You are currently browsing the tag archive for the ‘Accounting’ tag.

The imperative to transform the finance department to function in a more strategic, forward-looking and action-oriented fashion has been a consistent theme of practitioners, consultants and business journalists for two decades. In all that time, however, most finance and accounting departments have not changed much. In our benchmark research on the Office of Finance, nine out of 10 participants said that it’s important or very important for finance departments tovr_Office_of_Finance_05_finance_should_take_strategic_roletake a strategic role in running their company. The research also shows a significant gap between this objective and how well most departments perform. A large majority (83%) said they perform the core finance functions of accounting, fiscal control, transaction management, financial reporting and internal auditing, but only 41 percent said they play an active role in their company’s management. Even fewer (25%) have implemented a high degree of automation in their core finance functions and actively promote process and analytical excellence.

Despite these findings, we believe that today finance transformation is both necessary and achievable. Practical, affordable technology is available to enhance productivity in order to de-emphasize the department’s “bean counting” role and promote its ability to enhance the performance of the entire corporation. Technology enables Finance to be more proactive and more strategic in providing analyses and methods that enhance its capabilities and improve the performance of the entire corporation. Of course, technology by itself will not transform a finance organization, but most of the longstanding issues that it must address to improve performance can be fixed using information technology to address interrelated people, process and data issues in a comprehensive fashion.

Our Office of Finance research agenda for 2016 emphasizes three broad technology-related themes serving the goal of finance transformation:

  • Applying a continuous accounting approach to promote greater departmental efficiency and effectiveness
  • Adopting technology that promotes action-oriented continuous planning, using rapid, short planning cycles to promote agility, coordination and accountability
  • Using software and other information technologies to achieve continuous optimization to promote ongoing organizational alignment across departments and business units.

Continuous Accounting

We introduced the term “continuous accounting” last year to identify the three areas where our research consistently finds tactical roadblocks to achieving a more strategic finance organization. By focusing on these three areas, finance executives can achieve steady gains in effectiveness.

vr_Office_of_Finance_11_automation_speeds_the_financial_closeThe first area concerns how the organization uses technology and manages information. To enhance effectiveness, finance departments must use software to automate all mechanical, repetitive accounting processes in a continuous, end-to-end fashion. Automation improves efficiency by eliminating the need to have people perform repetitive tasks. For example, we find that most (71%) companies that automate substantially all of their financial close complete it within six business days of the end of the quarter, compared to 43 percent that automate some of the process and just 23 percent that have automated little or none of it. Using software enables the department to manage the flow of data through its processes in a continuous, end-to-end fashion. This ensures data integrity, which in turn eliminates the need for checks and reconciliations that can consume time that could be spent more productively. Data integrity is undermined every time data is re-entered manually or when a spreadsheet is used in a process: for example, when data from one system is manually transferred to another; when the same information is entered twice in two different systems; or when a spreadsheet is used to perform an allocation or a set of calculations.

The second aspect of continuous accounting involves optimizing scheduling of tasks. Continuous accounting incorporates a process management approach that, wherever possible, distributes workloads continuously to flatten spikes of activities, whether in the month, quarter, half-year or year. This approach eliminates bottlenecks and optimizes when tasks are executed. It reduces stress on the department and can eliminate the need for temporary help and its associated expense. Much of the traditional accounting cycle and related departmental practices are artifacts of paper-based bookkeeping systems. These methods dictated the need to wait until the end the month, quarter or year to take accountants off line to perform aggregations, allocations, checks and reconciliations; that rhythm represented the best trade-off of efficiency and control in such antiquated approaches. Today’s systems offer far more flexibility that enables departments to spread workloads more evenly over time and complete them more expeditiously.

The third aspect of continuous accounting is the need to instill continuous improvement in the departmental culture. This steps counters tendency of any organization – but especially finance – to embrace a “we’ve always done it this way” mindset that resists needed change.  Continuous improvement acts as a mission statement that sets increasingly rigorous objectives. To achieve those objectives it’s necessary to have regular reviews of performance toward those objectives and make addressing shortcomings a priority. For departmental executives, communicating the need for continuous improvement is an essential element to achieving finance transformation.

