As an entrepreneur, you have many tasks. It is not only important to maintain production, sales, etc., but also to take care of the finances of your company. In addition to accounting, this also includes the preparation of balance sheets or annual financial statements. There are a wide variety of tasks to be carried out, including a possible consolidation.
What is Consolidation?
According to usvsukenglish, consolidation is the conversion of short-term debt into long-term debt. But you can also combine several credits or loans and turn them into a loan or loan. The term also appears in a few other areas, for example in finance. Regardless of the area in which consolidation is spoken of, it is always a question of achieving stability or consolidation.
Consolidation in finance
In finance, the term refers to the process of converting short-term debt into long-term debt. If you refer to the practice, you can imagine it as follows. As an entrepreneur, you have short-term payment obligations. This can be with your supplier or other creditors, for example. In order to be able to meet these payment obligations, you, as an entrepreneur, take out a long-term loan. With this step you secure your company. With consolidation in the financial sector, however, it can also mean that you convert loans you have taken out with high interest rates, for example with another bank, and get a longer term and lower interest rates.
| Term | Description |
| Bridge financing | This term is one of the classics in finance. If you as a company are unable to meet your payment obligations in the short term, it often happens that you need a short-term loan. With this loan you ensure, for example, that production will continue, etc. This way, a possible bankruptcy can be averted. But not only you as a company can fall back on bridge financing. This can also be used by private individuals or even the state budget. |
| Unification | The point here is that there are many smaller liabilities , for example payment obligations to suppliers or several small loans. In order to be able to replace all of this, a larger loan with a long term is taken out. This solution is also used, as is the case with bridge financing, for private individuals or for the state budget. |
| Novation | This term describes the conversion of a costly loan or loan into a variant that is significantly cheaper. In most cases, this is done by switching to a different financial institution. This step also serves to secure a company. As with the other terms mentioned, novation also applies to the state budget and private individuals. |
Consolidation in accounting
In the area of accounting, this is understood to mean the summary of the various balance sheets from the areas of a company, its subsidiaries and departments. A uniform financial statement is drawn up from all individual financial statements. The large corporations in particular have to carry out this consolidation in order to be able to illustrate their overall balance sheet. Gains and losses are shown as the result of the entire group through the preparation of an entire financial statement. The case here is that several individual parts are combined into a whole.
Which cases require consolidation?
We have summarized the different cases in an overview for you:
| Area | Description |
| Companies | In the company, the consolidation bundles the debts into a long-term loan. With this you can improve the balance sheet as a company. |
| Economy | In business it means that there are more companies in a certain segment than the market demands. As part of the consolidation, companies are then taken over by another company in order to reduce the number of applicants on the market. One speaks here of a consolidation of the market. |
| Household | There is a budget at the federal, state or local level. In order to reduce structural deficits, a consolidation is carried out. This will ensure that the budget is balanced in the medium term. The positive consequence of this is a reduction in net new debt. However, other measures can also be used to consolidate the budget. These include, for example, cutting expenses, increasing taxes and other charges. But that also means that this form always affects the citizen. |
| Loans | In the area of loans, consolidation is used when private individuals convert several smaller loans into one large loan with a long term. This reduces the rate or the terms of the loan improve. This form is also known as debt rescheduling. |
| Stock exchange | Consolidation in the stock market area means that prices return to normal levels after price drops or sharp price increases. |
What are the goals of a consolidation?
Several goals are pursued through the implementation. These are as follows.
- A low long-term fixed interest rate can be secured.
- If several loans are combined, the borrower has more money available every month.
- Through a consolidation, companies improve their balance sheet and thus become more interesting again for both investors and investors.
- Municipalities, federal states or states balance their budgets through consolidation in order to reduce new debt and enable the corporations to work more economically.
- When restructuring companies that have got into serious financial difficulties, the financial options can be better bundled through consolidation. However, this usually only works in conjunction with massive cuts, for example through downsizing.
How does a consolidation work in a group?
The individual financial statements of companies always represent the starting point for a consolidation. An identical currency, a uniform structure and the balance sheet date are specified by the applicable accounting guidelines. The process in a group takes place in the following four areas.
- Capital consolidation: This is the term for offsetting the holdings of the parent company against the equity of all subsidiaries.
- Interim success minimization : In this step, the group-internal deliveries and services are deducted. Profits from transactions between subsidiaries are adjusted and only the actual profits are left to be booked.
- Debt consolidation: Here all receivables and liabilities that exist within the group are eliminated.
- Order and income consolidation: In this last step of the implementation, income and expenses of the subsidiaries are offset against each other. This leads to the adjustment of the consolidated income statement .
What does a consolidation of sub-areas mean?
The regulations can be different in every company. The form depends, among other things, on the shareholder structure, the size of the company and the legal provisions in force at its headquarters. A so-called full consolidation as described above is therefore not always necessary; only partial areas can be consolidated. For the tax office, for example, a consolidation of sales tax is always very important. There are no major differences in the approach to full consolidation.
Note!
For partial consolidation, the starting point is always the individual sales tax return . This is added up for all companies and reported to the main company. This then pays the sales tax to the tax office.
Summary
- The term consolidation is used to describe various processes, especially in the areas of finance and accounting.
- In the area of accounting, it means the merging of several annual financial statements .
- In a business, it means that short-term debt is converted into long-term debt.
- Consolidation is also possible for private individuals or for the state budget.
Conclusion
Consolidation is important for private individuals, for the federal, state and local government budgets, as well as for you as an entrepreneur. Consolidation describes processes that can be found in finance and accounting. As an entrepreneur, this means for you first and foremost that you get the opportunity to turn short-term liabilities into long-term credit. This improves your balance sheet and makes you more interesting for investors, for example.
