Longview’s recent Dialog user group meeting highlighted the company’s continued commitment to providing much needed automation tools for improving tax department performance – tools that enable the tax function to play a more strategic role in the management of a company. The sessions also covered the capabilities contained in the company’s latest release, Longview 7.2 Update 2 and gave customers a detailed product evolution roadmap following their merger with arcplan.

Using a dedicated tax application with a dedicated tax data store to handle direct (income) taxes has three main benefits. First, it enables a company to manage its tax exposure more intelligently, potentially reducing its tax expense. This is important because usually taxes are the second largest expense in a company. Second, the tax-related regulatory environment is becoming more challenging. Taxes paid to individual countries by multinational corporations have come under greater scrutiny by local tax authorities that are suspicious that these companies are manipulating individual countries’ tax laws to eliminate or substantially reduce local tax obligations. In this environment, it will become increasingly important for companies to have global visibility into their country-by-country tax exposure and options. Longview’s tax software can help companies determine how best to allocate income by jurisdiction. Third, by centralizing all global tax-related data in a single data store as well as automating calculations and the management of all tax-related data, Longview’s tax software can enables greater efficiency in the tax provision process. By saving time and ensuring all global tax-related data is consistent, it makes it possible for companies to manage their tax exposures more intelligently and makes it practical for companies to optimize tax payments by jurisdiction.

Corporations made up of more than a handful of legal entities and that operate in multiple direct tax jurisdictions can achieve significant time savings by adopting dedicated tax software rather than using desktop spreadsheets to manage the tax provision process. That’s because companies with these characteristics face challenges that quickly overwhelm spreadsheets. Direct taxes are extremely complicated because national tax codes are complex and ever-changing. Not only do specifics (such as depreciation schedules or inventory expensing rules) vary from one country to the next, but even basic tax concepts can differ. Then there is a “parallel universe” element, because “tax expense” is not the same as “taxes paid.” Tax and finance departments must be able to track and reconcile these differences and allocate tax expense (paid or deferred) accurately to individual business units. Accounting rules specify when tax expense must be recognized, but this can lag when those taxes are actually paid. Timing differences are the reason why very profitable companies pay nothing to tax authorities in some years and write big checks when they are losing money. A company’s tax position can be fluid, so it’s important to be able to work across multiple tax periods. Adjustments to individual entity tax expenses and positions occur frequently, so accurate adjustments and true-ups across tax periods must be easy to calculate, record and retrieve. Behind this are a myriad of specific journal entries to effect changes and the need to assemble a consistent set of account reconciliations to manage the details. The complexity of these processes is a large part of why we have computers.

Yet until recently spreadsheets were the most practical approach because the scale and complexity of the data management required made it difficult for anyone to offer a workable packaged solution. So companies have grown accustomed to using desktop spreadsheets to assemble and analyze data, calculate taxes, generate reports and store the data, analyses, calculations and reports. Our research shows that tax departments rely heavily on desktop spreadsheets for analysis and calculations to support their tax provision and compliance processes. More than half use spreadsheets exclusively and just 10 percent use a dedicated third-party application.

vr_Office_of_Finance_15_tax_depts_and_spreadsheetsOne reason why dedicated tax software makes sense is that, despite talk of reducing the complexity of tax regimes, they are still complex. As corporations grow and expand internationally, their legal entity structure becomes more multifaceted and their source systems for collecting and managing tax data can become fragmented. Unless the tax function is completely centralized, companies that operate in more than a handful of tax jurisdictions can find it hard to coordinate their tax data, calculations and processes. Centralization is not a cure-all, either, as the lack of local presence poses its own tax management issues in coordinating with local operations and finance organizations.

Another reason is that national taxing authorities may be making the tax department’s job more difficult. In 2013, the Organization for Economic Cooperation and Development (OECD) published a report titled “Action Plan on Base Erosion and Profit Shifting,” which describes the challenges national governments face in enforcing taxation in an increasingly global environment with a growing share of digital commerce. The OECD also is providing a forum for member governments to take action (including collective action) to strengthen their tax collection capabilities. Optimizing tax expense across jurisdictions will grow in importance if the OECD’s initiative for global tax reporting gains traction. Companies operating in multiple countries will find it increasingly necessary to understand how best to allocate income between countries to minimize the taxes within the constraints imposed by increased external transparency. Corporations that operate globally will need to be able to gauge how best to manage their tax exposure in an environment where decisions about transfer pricing and corporate organization will require greater care and forethought than today.