Used as an organizing principle for the department, continuous accounting frees up time and therefore the resources needed to implement changes that result in performance improvements in a sustained and steady fashion. Adopting a continuous accounting approach enables CFOs and finance executives to reduce the amount of time spent “fighting fires,” many of which are the result of not using capable technology.

The Transformation of ERP

In most companies, ERP systems are the backbone of the accounting function, and this software category will continue to be an important focus of our research in 2016. The ERP software market is set to undergo a significant transformation over the next five years. At the heart of this transformation is the decade-long evolution of a set of technologies that enable a major shift in the design of these systems – and it amounts to the most significant change since the introduction of client/server technology in the 1990s. Vendors are seizing on technologies such as in-memory computing, improving the user interface and user experience, adding more in-context collaboration and extending the use of mobility to differentiate their applications from rivals. Those with software-as-a-service (SaaS) subscription offerings are investing to make their software suitable for a broader variety of users in multitenant clouds. These and other topics will be addressed in the results of our next-generation ERP benchmark research, which we will release in 2016.

We’ll also continue to look at the application of financial vr_NG_Finance_Analytics_01_finance_analytics_users_dissatisfiedperformance management (FPM) to improve results. Ventana Research defines FPM as the process of addressing the often overlapping issues that affect how well finance organizations support the activities and strategic objectives of their companies and manage their own operations. FPM deals with the full cycle of the finance department’s functions, including corporate and strategic finance, planning, budgeting, forecasting, analysis, closing reporting and statutory filing. In each of these areas, using inappropriate technology has a negative impact on how well a company performs. We will continue to highlight the importance of improving the creation and use of analytics. For example, our Office of Finance research finds that on average, companies that are heavy users of spreadsheets in their closing process take longer to close their books than those that limit them or don’t use them at all. Elsewhere, our next-generation finance analytics research finds a high degree of dissatisfaction with finance analytics in the company: 58 percent said that significant or major changes are necessary while just 7 percent stated no improvements are necessary. The research also shows that heavy use of spreadsheets for all forms of analysis is at the heart of this dissatisfaction. In 2016 also we’ll publish the next installment of our Financial Performance Management Value Index, which assesses vendors and products in this software market.

Financial Performance Management

As noted above, we recommend that finance organizations that want to play a more strategic role in the management of their corporation should adopt a continuous planning methodology for their financial planning and analysis function. A continuous planning approach uses frequent, short planning cycles to promote agility, coordination and accountability in operations. It includes establishing an ongoing dialogue among finance and line-of-business managers and executives to track current conditions as well as changes in objectives and priorities driven by markets and the business climate. To manage planning in such a comprehensive way requires dedicated software that enables members of the FP&A organization to focus more of their time on analysis and modeling. Technology also enhances the quality of plans, forecasts and budgets. In particular, in-memory computing makes it feasible to rapidly process computation of even complex models with large data sets. Consequently, it can expand the range of planning, budgeting, forecasting and reviewing performed in rapid cycles. It enables organizations to run more simulations to understand trade-offs and the consequences of specific events, as well as change the focus of reviews from what just happened to what to do next. For these reasons, in-memory computing also may encourage more companies to replace spreadsheets (which have practical limits to the size, complexity and adaptability of the models that are created in them) with dedicated planning applications that can harness the power of in-memory processing.

Sales and Operations Planning for Finance

Companies that deal in physical goods that are manufactured or sourced and then sold direct or into distribution channels often benefit from using sales and operations planning (S&OP). The process of orchestrating the flow of parts and materials through the production process to meet expected customer demand involves many functional units, each of which make plans, as well as the finance organization, which assesses the financial impact. Sales and operations planning is a discipline aimed at aligning and optimizing the plans of several business units. There are sales plans, product plans, demand plans and supply chain plans. Within a corporation, the performance of each of the functional units that produce these plans is assessed using different, often conflicting metrics. Information technology enables corporations to manage their inventories more skillfully and  minimize their working capital investment while maximizing their ability to fulfill demand. S&OP is designed to align a company strategically so that it can execute tactically in more effective fashion. The ultimate goal is to determine how best to manage company resources, especially inventory and cash, to be able to profitably satisfy customer demand with the lowest incidence of stock-outs. The output of an S&OP group is a SKU-level demand forecast that is used to create a detailed inventory plan. This quantitative plan is a major driver of a process that guides the purchasing an optimal amount of inventory (the one that best balances desired fulfillment rates while minimizing the investment in inventory) from the best set of suppliers (balancing a range of considerations including goods availability, pricing, discounts, economic order quantities and supply chain constraints). To enhance their strategic value, the financial planning and analysis group should play an integral role in the sales and operations planning process.

