Risk Management

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Peter Minck
Peter Minck
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Donít Gamble With Your Financial Close

With the repetitive nature of creating financial statements, you might think the process would be supported by large-scale automation. Unfortunately, that isn't always the case.

Reporting on the financial close is one way for companies to promote their financial health and stability to investors and regulators. However, companies now look to the financial close for more than just Wall Street promotion. The finance department and the reports it produces play a significant role in decision support for strategic initiatives.

It determines the future direction of a company.

In the high-stakes world of corporate finance, the ability to provide quality finance data and analysis depends on a quality financial close. Accuracy is crucial at every stage of the close cycle (pre- through post-close). Speed is also important so that data can be analysed to show opportunity and risk. Still, many companies don't capitalize on potential insights from their financial close data. In fact, most of them lose money on the proposition.

We recently surveyed 56 companies in the Global 1,000 and found that 82% of the financial close activities in these organizations are completely manual. Even more troubling is the fact up to 23% of those formally documented financial close transactions never actually occurred. This overwhelming reliance on slow, inefficient, and error-prone manual tasks costs millions of dollars each year.

With the period-end close typically taking seven days to complete for each individual legal entity, the companies surveyed dedicate more than 8,300 full personnel days to the close every year. Further research revealed that these same organizations could eliminate 70% of these manual tasks with process automation.

If the average Global 1,000 company implemented this level of automation, it could realize an annual tangible savings of $3.86 million. Companies with more than 80 legal entities could save as much as $6.48 million every year. With the odds clearly stacked against them, financial executives need to identify where the root causes of these risks and inefficiencies lie.

Operational silos
For startups and businesses that are in their early growth phases, it's not uncommon for a majority of the backend operational and IT processes to be manually intensive. Reporting consolidation and efficiency, however, is also a challenge for larger companies, particularly global organizations that have grown rapidly. Whether as a result of an active M&A strategy or organic growth, the IT processes and their supporting technologies across most enterprises are often fragmented, evolving, and managed in individual silos that run independently of one another. These data fiefdoms may make sense from an operational standpoint, but the lack of a unified operational framework ultimately hampers the ability of the finance department to deliver the value and insight that the company as a whole really needs.

Breaking the manual mindset
An overreliance on manual reconciliation processes also brings an increased risk of human error. Meanwhile, undocumented processes threaten compliance and auditability requirements. Uncontrolled spreadsheets and offline reporting all contribute to an ineffective close, perpetuating the endless, unnecessary, and error-prone repetition of key tasks.

Businesses that don't take a structured and unified approach to the close often suffer a lack of transparency, as well. This is particularly true of companies with multiple corporate entities -- or if subsidiaries span a range of geographies -- each with a different team in charge of finance.

Manually finding errors, especially in the reconciliation process, can consume many hours of work. Of course, not finding errors can be catastrophic. Process automation is the key to eliminating these unnecessary bottlenecks. With automated processes, you can test run a particular step in the close to check for errors. You can also build in automated error handling to flag any errors that occur without the need to search for them. Automation allows the finance team to both manage by exception and dynamically manage the exceptions themselves.

Speed vs. accuracy
It's easy to lose sight of the importance of analysis in a successful close, especially when so much time and effort is dedicated to accelerating reporting time. According to a 2012 benchmarking study by Ventana Research, more than 80% of the companies it examined planned to close their books within 5-6 days of the end of the month. Nevertheless, only 49% of them actually achieved this goal.

Though speed is important, the accuracy of the closing data offers the greatest returns for finance executives. It showcases strategic performance to the most important company stakeholders, including members of the board, the competition, investors, and regulators. Establishing a quality close that combines speed and insight can transform an organization, driving down operational costs and driving up new opportunities.

Automate for transformation
An American Productivity and Quality Center report (registration required) urges companies to improve the financial close and "use automation to boost process effectiveness." Automation is the best way to have a reliable, efficient, fast, consistent, and accurate financial close process. It supports the overall health of any company inside and out. It can even eliminate the need to replace applications or infrastructure, allowing the enterprise to tap into the real value of its IT systems while eliminating wasted time and effort.

According to 2013 benchmark data from PricewaterhouseCoopers, 60% of companies "still rely on manual spreadsheet manipulation for reporting, and only around 30% have a formalized strategy to align technology to business needs." Average companies are losing millions every year just because they haven't automated processes in their financial close. They're spending more time collecting data and closing the books. These companies also sacrifice valuable, accurate business intelligence in the process. Don't gamble on your financial close with a manual mindset. Automate for numbers you can trust to provide valuable insight for the future.

Peter Minck, Vice President, Business Solutions, Redwood Software, heads Redwood's North American Financial Close Automation team. Before joining Redwood, Minck held executive financial management positions at Automatic Data Processing, The Rockefeller Group, Goldman Sachs ... View Full Bio
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