The post-pandemic world of the Finance Department has changed significantly following the global lifting of restrictions related to the Covid-19 coronavirus outbreak. Many of the internal, and often external (customer-facing “service”) departments of the organisation have successfully maintained operations by staff engaging through remote working (WFH) and these same persons are somewhat reluctant to now re-embrace with the rigours of lengthy commutes, crowded transportation systems, or full-time office attendance. The annual Christmas parties may indeed be an early casualty of this new normal.
LSA Solutions do endorse; the fundamental concepts; latest technologies; and vendor solutions, that enable continual improvements within the Office of Finance despite - or because of - latest attitudes.
Essential to ensuring success for any organisation is the need for appropriate investment in people and also the tools of their trade. This may be as simple as providing clear guidance, structures and IT equipment for staff to engage efficiently from the home environment. Although, over past months, experience for many has led to a re-evaluation of the use of their existing and legacy financial tools.
ERP Systems and the Period-End Close
The fundamental financial records (ERP systems) have generally been able to function whether the accountants and ledger clerks are merely down the corridor from the server or working from home. Accurate recording of the daily transactions ‘orders to payments’ for both purchase and sales ledger transactions is essential, along with reconciliation of bank accounts, unfulfilled or partial orders and accruals for known items where orders have yet to be received at the end of each accounting period.
Whilst certain organisations may use common ERP systems across all entities, divisions and countries, generally LSA Solutions do not consider that the benefits of a single platform necessarily outweigh the advantages of ‘best in class solutions’ to handle the complexity of any manufacturing processes or services industry.
Checklists that not only determine individual tasks, but also assign their responsibilities are essential. It may also be necessary to reconcile intercompany transactions or inter-divisional trading a few days prior to the period-end, in order that aggressively-set Financial Reporting deadlines may be adopted. Today’s finance teams tend to be organised into local entity accountants; individual business partners by department, product, or sector; as well as the centralised group compliance and reporting teams. Internal audit serves the useful purpose to determine the degrees to which each aspect is managed.
A Typical ERP Task List Example
- Sales orders processed and payment terms / credit limits agreed
- Matching of goods delivery notes alongside sales invoices raised
- Validation / posting of invoices received and individual expense claims
- Payroll preparation and local withholding tax calculations. (PAYE / NI, pensions etc.)
- Payments to suppliers and transfer of funds to meet payroll related costs
- Reconciliation of intercompany / inter-divisional transactions
- Posting of cash book entries and matching of receipts and payments to items due
- Preparation of 'flash results', e.g. Day 1 indications of Sales, Cash and key KPI’s
- Reconciliation of bank accounts (including foreign currency accounts)
- Accruals and provisions, including calculation of profits arising on long term contracts
- Closing of sub-ledgers and roll-forward of period-end ERP balances
- Extraction of Trial Balance data and relevant details for local financial reporting **
- Preparation of data for group submission for monthly management / financial reports **
- Aged debt and outstanding creditors analysis **
- Key statistics relating business operations, labour utilisation, market penetration, etc. **
Note: ** leading vendor software solutions do enable automation of data extracts and compilation of both the local currency and group reporting (defined currency) requirements from a single platform.
Financial Consolidation and Reporting
Financial consolidation and reporting are a process of combining data from several business entities across a single organisation and being able to the compare results by entity, department and location using a single reporting currency. Isolating effects of foreign currency translations from product-mix to show performance against targets. Management reporting is often less concerned with statutory guidelines for Revenue Recognition and Balance Sheet accounting (IFRS and/or US GAAP regulations) and more concerned with measurement against expectations for the purpose of bonuses or rewards.
However, LSA Solutions do not consider that statutory filings (legal entity returns) and tax accounting submissions should ever be divorced from the overall Management reporting objectives. Indeed, where a single reporting platform is deployed then these functions can be easily capable of reconciliation. Accuracy, speed and consistency are necessary to ensure that timely corrective actions can be taken.
Narrative reporting has gained greater importance and significance in recent years, as predictability of results does become less certain in post-pandemic times. Accordingly, the ability to analyse and explain ‘what did occur’, and ‘what might be done’ to rectify, or enhance performance in the face of ongoing uncertainty is considered more essential than merely the numbers for each reporting period.
Many organisations will 'flag' on a periodic basis, either weekly, monthly, or quarterly, key statistics for senior management to enable confidence within operations and / or initiatives being undertaken, e.g. Sales numbers (units and values by product); Utilisation rates; Headcount; or exceptional items.
Today’s executives are demanding, and do need, ever-increasing volumes of highly accurate, robust information, within ever shortening time scales, in order to respond effectively to market conditions.
Preparation of group financial statements is dependent upon the data being supplied by subsidiaries. Even when common ERP systems exists, there is still a need for financial forecasts, budgets and plans to be incorporated within management information in order to enable analysis and Business Insights.
Smaller organisations with only a few subsidiaries, or remote branches may be able to manage their group reporting requirements through use of Microsoft Excel templates and MS Office applications. However, most organisations from relatively simple SME’s to global enterprises need; financial data controls; processes; and the auditability of latest (FPM) financial performance management systems.
Finance professionals across the organisation share the responsibility for the reliability of their data and oversight of financial transactions, in order to drive enterprise performance and ensure financial governance. Financial consolidation and reporting solutions from today’s leading vendors do provide necessary frameworks to implement data controls and provide transparency of process / transactions
Unless there has been significant rationalisation by Group management, most local entity books will be compiled in local currency, using independent charts of accounts, product codes and structures.