Advanced Analytics

We also will monitor the ongoing development of advanced analytics for business users. Using technology to make better use of data through advanced analytics can provide companies with breakthrough results. Often that’s because using capable information technology can provide insights and visibility that are unavailable by eyeballing data or using spreadsheets. Advanced techniques such as predictive analytics provide companies with more nuanced forecasts as well as the ability to spot deviations from expected results and thus address problems or seize opportunities sooner. For example, price and revenue optimization is rapidly developing applied analytic techniques that enable businesses to achieve higher profitability, increased sales or some combination. Software that helps manage pricing and profitability is spreading from hospitality, transportation, retailing to consumer financial services and other areas, especially business-to-business verticals. Used properly, this type of software enables a company to tailor its control of individual decisions regarding pricing, discounts and other terms to achieve the results best suited to its strategy. It can continuously make adjustments consistent with longer-term objectives in response to market conditions. Price and revenue optimization is impossible to achieve without using software and analytics that can deal with the huge volumes of today’s data.

Tools for Promoting Productivity and Effectiveness

There are a range of specialized software tools also can promote a more effective finance function, and executives must focus on acquiring and using those that enable the department to take a more active role in improving performance in the company’s operations. Finance has the necessary analytical talent and is positioned to be a neutral party in balancing the requirements of different functional groups or where issues cross business units or geographic boundaries.

The Office of Finance practice will continue to focus on software categories that can improve corporate efficiency, increase visibility and enhance agility. Our main objective is to enable finance organizations to be more effective by eliminating the root causes of time-wasting, low-value activities. For example, more companies are adopting a subscription or recurring revenue business model. This model isn’t always handled well by ERP systems, especially if a company is selling something more complex than simple subscriptions. These companies need to automate their quote-to-cash process from end to end, with the objective of controlling the flow of data, from configuring, quoting and pricing all the way to billing. Using this type of automation to ensure data quality enables companies to achieve two usually conflicting goals: substantially reducing finance and accounting department workloads while still allowing sales and marketing to offer customers flexibility in how they buy their services or products. Expense management is another classic time-waster poorly executed in most companies. Automation not only can save the finance department time, it also can reduce the “administrivia” workload for employees who have to submit expense reports. The cost of these expense management systems is typically less than one full-time equivalent employee, but it can save a multiple of that amount of time.

Managing Taxes More Intelligently

Taxes are one of the biggest expenses corporations face. There are two basic types of taxes: direct or income taxes and indirect taxes, which include sales and use tax and value taxes. Managing direct tax provision and analysis is still in the dark ages in most companies. We recommend to corporations that operate in multiple countries and that have even a moderately complex legal entity structure that they consider tax provision software that is supported by what we call a tax data warehouse of record. Taxes operate in a parallel universe from business management. Our research confirms that most companies use spreadsheets to manage their tax provision and analysis: Half (52%) rely solely on spreadsheets, and another 38 percent mainly use them. Several issues arise in using spreadsheets in the tax function: They are time-consuming, provide limited visibility to senior executives and pose unnecessary risks through errors. International companies are facing increasing scrutiny of their tax positions and can benefit from using dedicated software to manage their direct taxes more intelligently. Among the indirect taxes, in the United States, sales taxes are notoriously complex to administer. We recommend that any company with 100 or more employees doing business in more than a handful of states adopt a sales tax service for the same reason that they use a payroll service: It’s not worth the time, hassle and potential liability to do it in house.

The Impact of Changes to Accounting Rules

The Office of Finance practice at Ventana invests a great deal of time in researching software applications and related information technology. Uniquely, though, we also read accounting bulletins. The world of accounting is undergoing a substantial change now and over the next three years as a result of the adoption of accounting rule changes for revenue recognition and, to a lesser extent, lease accounting. The impact of revenue recognition changes will be profound because it is built on a fundamentally different conceptual framework than classical accounting. The upshot of this framework is that systems must account for revenues and expenses in a parallel fashion rather than in a balancing one. This type of approach would have been extremely problematic in paper-based systems. It’s feasible only because of the nearly universal use of computer-based accounting systems. Almost all ERP vendors are gearing up to support the new accounting rules, but it’s important for companies to plan ahead to make the transition as smooth as possible. And it’s important to be sure that sales contracts and documentation are designed to make accounting for them as efficient as possible.

