STREAMLINING THE FINANCIAL CLOSE: OVERCOMING NEW … · 2 I STREAMLINING THE FINANCIAL CLOSE: OVERCOMING NEW CHALLENGES ... such as revenue recognition and lease accounting standards

STREAMLINING THE FINANCIAL CLOSE:

OVERCOMING NEW CHALLENGES

2 I STREAMLINING THE FINANCIAL CLOSE: OVERCOMING NEW CHALLENGES

BUSINESS MANAGERS AT COMPANIES TODAY ARE EXPECTING MORE FROM

THE CHIEF FINANCIAL OFFICERS AND THEIR FINANCE TEAMS, and more

from the close process. These general managers are facing challenges from all

sides: profit margin pressures, new competitors, disruptive technologies, changing

consumer tastes, and even threats from private equity companies. That means

closing the books, delivering the numbers faster, providing additional insights, and

getting the information out in easily digestible formats are all critically important

tasks for today’s CFOs.

William Marchionni, senior director with the Hackett Group, recently spoke

during a CFO webcast, “The CFO Playbook on Strategy: How to Overcome New

Challenges of Streamlining the Financial Close,” providing some insights for CFOs.

In the webcast, sponsored by Workday, Marchionni gave advice on the recent tax

legislation and other close-related issues that CFOs are currently grappling with.

A former CFO, Marchionni advises CFOs, comptrollers, and other finance leaders

on financial and management reporting, revenue and cost management, capital

management, process reengineering, and strategic planning.

CFOs should be thinking about seven areas related to the financial close:

• Ongoing financial close issues

• Considerations related to the recent tax legislation

• Primary reasons that finance teams don’t consistently close on time

• Identifying bottlenecks and eliminating them with automation

• Latest resources and tools for streamlining the close

• Collaboration opportunities to close more efficiently and accurately

• Common mistakes to avoid when revamping financial close processes


Ongoing Financial Close Issues

Many of the fi nancial close issues that CFOs are battling this year aren’t

entirely different from previous years, but the demands related to those

issues are ratcheting up. CFOs are facing more and more demands from

their own company business managers, including expectations for faster

closes. They’re also expected to build more agile accounting functions that

respond to business changes and adapt to increasingly complex operating

and service delivery models that companies are deploying.

“Developing an agile accounting process—it’s not just about being good or

great,” Marchionni says. “It’s asking: Do my processes have the agility they

need? Are they leverageable enough? Are they scalable enough going

forward?”

CFOs need to take advantage of the increase in master data management

and information that’s available to fi nance. CFOs are also grappling with

new and maturing statutory and regulatory requirements, such as revenue

recognition and lease accounting standards and federal tax code changes.

The tax and accounting standards changes can be lumped into a broader

category—legislative and regulatory changes—that CFOs should always be

strategically prepared for through forward-looking management of people,

processes, and technology.

“ DEVELOPING AN AGILE ACCOUNTING PROCESS—IT’S NOT JUST ABOUT BEING GOOD OR GREAT, IT’S ASKING: DO MY PROCESSES HAVE THE AGILITY THEY NEED? ARE THEY LEVERAGEABLE ENOUGH? ARE THEY SCALABLE ENOUGH GOING FORWARD?”

— William Marchionni, senior director, the Hackett Group


Tax Changes

With the latest federal tax changes, CFOs and their finance teams should keep in mind four

specific considerations as they prepare for the next close cycle:

• The impact of the timing of tax provision information

• The impact of repatriation on intercompany activity

• The impact of repatriation on cash reconciliation and reporting

• The effect on payroll processing and reviews

Some companies are still figuring out what they will do, and when they will do it, in response to

the tax code changes. The tax changes are forcing CFOs in some cases to deal with the financial

impact of repatriation of overseas cash, for example, or the longer-term impact of changing

tax provisions. Building new facilities with tax savings, awarding employee bonuses, increasing

hourly rates for some employees, and changing 401(k) contributions are all examples of company

decisions that will impact efforts to close the books quickly throughout the year. Changes that

affect payroll processing will also create more difficulty for the finance team when running

analytical reviews.

“The new tax law has some uncertainty and some complexity that did not exist the previous

quarter or a few months back,” Marchionni says. “We have to consider that as we think about

closing the books. That tax provision may come to us later in the process. The auditors may be

spending more time on that, so it is going to have an impact.”

