AFTER the long holiday break, ‘tis the season that many finance managers and staff dread the most -- the yearend financial closing, especially for a large number of companies that follow the calendar year as their fiscal year, wherein they toil long hours to close the books for the preceding year requiring volumes of information from line-of-business.
The reason this activity is so horrendous is because of the time-consuming convoluted close-to-disclose process that is likewise headache-inducing. Finance department staff in the frontline work through weekends to get the job done, which is not easy or always perfect. Many laggards in a global study of financial consultants Hackett Group take 30 days to close the books, costing these companies 13% of the total company revenue. These costs come from using too many resources to accomplish what should be nothing more than a mechanical task, which should have been allocated for solving other more important issues in the finance department.
Apart from the intense manual labor and long working hours, these companies face greater risks due to human error in using multiple spreadsheets and manipulating complex business data. In fact, the potential for spreadsheet errors was cited by banking giant JPMorgan in its reported investigation of $7 billion in losses due to massive spreadsheet errors in 2012. Many spreadsheet error examples abound that resulted in financial and reputational losses. What’s even more glaring is that 70% of companies globally use spreadsheets to manage financial reporting, based on a 2012 study conducted by Oracle and Accenture.
But what’s more interesting now is that many companies are starting to streamline processes, working on the human element and investing in automation technologies. Much of the drive is coming from regulatory pressures from the Sarbanes-Oxley Law and the Securities and Exchange Commission of many countries to have a more transparent financial reporting system, as well from the desire of business executives to gain operational efficiencies. In fact, in a 2012 survey of the American Productivity & Quality Center (APQC), a business benchmarking and research organization, 75% of organizations reported that close-to-disclose process is one of the top two targets for financial improvement over the next 18 months.
Improving the financial close is proving to be incredibly challenging as averred by many CEOs. Business executives should look at three critical areas to improve on -- processes, technology, and people -- with the objective of shortening the closing cycle to the global average of nine days, and even reach the best practice of 7.6 days, according to the Hackett Group.
To streamline the process in properly closing the books and preparing financial statements, it is important to start with a checklist that includes all the necessary journal entries and procedures The CFO’s role is critical in re-evaluating the process by understanding how many people are involved in the process, who does what in the cycle, what can be moved to the pre-close cycle, and what and where the bottlenecks are. Key is standardizing tasks and timelines to ensure the closing of the books on time.
Apart from hastening the process, what’s also important is to understand the complexity of the closing process. As more and more corporations become increasingly complicated through acquisitions and complex subsidiary structures, business executives need to be cognizant of the local reporting requirements and differing accounting rules for each corporate structure. This is where technology can help by automating the close-to-disclose process by assisting in reconciling financial accounts, processing inter-company activities, and so on. This also removes the risk of errors from the use of spreadsheets.
But process improvements and technology are not silver bullets. They are nothing if not for people who will execute the new process and adopt and implement the new technology. Training, reward and motivation programs for finance department staff are all important to ensure the success of any improvement initiative and preclude burnout among employees.
All financial closing improvement initiatives require a balanced focus on process, technology and people, coupled with proper governance in order to truly realize its full value.
The opinions expressed here are the views of the writer and do not necessarily reflect the views and opinions of FINEX.
REYNALDO C. LUGTU, JR. is a senior executive in an information and communications technology firm. He also teaches strategy, management and marketing courses in the MBA Program of the Ramon V. del Rosario College of Business, De La Salle University.
reylugtu@gmail.com
source: Businessworld
No comments:
Post a Comment