Technology’s Role in the Office of Finance

One major reason for investing in technology is to help senior executives achieve better results by supporting more effective business management techniques. For example, our benchmark research on long-range planning demonstrates that better management of technology and information can improve alignment between strategy and execution. And when it comes to cloud computing, far from simply being a technology concern, cloud computing enables corporations to cut costs and gain access to more sophisticated technology than they could feasibly support in an on-premises deployment. Using technology can boost performance. The improper use of spreadsheets as seen in our research continues be an unseen killer of corporate productivity because these tools have inherent defects that significantly reduce users’ efficiency. Relying on spreadsheets makes it impossible to find the time to improve performance. Increasingly companies have inexpensive options that are easier to use and enable more advanced, reliable modeling, analysis and reporting.

Information technology is an essential element of business management and promotes a discipline of continuous optimization, a term we use to emphasize the importance of achieving better alignment of organizations to a company’s strategy. Yet many senior executives and managers have too narrow and too limited an understanding of IT’s full potential, much as those managing corporate information technology usually don’t appreciate business issues and how IT can address them. The business/IT divide is a barrier that prevents many companies from achieving their performance potential. The divide need not exist. Business executives don’t have to be able to write Java code or master the intricacies of an ERP or sales compensation application. However, they should master the basics of IT just as they must understand the fundamentals of corporate finance, the production process and – at least at a high level – the technologies that support that process. Our research practice addresses the significant business issues where technology plays an important role in addressing those issues. Because business is dynamic, optimization must be continuous to adapt to changes in markets, the competitive landscape and customer demands. Continuous optimization requires companies to operate in faster cycles and have real-time visibility to improve responsiveness and agility. Information technology can remove the barriers that prevent them from achieving more optimal results.

Regards,

Robert Kugel – SVP Research

Aria Systems provides companies with software for managing subscription or recurring revenue business models. A recurring revenue business models includes three types of selling and billing structures: a one-time transaction plus a periodic service charge; subscription-based services involving periodic charges; or a contractual relationship that charges periodically for goods and services. Aria’s cloud-based software addresses key requirements of users in the marketing, sales, operations and accounting functions in this type of business.

Recurring revenue, first popularized in the telecommunications industry, is increasingly common in others. It is well suited to companies accessing software and hardware technology as a service through cloud computing. For example, has a strong impact in the entertainment business, as customers subscribe to rent movies, music and other creative digital products instead of owning them. In general recurring revenue is attractive to providers of services or products because it establishes a regular, predictable income stream as long as they retain the customer. In using it it’s essential to handle interactions smoothly and completely in order to sustain customer engagement and maximize each customer’s lifetime value. Software is an essential element to successfully doing so.

Aria’s software is designed to help companies maximize customer lifetime value in three main ways. First, it is designed to help create a positive customer experience with every interaction. In our benchmark research on recurring revenue,vr_Recurring_Revenue_03_recurring_revenue_challengesmaintaining customer engagement is the most frequently cited challenge in businesses that use it, cited by 55 percent of participants. Having repeated positive interactions can be an important determinant of renewal rates. Renewals in turn are a key driver of profitability in these businesses because of the relatively high cost of adding a customer. Along those lines, 39 percent of participants  cited customer retention as an impediment. Moreover, since a company’s costs related to its recurring revenue business are relatively fixed in the short term, almost all the impact of lost revenue drops to the bottom line, depressing profits.

Rather than treating billing as a purely functional accounting event, Aria’s software enables a company to automatically incorporate personalized usage tips or customized thank-you messages in anticipation of an approaching anniversary (and renewal) date. It also can automate up-sell and cross-sell messages tailored to each customer. Nearly half (46%) or organizations said cross-selling and up-selling are difficult. This may be because they can’t engage effectively with existing customers. Multiple internal factors may affect this, such as a poorly designed marketing program for existing customers, a lack of skilled agents for performing ongoing interactions or technology limitations that prevent a company from creating or executing an effective customer nurturing program. Using software to craft an automated process for deepening customer interactions can be a way to enhance engagement. Companies that find it difficult to up-sell or cross-sell also may discover that for some customers its primary service is of limited importance. This may be because they don’t want to consider a more expensive, deluxe version or add-ons. Understanding which customers fall into this category is important so that up-sell and cross-sell efforts are focused only on those who likely to be receptive. Aria’s software enables business people to manage these aspects of the billing process without involving IT professionals.

