Microsoft Excel has long been the go-to personal productivity tool of choice for financial departments. That mindset choice is not going away any time soon. However, a spreadsheet-based financial modelling application has well-known issues come month-end. A true Excel-based, built-for-purpose application which solves these accuracy and time-sapping spreadsheet management issues has so-far eluded the Office of Finance – until now.
Financial Close Processes need to be performed for every reporting period, whether this be internal management snapshots of achievement-to-date, or annual statutory compliance filing for authorities. Today’s executives are demanding and need accurate, robust information, within ever shortening time scales.
Automation of these processes can alleviate finance teams from mundane, time consuming collation of numbers, to enable greater emphasis upon evaluation and analysis of results for Business Insights.
What Does a Typical Month-End Look Like for You?
Finance teams from within most groups and organisations will deal daily with a number of disparate data sources that need to be aligned in order that the monthly management results, as well as the statutory reporting requirements can be compiled. Indeed, frequently, separate departments within the Group Finance teams handle the varied external compliance reports and internal monitoring of operational performance.
With budgets, plans, and forecasts also often seen as a distinct activity, many organisations, even those that may have previously deployed FPM toolkits, do still today blend software applications with personalised performance management tools (e.g. MS Excel, Pivot Tables and MS Power BI) in order to achieve required formats and details for their management of business.
Multiple spreadsheet templates require torturous administration and constant amendment for new reporting lines, reporting unit modifications and struggle with any acquisitions or business disposals. Determining and separating currency movement effects from ‘reported’ compared to ‘anticipated’ results can be difficult and requires separate MS Excel spreadsheet analysis of individual revenue lines.
Budget-holder responsibility, particularly within larger enterprises, rarely extend to full Balance Sheet effects of Sales and Debtor patterns and/or Costs and Creditor profiles, with ‘product mix’ often used as the (most reasonable?) explanation for variance of Actuals to the Budget or any selected Forecast.
Electronic payments and receipts systems have tended to assist with traditional bank reconciliations. However, intercompany and inter-divisional trading, particularly where transfer pricing exists, do still cause ‘reconciliation headaches’ and complex elimination for group statements. With “materiality” still most frequently applied to offset the time pressures and meet the required reporting deadlines.
LSA Solutions believe that appropriate FPM solutions should be developed such that “materiality” is only used for reporting template purposes, rather than as a reason for whether items are reconciled.
How Long Should a Month-End Close Take?
Today’s Finance Professionals seek to streamline ALL the processes and improve efficiencies through deployment of financial performance management solutions that are available from a wide range of software vendors offering varying technologies, platforms, and approach toward a common problem.
Whilst distinct point solutions to alleviate individual 'pain points' might previously have been viewed as an acceptable situation, today it is more likely that a comprehensive software package is desired.
A deep understanding of the various steps and tasks that have to be performed in order to transform both financial and non-financial data from underlying local currency transaction-based (ERP) systems into a consolidated set of Group results, is vital to ensuring that an appropriate software is selected.
Month-end close processes and financial reporting needs to be timely, in order to provide business understanding and enable corrective actions, where necessary, to be taken. Exploitation of growth and elimination of waste is key to successful operations. Flash results should be available in hours, with full financial reporting completed within days, rather than weeks. Formalised accruals processes and provisions calculations are essential, as are the need to reconcile bookings to orders to payment.
Preparing for Your Month-End
Understanding the importance of having the correct systems and processes in place for the periodic reporting of financial results is relevant for any financial performance management (FPM) solutions that are marketed by today’s leading vendors. Also, known as “closed-loop”, CPM, or EPM solutions.
Traditional planning software tools claim to be able to perform financial consolidation, whereas some legacy consolidation tools can be used for simplistic financial planning and monitoring against targets.
Finance departments within many organisations will have their checklists of manual tasks that need to be undertaken, which are assigned to nominated individuals or sub-teams. Automation, enables these to tend towards simplified validation sign-offs as opposed to many hours/days of tedious work.
Checking the Numbers
Today’s finance professionals need to be able to query and analyse data on a self-service basis with the IT departments ensuring continuity of connection and security, rather than the need to respond to multiple requests for modification to report formats or provide additional query and analysis work.
Leading vendor software solutions today enable automated cross-referencing of Data values within the financial data repository/warehouse via the use of “scripts”, “wizards” or “assistants”, such that end-Users are automatically notified of and Dr/Cr imbalance, Dr/Cr variances beyond tolerance. Also, when individual Users have validated their numbers ready for formal consolidation and publication.
Evidence of reconciliations being made and validation sign-off, along with explanations for variance are greatly enhanced by financial performance software that incorporates financial intelligence such that automated checks and online commentaries are enabled. General ledger (T.B.) and sub-ledger 'balancing' are key along with Ageing Analysis and Long Term Debt/Lease profiling for IFRS purposes.
Running Your Month-End Checklist
Who does what at month-end and, .. what is included within your checklist, will depend upon where your entity (that is being reported) sits within a group hierarchy. All local businesses need to ‘close’.
Financial Managers will be responsible for ensuring that the local “books of account” (ERP systems) are complete for each reporting period, with invoicing and transactions being posted along with the necessary accruals and prepayments to accurately reflect the financial position for the report period. Regional and Group Financial Controllers need to ensure that local data can be collated and reported.
The complexities of multiple ‘charts of account’, local currencies, and frequent unrelated ERP systems (particularly within the groups, where organic growth is supplemented by acquisitions and disposals) far outweigh capabilities of MS Excel spreadsheets for the modelling of Group Financial Consolidation and Reporting. Many of the legacy (32-bit batch processing) and traditional on-premise applications have failed to keep up-to-date with advancements in recent technologies and end-User experiences.