Desktop spreadsheets are not well suited to any repetitive collaborative enterprise task or as a corporate data store. They are a poor choice for managing taxes because they are error-prone, lack transparency, are difficult to use for data aggregation, lack controls and have a limited ability to handle more than a few dimensions at a time. Data from corporate sources, such as ERP systems, may have to be adjusted and transformed to put this information into its proper tax context – for example, performing allocations or transforming the data so that it reflects the tax-relevant legal entity structure rather than corporate management structure. Doing this manually in desktop spreadsheets is time-consuming and prone to errors. Moreover, in desktop spreadsheets it is difficult to parse even moderately complex nested formulas or spot errors and inconsistencies. Pivot tables have only a limited ability to manage key dimensions (such as time, location, business unit and legal entity) in performing analyses and reporting. As a data store, spreadsheets may be inaccessible to others in the organization if they are kept on an individual’s hard drive. Spreadsheets are rarely documented well, so it is difficult for anyone other than the creator to understand their structure and formulas or their underlying assumptions. The provenance of the data in the spreadsheets may be unclear, making it difficult to understand the source of discrepancies between individual spreadsheets as well as making audits difficult.  Companies are able to deal with spreadsheets’ inherent shortcomings only by spending more time than they should assembling data, making calculations, checking for errors,  creating reports and auditing the results.

Applications for managing taxes such as Longview Tax are making provisioning and reporting faster, more efficient and more reliable. One of the most important elements of such a system is the tax data warehouse that is at the core of Longview Tax. Statutory and tax accounting are not the same, so it’s important for companies to keep a tax-sensitized record of transactions and balances. This speeds calculations, analysis and reporting and improves the accuracy and dependability of the tax department’s work product. By substantially reducing or eliminating the use of desktop spreadsheets, it increases the transparency of the tax process. Segregating tax data from the rest of a company’s enterprise data is also essential because of the need to keep this information in an “as-was” state. Corporations buy and sell business units as well as reorganize on an ongoing basis. They then adjust their financial and management accounting systems to reflect the current needs of the business. Tax authorities, however, are concerned with the individual legal entities that make up a corporation as they existed in a given fiscal period. Maintaining all tax data together – including all of the minutiae of individual account adjustments and true-ups within and between periods – facilitates tax audit defense.

Beyond handling data better, Longview Tax also makes people working in tax departments much more efficient and the results of their work more accurate and transparent. It ensures that the process of capturing the difference between book (statutory) accounting and tax accounting is efficient, accurate and consistent. It enables corporations to standardize processes and reporting to simplify training and streamline reviews and audits. It’s able to use the dimensional capabilities of the system to enable a company to instantly and consistently create and publish reports that conform to the requirements of different taxing authorities – including, for example, different currencies and different depreciation methods for the exact same assets. By eliminating the need for people to perform repetitive tasks that require little judgment, it enables the department to increase its value and make it more strategic to a corporation.

Longview Tax provides bidirectional integration with a company’s ERP system, data warehouses and tax compliance software to ensure the fidelity of data at every step in tax-related processes. It gives administrators the ability to define and monitor tax department tasks to ensure all steps are performed and alerts them of delays. It provides an Excel add-in to give users a familiar environment in which to work and an ability to do ad-hoc calculations while eliminating almost all of the defects associated with desktop spreadsheets. Data and formulas are stored in a central database, ensuring quality and consistency. All of this promotes accuracy, reduces the risk of errors in calculations and presentations and can substantially cut the amount of time people in tax departments spend checking and reconciling their spreadsheets, which also boosts efficiency. And because Longview offers software for statutory consolidation, disclosures and external financial reporting, the Tax application supports the creation of required financial statement footnotes and tax disclosures.

Just improving the efficiency of a tax department can justify investing in a tax application because of the time it saves, greater accuracy and increased transparency. Companies may also find that by speeding the process of assembling tax data and performing the necessary calculations they have more time to consider their options on where and when they report income. I recommend that any company operating in more than a handful of tax jurisdictions should consider using a dedicated application for tax analysis, provisioning and reporting and that they consider Longview Tax for that role.

Regards,

Robert Kugel – SVP Research

Our benchmark research on next-generation business planning finds that a large majority of companies rely on spreadsheets to manage planning processes. For example, four out of five use them for supply chain planning, and about two-thirds for budgeting and sales forecasting. Spreadsheets are the default choice for modeling and planning because they are flexible. They adapt to the needs of different parts of any type of business.vr_NGBP_09_spreadsheets_dominant_in_planning_software Unfortunately, they have inherent defects that make them problematic when used in collaborative, repetitive enterprise processes such as planning and budgeting. While it’s easy to create a model, it can quickly become a barrier to more integrated planning across the business units in an enterprise. As I’ve noted before, software vendors and IT departments have been trying – mainly in vain – to get users to switch from spreadsheets to a variety of dedicated applications. They’ve failed to make much of a dent because although these applications have substantial advantages over spreadsheets when used in repetitive, collaborative enterprise tasks, these advantages are mainly realized after the model, process or report is put to use in the “production” phase (to borrow an IT term).