Repatriation of offshore funds to the U.S. due to the tax law changes can add up to some big figures,

from an intercompany and cash perspective. That means additional approvals may be required,

depending on where the money is routed and how it will be booked. These are typically one-off

transactions, so they change up what had been the regular, predictable volume of transactions.

Ultimately, a company’s chief accounting officer should be responsible for planning for these issues.


AIMING FOR CONSISTENCY IT’S NO COINCIDENCE THAT WORLD-CLASS COMPANIES CONSISTENTLY CLOSE

THEIR BOOKS ON TIME and within the same number of days for every cycle,

whether the closing is for the month, quarter or year. For finance teams that don’t

consistently close accurately and on time, the reasons why typically fall into four

categories: systems integration issues, master data management issues, limited risk-

based assessments, and difficulty enforcing materiality thresholds for allocations and

intercompany transactions.

Companies that don’t consolidate their finance-related systems can create closing

headaches for their finance teams. “There are companies out there that have single ERP

with limited instances, but they’re few and far between, and most organizations have

a plethora of systems. And with multiple systems, then you have potential integration

issues,” Marchionni says.

Master data management is a related issue, especially when “multiple versions of

the truth” are created, Marchionni says. Organizations need to plan out how they will

control and massage their data to make it comparable, as well as how best to map the

data and report it out.

Another challenge that has a strategic impact on how organizations build their close

processes is their limited risk-based assessments of their work. Not all reconciliations

need to be performed during the close, so the finance team can go through the balance

sheet looking at accounts, and then rank and segment them by risk. That process can

determine when and how often the reconciliations should be performed, as well as who

should approve them.

Another issue is that many organizations have different materiality depending on where

they are in the close—on Day 1, $50,000 will be considered material; Day 2, $250,000;

and Day 3, $500,000, for example. While it’s easy to put the materiality thresholds in

place, culturally, it’s often very difficult for people to adhere to them, Marchionni says.

The best performing companies are good at sticking to their materiality thresholds.

CFOs at best performing organizations are also more sophisticated in their

understanding of statistics and using analytical-driven reviews on a real-time or interim

basis to determine what’s material, and what has to be performed during the close

process and what doesn’t.

“There’s cultural challenges for organizations in order to make that all work, but I do

think a key differentiator of top performers is their ability to look at the relative risk

of what they’re trying to do and then being able to use sampling or some subset

approach,” Marchionni says.


“ WHILE THE TEAM MEMBERS ARE TYPICALLY ASKED TO TAKE ON THE ASSIGNMENT IN ADDITION TO THEIR REGULAR WORKLOAD, THEIR INCENTIVE CAN BE HOW THEIR LIVES AND THE LIVES OF THE FINANCE TEAM MEMBERS WILL BE IMPROVED BY ELIMINATING BOTTLENECKS AND STREAMLINING THE CLOSE.”

— William Marchionni, senior director, the Hackett Group

ELIMINATING BOTTLENECKS WHEN THE CFO AND FINANCE TEAM ARE TRYING TO IDENTIFY AND

ELIMINATE BOTTLENECKS in the financial close, typically the best starting

point is to look at all manual journal entries. The finance team can then

work backward from the manual journal entries to reverse-engineer a

solution, typically through automation. Best-performing organizations

want to not only close on time, but do so in a manner that doesn’t burn

out their employees working overtime hours every close or deprive them

of professional development opportunities because they are stuck in every

close for too many days.

Examining the manual journal entry situations can be as simple as

establishing a tool that captures information about who booked the

journal entry, when was it booked, why was it booked, the inputs needed

to make it, and where the inputs came from. Running the tool over multiple

closes can help finance identify solutions, such as improved training,

setting different deadlines for submitting financial information, or better

enforcement of existing deadlines.

Another practice that helps eliminate bottlenecks in the close is

establishing an account-to-report (A2R) global process owner who

oversees the process, looks for opportunities to harmonize and

improve the close, advocate for budget dollars, and make decisions on

standardization and other related issues. Organizations can also set up

formal, temporary, accountable teams—complete with formal governance

structures—that are tasked with monitoring the financial close and then

transforming and improving the process. “While the team members are

typically asked to take on the assignment in addition to their regular

workload, their incentive can be how their lives and the lives of the

finance team members will be improved by eliminating bottlenecks and

streamlining the close,” Marchionni says.