Advantages of Financial Close Software
Consolidation and reporting starts with Data loading from underlying ERP (or manual records) with vendors having “connectors” to the most commonly used ERP systems to enable the ETL processes. (i.e. extract, translate and load routines). These must be open and transparent to ensure auditability and tracking of source values. Particularly, where local charts of account are being transformed to a common report CoA, with items (account, cost centre, product or entity identifiers) being translated, via mapping routines, into Group reporting categories. Experience with your ERP system is essential.
Working practices adopted during the global Coronavirus Covid-19 pandemic of group financial teams working from home rather than group offices continue, and drive the need for ‘cloud-based solutions’ in addition to remote logon for centralised ERP, payroll and any formally ‘office-based only’ systems.
Today’s leading software vendors are developing core applications that not only capitalise upon advancement in computer technologies and improved capabilities for the end-User experience, but also enable standardised interfaces to extended functionalities into specialist areas of finance, e.g.
- Task definition, monitoring and management (workflow)
- Account validations (transaction matching) and inter-company reconciliations
- Movement’s analysis and regional segmentation of results (notes to financial statements)
- Commentary to financial statements and external published documents
- Tax computations, along with any required XBRL and/or iXBRL filings.
The various stages of preparation of group financial statements need to be defined and understood. Modern software solutions are capable of interfacing with source systems on a daily, or on-demand basis, such that it is no longer necessary to wait for that ‘missing subsidiaries data’ before the process of preparation of the financial statements can begin. Workflows and dashboards can clearly indicate where each and every participant in the process has reached and where any hold-ups are occurring.
Selection of the most appropriate Financial Consolidation and Reporting software tools to enable the several distinct data transformation steps, and very specific reporting routines to be undertaken both logically and efficiently are usually driven by understanding of capabilities and development pedigree.
Recent entrants, such as Fluence Technologies to the marketplace have embraced the ‘knowledge’ and ‘best practices’ from both existing applications and well-respected legacy reporting systems to introduce greater simplicity in the performance of consolidation processes, by leveraging 'always available' cloud-based (SaaS) technology. Complex ownership considerations and entity structures are handled with simple tables.
First stage of any implementation for financial consolidation and reporting software is to determine the dimensionality and items for the financial model that are required in order to enable the process.
Financial Reporting tends towards standardised templates where rows are deployed for subject lines (i.e. Balance Sheet, Results, or Cashflow headings) with columns being used to identify organisational slices of the data (e.g. Entities, Cost Centres, Regions, or analysis of the stages within a consolidation). Guided “drill” paths then provide further analysis of the data values that reside within the report grid.
Accordingly, as most financial reporting is reasonably prescriptive, data models tend to be consistent across software vendors. Therefore, efficiency distinctions have to be identified from the approach taken by the vendor towards the solving of the complex and common issues faced by financial teams.
Financial reporting is based upon statements of activities that arise within the nominated accounting period, i.e. monthly or annual statements. The ability to ‘open’ current periods with results of earlier ‘closed’ periods is key to financial consolidation software to enable accurate and consistent reports.
Financial consolidation and reporting is significantly more than the simple aggregation of numbers.
Consolidation rules need to be setup to handle the manipulation required to loaded source Data for;
- Data validations to ensure that ledgers (trial balances) “balance” and sub-ledgers “reconcile”. Including bank accounts, asset registers, equity movements and significant projects summary.
- Foreign currency translations, for both Group reports and sub-group reporting requirements.
- Intercompany (and/or inter-divisional) balances (or transactions) matching and eliminations.
- Allocation of items for cashflow and reconciliation to funds movements and/or cash balances.
- Processes to allocate and align, both revenue and costs for the purpose of financial reporting. Declared accounting methods need to be consistently applied but also capable of modification.
- Methodology to prepare/post all journal entries not being held within local books of account. Amortisation of goodwill arising on consolidation, or calculation of minority interests, etc.
- Distinction between period and total year-to-date activity for the purpose of results reporting. Whilst most vendor applications upload YTD values, some vendors upload period transactions In-memory vendor solutions tending towards auto-aggregation wherever this is appropriate, based upon internally created and maintained dimensional hierarchies/alternative hierarchies.
- Methodologies to calculate the period and/or year-end rollover values for relevant accounts.
Definition and ease of maintenance of the consolidation rules templates and tables is key to efficient processes and time-saving during the preparation of any Group results. Many of the validation rules used within financial consolidation software apply equally for local reports, as well as group reporting and consolidations. The commonality often enables valuable justification for duplicated ROI measure
LSA Solutions consider that where specialist software needs to be deployed for any particular reason, (i.e., calculation of revenues) then results of such computations still need to be consolidated within a single, one version of the truth, financial reporting platform. Commonly, today’s software vendors are agnostic as regards the underlying source ERP systems or common specialist computational software.
Financial consolidation requires the consistent adoption of policies and guidelines in order to ensure full compliance and production of the statements in accordance with international or local standards that govern the disclosure requirements. These rules can be complex and varied, but easily definable.
Financial planning is most frequently undertaken to align targets and internal management structures with budget-holder responsibilities of organisations, in order to ensure ownership and achievement.
Operational forecasting can be individually modelled to meet expectations and targets, with anything from detailed “bills of materials” to wider ranging multi-year “trend analysis” being key performance indicators and measures. Certain employment compensation schemes can involve complex variables.
Choices may not always be clear, which is where experienced advisors can ‘add-value’ to evaluation and selection of the most appropriate software vendor for your particular financial consolidation and reporting requirements. Initial assessments may be offered without charge, on a no-obligation basis. Contact us for more information and assistance.