidation calculations run, but automated elimination of intercompany transactions eludes the finance team and there are still many manual journals required to reach the required output.

The importance of a streamlined close process and system-driven solutions throughout the finance function have genuinely come to light during the current pandemic. Where the disruption of work-from-home, connectivity challenges, and critical access to data at the right level at the appropriate time caused many a sleepless night for the entire executive.

The above scenarios could be applied monthly for management accounts, annually for budgeting and planning purposes, or even statutory reporting.

In a consistent, reliable, and timeous fashion, the requirement to compile a standardised set of reports at different levels of the organisation is a priority for any business, regardless of where the organisation is in its journey of finance transformation.

Therefore, it is pretty understandable that we would seek a mechanism to simplify and automate many routine activities in the financial reporting process. The importance of having these reports be available centrally and not stuck on someone’s desktop is also quite apparent.

We have sufficiently covered what we want and why – Now let us talk about “How”:

Automated consolidation and specifically intercompany elimination within a complex reporting structure is of course, something that can only be considered if you have decided to implement or enhance an EPM tool.

“He who fails to plan is planning to fail” – Benjamin Franklin

Understanding the source system infrastructure, data flow, and consolidation structure is critical to the success of any finance automation journey.

By understanding where data comes from and what information is available, the finance or project team can set up a realistic roll-out plan, identify dependencies in the process and prioritise specific outcomes.

The defined set of financial requirements will be translated into system talk, and while developers are creative and skilful in their craft, understanding and streamlining the financial reporting foundation beforehand will be a significant advantage in the long run.

Let us consider some examples in understanding a reporting landscape to aid planning:

  • Do we have multiple entities on different source Enterprise Resource Planning (ERP) systems?
    Integration functionality of the EPM tool to be considered.
  • Do these entities have a uniform (group) Chart of Accounts?
    If no alignment exists, this will need to be created to enable uniform group reporting.
  • What is the mechanism used to tag transactions for elimination in the source ERP?
    Finance teams may capture these in individual source ERP accounts or can make use of an intercompany dimension, but this is a crucial part of how the data is fed into the EPM tool.
  • At what level do eliminations take place?
    Entity basis, divisional basis, any lower-level eliminations.
  • What type of transactions need to be considered?
    Straightforward trade receivables/trade payables elimination or is it something a bit more complex like unrealised profit in stock.
  • Do users understand the mechanism that drives elimination?
    Change management and appropriate staff training are essential to ensure data is captured accurately in the source ERP.
  • Can we identify the relationship to be eliminated?
    Asset/liability, income/expense, expense/equity
  • Do our budgeting/planning requirements differ from what happens in actuals?
    Level of detail/how data is captured/integrated

One can anticipate why exploring these points would pave the way to a well-thought-through reporting process – by streamlining elements in the source systems (ERPs) and understanding the consolidation structures and base data, you reduce complexity and limit exceptions in the process flow.

Of course, automated eliminations are a single component to an EPM implementation, and by deciding to undergo this journey, finance leaders will likely reap many other benefits, such as:

  • Consistency in reporting structures (account mapping).
  • Consistency in actual reports across the organisation.
  • Automated integration from different financial and non-financial data sources.
  • Data availability on the tool once the workflow is closed out, to mention but a few.

As with any Finance Transformation journey, the approach needs to be tailored to meet specific orgnisational requirements, and hopefully, this article provides some food for thought when examining your organisation’s existing reporting tools and processes and allows you to get started with the preparation required to set up streamlined and automated eliminations on any EPM tool.

Jigsaw Advisory specialises in guiding CFOs and finance teams through their digital transformation journey. We value and nurture our niche position as a trusted transformation advisor to many top-level CFOs and are so confident about our recommendations that we choose to implement the solutions ourselves. That way, we fully understand the business context for the challenge and use that to serve as the focus throughout the implementation and benefits realisation process. Get in touch with our senior team.

Written by Ilza Brauteseth