Although often seen as separate and distinct skillsets or functions within any sizeable finance team, there exists the requirement that the overall financial reporting systems and tools that are deployed can provide:
- Financial Close and Consolidation, combined with
- Financial Forecasting, Budgets and Plans, as well as providing detailed
- Financial Analysis, in addition to
- Financial Reporting and Disclosure compliance
LSA Solutions consider that today’s leading software vendors for EPM, CPM, and/or FPM solutions frequently enable the entire suite of financial tools from a single financial data mart (platform). Most allow integration to third-party systems such that existing planning or analysis tools may be retained.
The process usually begins with creation of a Datamart or financial reporting platform that comprises:
- A common reporting chart of accounts with traceability to original source transactions
- Both management and statutory reporting, along with tax and other regulatory structures
- Multiple currency (and/or multiple year-end) reporting and consolidation capabilities
- Defined processes for the step-by-step evaluation of movements, from opening to closing balances, together with any investment elimination and/or minority interest calculations, plus revenue recognition methodologies and intercompany eliminations / reconciliations
- Ability to record/display 'notes to financial statements' to enable greater understanding
- Visual progress maps and workflow diagrams to identify where delays might be occurring
Any financial performance management (FPM) solution should be owned and managed by the professional finance teams under the direction of the Group Financial Director. Whilst IT departments do have a leading role to play in the provision and maintenance of the security and access to networks, LSA consider that Financial solutions modelling and required self-service reports available for the end-Users should be within the control of the internal (group) finance teams.
Financial forecasting, Budgets and Plans
Goals and aspirations of organisation leaders are usually encapsulated within formal business Plans. These do not necessarily contain precise details of the exact step-by-step processes to achievement, but rather set-out rational and likely funding needs to enable reaching long-term or interim targets.
Organisations need to predict likely outcomes in order to prepare and ready resources to cope with anticipated demands, either in manufacturing, acquisition of products and services, or availability of personnel to deliver to requirements. Whilst the process of setting an annual Budget (strategic plan) might be driven by top-level targets and alternative scenario’s to achievement, in many organisations Budgets are created on a bottom-up basis by looking at existing capabilities by department, division and region and how modifications or amendments might feasibly be constructed to ensure growth.
This bottom-up approach requires considerably more time, effort and frequently multiple iterations in order to arrive at an optimum and achievable consensus. It starts with a sales and marketing plan indicating requirements from production and purchasing, and then moves into support departments to clarify personnel numbers to deliver the objectives. Notifications and communications are key to success and today’s leading financial performance management (FPM) software vendors do provide tools to enable both the integration of tasks and full understanding of progress across the enterprise.
Forecasts tend towards 'snap-shots' of short-term predictability based upon latest trends, marketing initiatives, or brand recognition through product launches and/or recommendations via social media. Such information is supposed to be approximately right, rather than precisely wrong and should be a regular feature of any periodic financial reporting. However, many large organisations only forecast on a quarterly basis, due primarily to lack of internal skills and appropriate tools to compile with ease.
LSA Solutions are aware that prior to the Coronavirus Covid-19 pandemic many finance departments were content to seek solutions for their most urgent pain-points, rather than approach these tasks within the full remit of the finance professional and the Office of Finance, as a single holistic solution. As a result, often today, disparate tools are stitched-together via a web of Microsoft Excel templates.
So how should today’s business leaders and financial professionals address the challenges they face?
As an individual and personal performance tool, MS Excel is virtually unrivalled. However, complex organisations are often heavily dependent upon just a few key staff and a variety of MS office tools.
Today’s buzz-words are financial automation and the digital office of finance, but none of these can be delivered if ‘unsupported financial models’ that rely upon the Microsoft skillsets of just a few are in existence.
Today’s leading financial performance management software (FPM) vendors do embrace Microsoft, with Office Add-in’s and Cloud solutions that operate on hosted or private Microsoft Azure platforms. Security and backups are provided with cloud-based solutions further redefining IT department roles.
So, firstly it is very important to fully evaluate all existing processes and requirements of your own business reporting and operations, and to understand where additional information could add-value. Simply to state that …, “the results are better because revenue exceeded expectations” is insufficient. Business needs to understand how current results were affected by events, marketing, latest trends, competitive incentives and/or discounting policies. Detailed financial analysis offers Business Insights
Secondly, whilst virtually all FPM vendor solutions do attempt to achieve a similar outcome they each utilise very separate and distinct technologies. Certain aspects of one particular software vendor may complement the existing skillsets within the organisation, whereas another may involve the adoption of totally new techniques. Nearly all of the latest vendor solutions will embrace IT technologies that provide both simplified or enhanced graphics and navigation for improved end-User and Administrator experience.
Understanding the benefits from the viewpoint of Finance or IT department skillsets can be essential to the eventual particular vendor choice following any ‘requests for information’ (RFI) documents that need to be issued to an initial shortlist of vendors.
Budget and cost constraints together with the desire to resolve individual pain-points do frequently drive the evaluation of leading software solutions. However, LSA Solutions strongly believe that such approach can be misleading in terms of eventual pay-back and return on investment which may be vastly enhanced by a more holistic determination of future needs and/or immediate implementation.