Uncovering the hidden costs of Finance Inefficiency
How finance departments can significantly improve the closing process
and realize unforeseen benefits
THE OFFICE OF FINANCE: A SITUATION REVIEW
Finance professionals suffer for at least a few days or even weeks of every fiscal period. Once that time comes around when the books are to be closed, the corporate finance departments of every business, public or private, small or multi-national, parent or subsidiary, gear up for that periodic ritual. Nevertheless, finance professionals rev up their spreadsheets, knowing that this is a time of long hours and high pressure. Finance departments go into full mobilization, all in the name of getting those consolidated reports to management, the Securities and Exchange Commission and other government agencies. Everyone is preparing to work 14-18 hours per day for a solid week, all to make that deadline.
THE CHALLENGE: SHORT-TERM GAIN – LONG TERM PAIN
So, finance mobilizes their tools, spreadsheets, databases in dozens of locations, manual ledger sheets and simple pencil and paper. All this to perform complex tasks of translating currencies of their subsidiaries into a common, base currency, in order to generate closing journal entries that conform with local accounting principles, elimination of investments and inter-company activity providing an audit trail, reporting, analyzing – and the list goes on and on.
These tools are generally not the most efficient tools for the task at hand. In fact, the use of these tools makes it inefficient for finance departments to complete this periodic ritual in a timely, effective matter. As a company grows and becomes more complex, the ability of the typical tools and processes to continue to do the job diminishes.
The good news is there is a better way. In order to get there, finance leaders need to realize that investing in the proper tools and processes to get the job done is a necessity. Although there is some initial cost in these solutions, costs can be recovered very quickly based on a variety of factors that we will explore in more depth. Ultimately finance professionals will be able to shift their focus from producing consolidated financial statements to analyzing financial results for more business insights.
One of the biggest challenges for finance professionals is translating all subsidiaries from local currencies to a common, base currency used at the consolidated level. Even a medium-sized enterprise may have to deal with companies in 15-20 currencies, not to mention that companies in different countries may handle currency translation in a different manner than US Generally Accepted Accounting Principles (GAAP).
Consolidation solutions take a more direct approach by storing combinations of currencies, current rates and historical rates in a centralized location, designating accounts for currency gains and losses, and automating the entire process. Current average and month-end rates can be entered into these solutions every period, at which point they can perform all the tasks related to currency translation automatically.
This is arguably the most painful task when performing a consolidation, if only for the reconciliation issues that inevitably occur between entities. Companies frequently transact with each other within the enterprise, and these transactions are recorded in the books and records of both company and trading partner. The challenges arise when these balances are out of sync. It never is a perfect process because so many factors – timing differences, currency conversion errors, keypunching errors or disagreements internally on pricing, just to name a few – prevent it from being perfect.
A consolidation solution will have advanced capabilities in this area. After converting balances to a base currency, these solutions begin an automatic matching process between companies and their related trading partners, identifying every component of these inter-company balances. Differences can be easily highlighted on a detailed reconciliation report. And while there may be no remedy for having to go back to the parties who initiated the transaction to reconcile the difference, most of these differences can be explained just by reviewing the report. Once differences have been fixed or fall within an acceptable level, these solutions can automatically create the eliminating journals for the entire enterprise.
DATA VOLUME AND DISPARATE ERP SYSTEMS
It is extremely rare that an enterprise with multiple subsidiaries operating around the globe has a standardized chart of accounts in every general ledger system for each of their companies. If they do, that’s terrific, but generally speaking there will be a time when that particular enterprise goes out and buys another company (or group of companies), and immediate standardization of the newly acquired companies just isn’t practical.
Of course, a consolidation solution can also takes care of these challenges. By establishing a standard chart of accounts, companies, departments, etc., these tools utilize internal tables to map the data that is loaded directly from each ERP system into the single set of elements. If there is a need to trace how a value is mapped into the consolidation system, audit reports can easily be generated to show the flow of data from source to target. Furthermore, if an error occurs upon loading the data, this will be detailed in a log file for further investigation. Sometimes it may be a new source general ledger account that needs to be mapped to one of the existing target accounts, so a simple addition to the applicable mapping table usually fixes the problem. Thus dealing with thousands or even millions of disparate records becomes an afterthought.
COMMON ACCOUNTING STANDARDS
This issue has been around a long time but is going to get even more complicated in the coming years. Simply put, not every company uses the same set of accounting standards. The global economy has prompted an international governing body to develop a set of universal accounting standards. These principles, the International Financial Reporting Standards (IFRS) are being adopted globally. But for a consolidated enterprise, all that matters on a consolidated basis is a single set of accounting rules.
But consider what consolidation solutions can do. Any and all conversions from IFRS to GAAP (or any other set of standards) can be automated using an automatic set of journal entries designed to address this issue. A perfect example of this is the fact that under IFRS, fixed assets need to be revalued each year to their fair market value. A set of journals can be created automatically by the software to convert these amounts to book value, thus taking the guesswork out of this process, eliminating manual intervention in many cases, and shortening the time for this conversion considerably – sometimes from days to mere minutes.
REPORTING ANALYSIS AND REVIEW
All of the manual or spreadsheet-based processes described above take a great deal of time and effort just to produce a set of consolidated financial statements. In short, finance professionals inevitably spend a great deal more time producing statements than even looking at them. Furthermore, the additional time wasted with these processes prevents managers in the enterprise from getting their reports as quickly as possible to identify strengths and weaknesses in their numbers.
Beyond the automatic generation of these reports within consolidation solutions, there are other tools that can be integrated with other software solutions for more in-depth analysis. These tools enable comparisons of actual data with budgets, forecasts and plans. Finance professionals and operations personnel will have the ability to drill into their data, identifying strengths and weaknesses within different levels and areas of the enterprise, and make quick and efficient decisions based on this information. The ability of Finance professionals to analyze information effectively is further enhanced when companies centralize reporting and analysis into a center of excellence. Centralizing key functions, such as analysis or other financial processes, provides a shared service across the organization that reduces the cost and increases the efficiency of Finance operations.
THE BURDEN OF POOR CONSOLIDATION PROCESSES
Consider that turnover in some accounting departments is high. Half of the finance professionals’ workdays can be double shifts, leading to burn-out and higher than acceptable employee losses. These turnover rates end up being very costly as departments spend more time in training new people, time that could have been spent on more useful pursuits. Furthermore, because the finance professionals are producing the financial statements and reports – they just don’t have the time to review them in detail for accuracy or drill for business insights. By implementing consolidation solutions, it frees the finance professionals to focus more of their time on financial analytics. This allowed them to provide insight into the financial data and produce additional statistical reports. The end result is the reports get into the hands of management faster than ever – making them more competitive.