Second, to support positive customer interactions, the software offers flexibility to quickly create and modify customer offers in a controlled fashion. Aria has a centrally administered catalog that defines the products, services and bundles on offer as well as their pricing, terms and conditions. In addition the software can handle a range of things that a company can bill for, including types of content, service levels, usage metering based on physical quantities, time or distance  or some combination of factors. Companies can define and manage offers based, for example, on the sales channel, geographic location or currency, and it can do that without requiring expensive and time-consuming customizations; thus a company can introduce innovations rapidly or react quickly to changes in its market. The control provided by such a catalog enables sales people to configure a set of terms and conditions that best match a current or prospective customer’s needs within established parameters. These limits ensure that the offerings balance flexibility and complexity. They enable administrators to limit the available pricing and terms to offers are that are profitable (or at least not loss-making) for the company.

vr_Recurring_Revenue_06_finance_less_satisfied_with_invoicingThe third factor is that, by managing the billing process in a continuous fashion, Aria’s software ensures complete accuracy. For anything more than a simple subscription invoicing can be a chore because customers often add or remove services to and from their contracts or negotiate a new billing method to suit their needs. It’s easy for those outside of finance and accounting departments to overlook the impacts on the department of not having a controlled end-to-end process, which can be addressed by using a dedicated application designed to support the billing process in a recurring revenue business. In our research only 29 percent of participants with finance and accounting titles said they are satisfied with their company’s invoicing system, compared to nearly half (47%) of those who work in other parts of their company. Managing the billing process from contract to cash in a single system provides a control mechanism that makes sure that the customer is not overcharged and that the company doesn’t suffer revenue leakage.  Another benefit of the software is that by managing the process from end to end it ensures the integrity of the data used in the billing process and eliminates the need for time-consuming checks and reconciliations that are necessary when, for example, the same data must be entered into multiple systems or when companies use spreadsheets at any point in the process to move data from one system to another or to handle adjustments or allocations. A well-designed billing system also facilitates the revenue recognition process.

Some companies sell directly to customers either through sales people (assisted selling) or a commerce website (unassisted selling), and some do both. Where subscription-like services are concerned, using a centralized catalog as the authoritative source for controlling offers ensures that the offers are valid and consistent with policies. For directed selling, Aria’s offers integration with the salesforce.com CRM system to ensure data in the two systems is synchronized. The software can be integrated with a company’s e-commerce site and enable offers and promotions tailored to specific buyers based on their relationship with the company, their location, past buying history or other factors. For both types of selling, the software facilitates testing of plans, promotions and services to determine the best approach to use. Users can apply effective dating to turn promotions on or off automatically at set times.

Aria’s built-in analytics addresses the needs of various roles in managing the recurring revenue business. Analytics is necessary to measure and monitor the health of a business. Having up-to-the-minute data digested and displayed for specific roles and responsibilities supports faster, more coordinated responses to market developments. Confirming its importance, most (82%) of the participantsvr_Recurring_Revenue_08_analytics_most_important_for_recurring_revenuein our research chose analytics as an important new technology necessary to support their recurring revenue business.

Not every company needs a dedicated application to manage its recurring revenue business. Those with simple offerings that rarely change over the term of the subscription are likely to find that their ERP system will serve their needs. However, companies that have even moderately complex offerings, that serve a diverse set of customers or that need to be nimble in managing offers and promotions will find that a recurring revenue application improves their performance. Our research finds that users of dedicated third-party software said they are satisfied with its performance more often than those using any other method: 86 percent said they are satisfied or somewhat satisfied with it, compared to 70 percent of those that use their ERP system and just 40 percent that use spreadsheets. I recommend that companies that have recurring revenue businesses assess whether dedicated software can help their performance and, if they so decide, they should consider Aria’s offering.

Regards,

Robert Kugel – SVP Research

Twitter Updates

Stats

  • 126,535 hits
%d bloggers like this: