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Business computing has undergone a quiet revolution over the past two decades. As a result of having added, one-by-one, applications that automate all sorts of business processes, organizations now collect data from a wider and deeper array of sources than ever before. Advances in the tools for analyzing and reporting the data from such systems have made it possible to assess financial performance, process quality, operational status, risk and even governance and compliance in every aspect of a business. Against this background, however, our recently released benchmark research finds that finance organizations are slow to make use of the broader range of data and apply advanced analytics to it.

Analytics has long been a tool used by Finance. Yet because analytical techniques for assessing balance sheets, income statements and cash-flow statements are well developed and widely accepted, vr_NG_Finance_Analytics_01_finance_analytics_users_dissatisfiedfinance professionals have had little incentive to do more even as the opportunities available to them have proliferated. Taking a narrow of finance analytics they have largely failed to take advantage of advanced analytics to address the full needs of today’s enterprise and thus to increase their own value to it.

It’s not that finance departments aren’t aware of their shortcomings. For instance, more than half (58%) of participants in this research said that significant or major changes to their process for creating finance analytics are necessary; only 7 percent said no improvements are needed. We found four main reasons for dissatisfaction with their process: it’s too slow; it isn’t adaptable to change; there aren’t enough skilled people to do this work; and data used in it is inaccessible or too difficult to integrate.

Usually, addressing some business issue requires dealing with a combination of the underlying people, processes, information and technology. Companies often fail to address the issue successfully because they focus on just one of these elements. We think it’s important to use the people, process, information and technology framework to isolate the root causes behind the issues. Let’s look at the role of technology – mainly software – in finance analytics.

Our research finds many companies have trouble with the technology aspects. Only 12 percent of organizations are satisfied with vr_NG_Finance_Analytics_02_spreadsheets_arent_right_for_finance_analyticsthe software they use to create and apply analytics; more than twice as many (27%) are not satisfied. That’s probably because 71 percent of them use spreadsheets for analytics, a higher percentage than for any other tool. Two-thirds of these users said that reliance on spreadsheets makes it difficult to produce accurate and timely analytics. In contrast, fewer than half use innovative techniques such as predictive analytics (44%) to assist planning and forecasting, and just 20 percent are employing big data to process the flood of data into today’s businesses.

The research demonstrates a correlation between the technology a company uses and how well its finance analytics processes work. Two-thirds of participants who said their software works well or very well also said their finance analytics process needs little or no improvement. By comparison, just one in four of those that said significant changes must be made to the software they use have a process that needs little or no improvement.

Here again we find that the inappropriate use of spreadsheets is an issue. When asked whether spreadsheets cause problems in their use of analytics, 67 percent said yes. This is because desktop spreadsheets have inherent shortcomings that make them poorly suited for any sort of advanced analytics. In particular, they cannot readily manage analyses involving more than a handful of dimensions. (A dimension is some aspect of business data such as time, business divisions, product families, sales territories and currency.) Many of these dimensions are constructed in hierarchies: Branches roll up into territories which roll up into divisions of companies, for example. Analyzing data usually requires viewing the data from different perspectives (which translates into dimensions) to isolate an issue or opportunity. One such would be looking at sales by product family and region and then drilling down into specific branches or stock-keeping units (SKUs). In doing analysis, it’s difficult enough to manage the dimensions of the purely financial aspects of a business. Spreadsheets are especially ill-suited to analyzing operational and financial data together, such as the delivery method or product configuration details.

Our research data shows that not having the right technology is impedes finance departments’ ability to create and use more advanced analytics. We found several reasons why companies decide not to make these technology investments. The top three are a lack of resources, no budget and a business case that’s not strong enough. The first two may be valid reasons, but not wanting to commit resources and budget to advanced analytics could be a symptom of a poorly constructed business case, as I noted earlier. A lack of leadership and vision on the part of senior finance executives also plays a role. Many may say they want their department to play a more strategic role in running their company yet fail to follow through to adopt new methods and the necessary supporting technology.

But now a new generation of finance department leaders is emerging. These are people young enough to have grown up with technology and to be more demanding in their use of software and systems to produce results. The time is ripe for change, and it’s up them to drive finance departments to be more strategic in their use of analytics.

Regards,

Robert Kugel – SVP Research

Reconciling accounts at the end of a period is one of those mundane finance department tasks that are ripe for automation. Reconciliation is the process of comparing account data (at the balance or item level) that exists either in two accounting systems or in an accounting system and somewhere else (such as in a spreadsheet or on paper). The purpose of the reconciling process is to identify things that don’t match (as they must in double-entry bookkeeping systems) and then assess the nature and causes of the variances. This is followed by making adjustments or corrections to ensure that the information in a company’s books is accurate. Most of the time, reconciliation is a matter of good housekeeping. The process identifies errors and omissions in the accounting process, including invalid journal postings and duplicate accounting entries, so they can be corrected. Reconciliation also is an important line of defense against fraud, since inconsistencies may be a sign of such activity.

But let’s be frank: The reconciliation process is tedious. As for all tedious processes in modern corporations, it makes sense to let machines do this work. Reconciliation is a part of the accounting close process, and one of the main benefits of automation here is that it can accelerate the process. This is important because our benchmark research on closing finds that it’s actually taking longer for companies to close their books than it used to. The research also shows a correlation between the degree of automation in the close process and the time it takes to complete it.

vr_fcc_financial_close_and_automation_updatedBack in the days of quill pens and blotters it might have been manageable to meticulously comb through accounting entries. Today, however, volumes of data are too great to make this realistically feasible, and technology provides accountants with faster and more effective means of spotting patterns and familiarizing them with the peculiarities of the company’s books. For CFOs and controllers who are trying to determine how to begin the process of transforming their department to make it a more strategic player in their company, here is a way to free finance staff to do more productive tasks.

There are three important virtues associated with automating reconciliation. The first is consistency: Business rules, policies and procedures are applied consistently in ways that are in line with accounting policies that external and internal auditors accept. Machines are more reliably consistent than humans in such tasks. The second virtue is elegance: Automated systems simplify the process while making it faster and more accurate. They enable auditors to focus their time and attention on the most important issues that arise from the process. The ability of automated systems to highlight exceptions eliminates the need for random sampling, which both consumes time and poses the risk that something important will go unnoticed. The third virtue is efficiency: Automated systems enable a company to substantially reduce the amount of time needed to complete the reconciliation of accounts because the system performs the purely mechanical tasks and skips the accounts in which there has been no activity or in which the amounts to be reconciled are too small to be material. These systems also reduce the time internal and external auditors need to check reconciliations because all of the work is centralized in a single system and because the system and its configuration functions as a higher level of control in the reconciliation process that’s easy to test and monitor.

Despite these obvious virtues, most companies don’t use such capable automation. The majority manage reconciliations in spreadsheets shared through email. Electronic spreadsheets were a major advance decades ago. Today, however, they are not the best choice because the information they contain is fragmented, difficult to consolidate, hard to share and prone to error. Running this process with spreadsheets and email is more difficult and time-consuming to manage and control than using a dedicated reconciliation application. A well-designed dedicated application assigns ownership of every task to individuals and provides real-time visibility into which parts are on schedule, which are behind and which may be in danger of falling behind schedule. These systems employ templates that are centrally controlled to ensure consistency and quality. The templates can be updated as needed. A spreadsheet may start as a template, but it’s difficult to control them, even with protections built in.

Documentation is another weak spot in spreadsheets shared through email. Although there are objective aspects to the reconciliation process, those performing it ultimately must use their judgment. These judgments must be supported by narratives and calculations that clearly and completely explain the decisions each person made and by citing supporting documents wherever necessary. A related aspect is approvals, since good governance and control of accounting systems requires that someone inspect and approve the work of others when their actions (or lack of action) can have a material impact on the quality and accuracy of financial statements. So another important element that a dedicated reconciliation system can provide are approval workflows to ensure that the work has been completed before the books can be closed.

Automating reconciliation can be a first step in creating a virtuous cycle. Many executives in finance organizations would like to improve the performance of their department but face the challenge of finding the time to devote to such efforts. The staff time that can be saved through automation can be reinvested in finding the root causes of other issues that bog down the department and fixing them. Automating reconciliation can accelerate the financial close, improve productivity, reduce errors and the related possibility (albeit limited) of financial misstatements, enhance control and diminish the risk of financial fraud. These are reasons enough why all midsize and larger corporations should investigate the benefits of dedicated reconciliation software.

Regards,

Robert Kugel – SVP Research

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