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Many finance executives want to improve their department’s effectiveness in order to play a more strategic role in their company. However, frequently they find at least three serious challenges to achieving this sort of finance transformation. One is that too much time and resources are devoted to purely mechanical tasks. Another is that the information executives need is not always available immediately. A third is that they lack the data (which is unavailable or too difficult to access), the analytic tools or both to do rapid contingency planning. One area in the Office of Finance that needs particular attention is treasury, as I commented recently. Treasury management is a challenge because it’s highly detailed and demands complete accuracy. These requirements make it an area that can benefit from more automation.

Ventana Research recently named Kyriba for Kyriba Enterprise the VR_tech_award_winner_2013winner of our 2013 Financial Management Innovation AwardKyriba offers a suite of Web-based software for treasury management that automates processes and data management and provides tailored analytics and self-service reporting for the treasury function. Kyriba Enterprise, its core product, manages cash, payments, financial transactions and bank relationships as well as risk management, including counterparty risk. Its “supply chain finance” capabilities facilitate payment of suppliers and optimize cash and credit. In order to make good decisions consistently in this area, organizations require better intelligence to weigh options for deploying cash balances and managing debt levels (by currency and location) as well as to make tactical decisions on whether to accelerate payment of invoices to take advantage of discounts.

One of the most important reasons to automate the treasury function is that it improves a company’s forward visibility into its cash and liquidity. Because business is dynamic, forecasts of a company’s short-term finances are constantly changing, so it’s important that projections can be updated quickly, consistently and accurately. Visibility and the ability to understand the impact of contingencies are critical in the decision-making process, which is why having a tool that can rapidly assess potential outcomes to various scenarios is important. As well, given the importance of cash and liquidity to the day-to-day functioning of a business, financial executives must be able to exercise full control over these assets. Treasury must also be productive, which is why a tool that improves its efficiency through automation and better data management is essential. With today’s low interest rates, paying early to get a price discount offers companies a high rate of return on their cash. However, many companies fail to take advantage of this (or fail to do so consistently) because they don’t have the tools or processes to ensure that valid invoices are paid promptly.

vr_ss21_errors_in_spreadsheetsTreasury management software has been around for decades, but many companies still use desktop spreadsheets exclusively or for parts of this finance department function. Reducing the use of desktop spreadsheets in treasury diminishes associated risks, notably errors. Our spreadsheet research shows that data and formula errors are relatively common: More than one-third (35%) of participants said that errors are common in the most important spreadsheets they use in their jobs, and about one-fourth (26%) said that they find errors in formulas.

Kyriba offers Web-based software as a service (SaaS). For treasury management, SaaS has several advantages, including anytime, anywhere access to data, which can be critically important when issues arise outside of normal business hours or when key people are out of the office. In addition, implementation can be rapid and requires a limited amount of upfront investment. Kyriba Enterprise requires no ongoing IT department support, and for larger organizations it can scale to their requirements. The company also has the requisite security certifications, which can offer an even more secure environment than a company’s own infrastructure.

Making the finance department more strategic usually starts with finding ways to automate as many routine functions and processes as possible, and managing data to ensure its accuracy, availability and consistency. This frees up resources that can be redeployed to do more valuable work. Dedicated software often plays a key role in automating core business processes, managing tasks and handling data. With the right software, treasury organizations can help transform finance departments by providing more immediate, reliable information, as well as analytics-based insights to support consistently better decision-making and improved efficiency. Finance executives who want to improve their treasury organization should evaluate how well their existing technology supports this function. If better software is needed, I recommend evaluating Kyriba Enterprise.

