KPMG International’s recent ‘race to close’ survey has found that 75 percent of businesses are looking to reduce the close and consolidation time for their business, with a target of less than six days.
It is intuitive to see that management needs reliable, insightful financial data to make informed business decisions, and that much of that insight comes from financial performance data. A lack of reliable financial data and the resulting impact on competitiveness impairs the performance of the enterprise through both a direct and indirect cost.
However, to start addressing the issues within finance does not necessarily require large capital investments in new finance systems. Management can start to see measurable performance improvements by improving data structures and financial reporting processes with much lower investments required.
Since the market downturn, we are seeing an increase in requests for assistance from companies looking to transform their finance functions. The twin drivers are the cost of finance and the need to support effective decision making.
The objective of these transformation initiatives is to reduce the time it takes to perform the monthly and annual close cycles, to provide more in-depth interpretation, analysis and insight into the number in terms of business performance, and to support decision-making with accurate, fact-based advice. Central to these objectives is a streamlined close-and-reporting process that is more akin to business-as-usual rather than a monthly event that drains valuable finance resources.
At a high level, the monthly close process has three well-defined steps: the general ledger close (collecting the data), consolidation (adding the numbers up), and report creation (analysing and formatting the results). Within each step, we see a recurring set of issues that relate to technology, process and organisation structure of the finance function.
The general ledger close consists of collecting the transaction data from the source transaction systems, including accounts payable and accounts receivable, capturing and entering accruals and closing the ledger so no further adjustments can be made. Non-financial data is captured at this stage, including headcount data, order data, shipment data, and inventory and budget data. Typical issues here include a lack of automated interfaces between the source systems, requiring manual data entry that could lead to data errors and onerous checking and correction processes.
The consolidation of the different accounts for the separate divisions, locations and subsidiaries involves establishing a standard view of the data. This is most effectively achieved through a single chart of accounts, performing necessary currency translations, identifying and eliminating intercompany transactions, and performing minority ownership calculations. This is a heavily iterative process requiring large amounts of rework as adjustments to the accounts are processed.
One common issue is overly complex organisation structures. Reducing the number of subsidiaries can have a material impact on reducing the complexity of the process. Another high-impact issue is the lack of a standardised chart of accounts across the organisation. The result is complex data mapping and resulting reconciliations to prove the mapping, all requiring high levels of manual effort and error correction. Many organisations that lack systems to automate the consolidation process use Excel sheets to manually perform consolidation. This practice is considered a significant control weakness and increases the risk of error.
Some organisations compensate for this control weakness by developing an onerous set of compensating controls designed to identify errors. This may include complex reconciliations and data reviews, with error corrections requiring the consolidation to be reworked and the controls to be performed again. The consolidation process thus becomes the most complicated, intensive and time consuming step in the close and reporting cycle.
The reporting process brings together the consolidated financial results and the non-financial data to present performance and financial results in the appropriate manner for the audience. In addition to external statutory reports, this process generates internal management reports including performance variance and trend analysis.
These internal reports are often bespoke and frequently include ad-hoc requests for addition information. Typical problems within this stage of the process are the collation of data from multiple systems and teams as well as a lack of automation. Reporting can become an Achilles’ heel for the finance organisation in that, over time, the requests for the same data to be presented in multiple ways for different audiences limit the ability to develop standard automated templates.
Many organisations believe that the solution to these problems is to implement a finance or business intelligence system and to recruit or develop talented finance resources to help bring additional insight to the analysis of their results. However, without addressing the underlying issues within the accounts structure and improving the close processes, a new system, at best, offers only a few advantages.
At worst, the reporting team reverts to out-of-system calculations, rendering the investment in the new system ineffective. A talented workforce is important to improving the capabilities of the finance function as a whole. But if the financial close and reporting processes and issues are not resolved, these specialists end up correcting accounting errors and creating numerous management reports, rather than focusing on providing insight to support business decision making.
The gains in performance improvement within the close process can be achieved through standardising the way financial data is classified and stored across the organisation. Examples of how this may be achieved include:
- one single chart of accounts
- allocation of balance sheet account ownership to individuals within the department
- eliminating high levels of resource and time intensive, error prone and poorly controlled manual data entry and manipulation
- more effective control environment focusing on error prevention to reduce rework
- flash reporting to quickly identify adjustments in the consolidation process and identify key messages prior the finalisation of the final set of results
- a minimal set of standardised management reports across the business and a single point of contact for all queries to avoid unnecessary report creation and interruptions to all staff to respond to information requests.
About the Author
KPMG is a global network of professional firms providing audit, tax and advisory services, with an industry focus.