NEW TOOLS NEW TOOLS AND TECHNOLOGIES CAN SUPPORT AN EFFICIENT AND

ACCURATE FINANCIAL CLOSE, including cloud-based technologies,

robotic process automation, mobile technologies, and smart close and

real-time close tools, as well as bolt-on capabilities, such as tools for

reconciliations or lease accounting.

Cloud-based technologies allow

companies to fully automate the

financial consolidation, reporting, and

period-end close process and provide

greater visibility into a company’s

financial results. One company realized

a 70% reduction in time to close by

leveraging a cloud-based finance

system.

The Hackett Group annually surveys

CFOs and other finance executives, and

the survey data shows that 45 percent

of companies today are using cloud

finance tools, while 81 percent expect

to be using cloud financial tools in two

or three years. Also, 15 percent of the

finance executives report their cloud

finance tool is used by their entire

enterprise, compared to an expected 44

percent in three years. Robotic process

automation for finance is in use at 21

percent of companies, with 78 percent

expecting to use RPA in three years.

For finance close management tools, 55 percent of the finance executives

say that the tools are important and that they’re using them, compared

to a predicted 80 percent in three years. The metrics are similar when the

finance executives are asked about their reconciliation tools.

“Speed’s important,” Marchionni says. “We’re going to move to where

CFOs say: ‘Let’s fail fast or let’s succeed fast, but we’re going to do this

fast. We’re not going to spend three years thinking about this while 78

percent of our competitors are already implementing it.’ ”


Internal Collaboration

CFOs can collaborate with internal customers and

consumers of management information at their

companies to identify and act on opportunities to

close the books more efficiently and accurately.

By asking the general managers, vice presidents,

and operations team members about the specific

information they need, and understanding the

drivers of their businesses, finance can streamline

the information delivered. This collaboration can

also be a part of formalizing the company’s master

data management organization, governance, and

approaches. This cleans up the “multiple versions of

the truth” issue.

Finance can also work with IT to simplify

architecture while leveraging emerging digital

capabilities, and with internal audit to apply risk

management approaches to practices and controls.

Common Mistakes

One of the most common mistakes that CFOs make as they revamp their

financial close processes is failing to invest adequately. “It’s hard for me

as a CFO to go out and tell someone to cut their expenses by 5 percent

while I’m increasing my budget,” Marchionni says. But CFOs have to keep

in mind that they are building agility into their processes for the future,

so they can respond when something dynamic happens.

Another common slipup is failing to leverage risk assessments when

designing and managing A2R processes. CFOs may not be comfortable

with risk assessments or they may be overly conservative because they

have been burned in the past. For example, as an auditor they may have

had a bad experience with a small sample size that didn’t work out.

“They’re going to bring their own histories and potential biases,”

Marchionni says. “Risk assessments are also more emerging and more

statistical in nature. I don’t think they take full advantage of them.”


CONCLUSION CFOs can simply look to top-performing

companies for examples of how to streamline

their financial close processes. Top-performers are

focusing intently on improving the performance

and agility of their closing and reporting processes

so they can respond quickly to demands and

changes, whether they are current, near-term, or

far in the future. These companies also harness

existing technologies to improve their close. And

they establish measurable and visible improvement

targets, and align incentives to foster improvement.

“This may be a great time to now say: ‘Well,

where can we improve? What is not scalable?’ ”

Marchionni says. “Think about those types of longer-

term considerations and use this time, if you’re

performing acceptably within your organization, to

think about that agility.”


ABOUT WORKDAYWorkday is a leading provider of enterprise cloud

applications for fi nance and human resources.

Founded in 2005, Workday delivers fi nancial

management, human capital management, and

analytics applications designed for the world’s

largest companies, educational institutions, and

government agencies. Organizations ranging

from medium-sized businesses to Fortune 50

enterprises, have selected Workday.

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STREAMLINING THE FINANCIAL CLOSE: OVERCOMING NEW … · 2 I STREAMLINING THE FINANCIAL CLOSE: OVERCOMING NEW CHALLENGES ... such as revenue recognition and lease accounting standards