Host Analytics Modeling Cloud is designed to address the needs of people who – often working alone – create representations of the business or portions of the business used in a collaborative planning process. These individuals often create analyses and reports that complement the planning process. To date most dedicated applications have been far more difficult than spreadsheets for the average business user to use in the design and test phases. To convince people to switch to its dedicated application, a vendor must offer an alternative that lets users model, create reports, collect data and create dedicated data stores as easily as they can do it in a desktop spreadsheet.

Modeling Cloud is designed to integrate individual businesses unit plans with a company’s financial planning, forecasting and budgeting. It attempts to address the spreadsheet problem by enabling individuals in business units to create and update plans and budgets and their underlying models in a way that is consistent with what they are used to doing, but also makes it easy to tie these together to achieve an integrated company-wide view. Compared to desktop spreadsheets, this approach better enables a company to analyze and refine plans and budgets. It also facilitates advanced modeling capabilities such as rolling quarters forecasting and contingency and what-if planning. Compared to desktop spreadsheets, with Modeling Cloud it’s much easier to consolidate the plans from multiple contributors and then drill back down into individual plans and their underlying assumptions. The software also has mobile features that enable individuals to review, contribute and approve plans and budgets on the go. Each of these capabilities increase the business value of the company’s planning and budgeting.

vr_NGBP_03_collaboration_is_important_for_planningPeople and businesses plan in order to be successful. Companies do a lot of planning – some formal and some informal – about all aspects of the business including sales, production, headcount, distribution and the supply chain. Done properly, planning is the best way to get everyone organized in executing the plan. At that point they can take advantage of collaboration, which is essential to effective planning and budgeting. Our research finds that in the large majority (85%) of companies that collaborate well in their planning and budgeting processes participants regard it as well managed. Dedicated applications work better than desktop spreadsheets when it comes to bringing individual models, plans, budgets and forecasts into an integrated companywide view. In contrast it’s difficult and time-consuming to combine desktop spreadsheets into a consolidated view, and it’s even harder and more tedious to look back into the underlying data in seeking a better understanding of important differences between individual plans and models.

Modeling Cloud is designed to address an important need in corporate planning – closely tying all aspects of business planning to financial planning and budgeting and helping organizations collaborate across business silos. Our research shows that integrated planning works better, as I have written : Two-thirds of companies in which information in individual plans is directly linked have a planning process that works well vr_NGBP_02_integrated_planning_works_betteror very well, compared to 40 percent in which the information must be copied and only 25 percent where there is little or no connection.  As a rule, providing users with a familiar environment in which to create business models, create and compare different business scenarios, analyze actuals and create reports goes a long way toward mitigating the difficulty of having to learn to use a new tool that has been a barrier to the use of dedicated planning software across an enterprise and makes it easy to directly link plans. Business planning can be more effective if individuals have software that gives them a high degree of flexibility to create models and plans in a way that works comfortably for them yet also facilitates the integration of everyone’s plans into a consolidated view.  Our research shows that dedicated planning applications can help users align their plans with strategy and the rest of the organization. For example, companies that use them said twice as often that they are able to estimate accurately one plan’s impact on others as those that use spreadsheets. In addition, two out of three that have dedicated applications said they are satisfied with their planning process and that their plans are accurate.

Information technology has the potential to make business planning more useful, as I have noted, enabling it to improve a company’s performance and increase its competitiveness. One of the necessary tools for more fully integrating business and financial planning is a software and data environment that enables business people to plan their part of the business in a way that is familiar, productive and useful to them in achieving their objectives. That environment also must enable them to communicate the financial consequences of their business plan to inform the financial forecasting, planning, budgeting and review processes. Host Analytics Modeling Cloud is designed to do that. It’s not a perfect substitute for spreadsheets, which still excel in their ability to help people quickly translate their thoughts into models and reports. But because Modeling Cloud eliminates most of the hassles and defects of spreadsheets (for example, the ability to quickly store, retrieve and consolidate data from a single authoritative source), it  is ultimately a much more attractive alternative. I recommend that Host Analytics customers assess using Modeling Cloud in their organization and that buyers of dedicated planning applications include this type of capability in their evaluation of vendors’ offerings.

Regards,

Robert Kugel – SVP Research

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