Regards,

Robert Kugel – SVP Research

Because of its impact on the Office of Finance, I’ve written in the past about the proposed timeline and IT implications of the convergence of U.S. Generally Accepted Accounting Principles (U.S. GAAP) and the International Financial Reporting Standards (IFRS). While the bottom-line differences between U.S. GAAP and IFRS are likely to be minimal for most businesses, some aspects of the convergence promise to be significant and problematic. One important change is how companies account for leases. The process of arriving at these rules has been contentious because it represents a major change that will entail substantial process and accounting challenges for U.S. GAAP companies. These changes are likely to go into effect as part of U.S. GAAP well ahead of any adoption of IFRS in the U.S. IT systems also will be affected, but software could smooth the transition if vendors provide a workable product.

The proposed change to lease accounting involves a sweeping conceptual change from the operating lease model, which simply records lease payments as they occur, to a right-of-use model, which reflects the present value of the future lease payments as a liability along with a corresponding asset on the balance sheet. The objective is to more accurately reflect a company’s financial position by presenting a more complete calculation of its financial liabilities. Although future material lease payments must be disclosed, currently this information is found in the footnotes.

The new approach to lease accounting will increase the workload of the accounting function, as it involves two phases: the initial posting of all existing lease liabilities and the posting of ongoing transactions related to recording leases and amortizing them over time. Gathering all relevant information about all leases will be problematic because the information may be scattered and details may be missing, and getting it into existing accounting systems will add to the burden. Moreover, on an ongoing basis, those entering into a lease will need to capture the corresponding vr_ss21_errors_in_spreadsheetsinformation at the time of the initial transaction and transmit it to the accounting department.

As things stand, it’s very likely companies will default to using desktop spreadsheets for data collection and even for period calculations, which is a shame because they certainly are not the best solution. Given that the data in these spreadsheets is likely to be copied and rekeyed, it is prone to error. Indeed, our research confirms that this issue is common with 35 percent of organizations have data errors compared to formula errors (24%). Maintaining spreadsheets is also likely to be time consuming, which is another common problem where organizations spend up to 18.1 hours per month on these tasks. Spreadsheets are not the best means of tracking the various lease terms or the forward-term and variable rent assumptions an organization needs to vr_ss21_spreadsheet_maintenance_is_a_burdenstore and track to accurately compute the value of assets, establish the initial lease liability and calculate its amortization over time. Moreover, the current guidance envisions a requirement that companies regularly reassess lease terms to determine if conditions that affect the valuation or amortization of the lease have changed. For instance, if economic incentives to renew the lease term change following the initial contract, that must be reflected in the valuation. If, say, a contract for a two-year lease is amended to include attractive options for renewals extending out an additional eight years, the liability on the balance sheet (and corresponding right-of-use asset) will increase.

Those entering into and managing leases are not necessarily accountants with access to core financial systems. Rather than having to rely on spreadsheets or make extensive changes to their ERP and financial systems, what companies need is a lightweight lease application that could be used by accountants and non-accountants alike. Such an app would serve as a distributed data entry vehicle to capture and update all relevant lease information, as well as an analytical tool for managing lease-related calculations. The software would need to provide the low-cost and ease-of-use characteristics of a spreadsheet but offer data connectivity and the controls of an enterprise application. It might even use a spreadsheet interface to give users a familiar environment in which to work. However, unlike a spreadsheet, the application would enable both flexible and consistent data entry for even the most complicated leases. The characteristics of individual leases could vary, but in almost all cases their basic structure, terms and conditions would follow a straightforward model. Rather than relying on uncontrolled email-enabled workflows, the process of entering information about a lease, reviewing and approving it as well as handling periodic reviews and updates would be handled by defined and auditable workflows. Rather than having to re-key information from a spreadsheet into financial systems, such an application would automate the process of posting information to financial systems.

The coming changes to lease accounting will present companies with substantial business challenges. Although there will be no real change to their economic condition, the increase in assets and liabilities may affect some companies’ credit rating or require changes to loan covenants. Recording and tracking leases will become a greater burden than before – in some cases considerably so. Therefore, it would be great if vendors could provide a low-cost, low-maintenance application to help corporations and their finance departments manage leases, reduce workloads and ensure accuracy.

Regards,

Robert Kugel – SVP Research

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