In the world of finance and administration, you regularly come across the term consolidation. But what exactly does it mean, and why is it so important for multi-entity companies? In this blog, we explain it in a way that is both understandable and practical.
What does consolidation mean?
Consolidation is the process of merging the financial data of multiple entities within a group into a single summary report. For example, consider a parent company with several subsidiaries. Instead of presenting financial statements for each entity separately, one consolidated financial statement is prepared to reflect the whole.
Why is consolidation necessary?
Consolidation is essential to provide a realistic and transparent picture of the financial position of a group as a whole. Without consolidation, each entity would appear to stand alone, whereas there are often intercompany transactions, loans or ownership relationships that can distort the picture.
Key reasons to consolidate:
- Legal requirement: In many countries, larger companies are required to prepare consolidated financial statements.
- Insight for stakeholders: Investors, banks and other stakeholders want to know how the group is doing as a whole.
- Strategic decision-making: A consolidated view helps management make informed decisions.
How does consolidation work?
The consolidation process consists of several steps:
- Collect financial data from all entities within the group.
- Eliminate intercompany transactions, such as sales between subsidiaries or internal loans.
- Merging balance sheet and result items into one consolidated statement.
- Applying consolidation rules, such as accounting for minority interests or goodwill.
Practical example
Suppose a parent company owns 100% of two subsidiaries. Each company has its own records, but there are also intercompany deliveries. On consolidation, these internal sales are eliminated so that group sales are not artificially inflated. The result is a purer picture of the performance of the group as a whole.
Automation of consolidation
Today, there are smart software solutions that greatly simplify the consolidation process. Think of tools that automatically recognise and eliminate intercompany transactions, convert currencies and generate reports according to applicable standards (such as IFRS or Dutch GAAP).
Consolidation is more than an administrative requirement – it is a powerful tool for transparency, control and strategic insight. Whether you are CFO of an international group or financial advisor of a growing company, a good understanding of consolidation will help you make better decisions.
