Minutes on Modern Finance

The Modern CloseDoes Your Finance Organization Measure Up?

Closing the books, reporting more efficiently… those are just table stakes for a modern CFO. You can’t ask for a more strategic role in the organization if you can’t deliver on the basics.”

Jeff Henley, Chairman of the Board and former CFO, Oracle Corporation

Moving From a Classic to a Modern Close

Although the close process may not rank at the top of C-suite priorities, smart finance executives know that a well-designed, technology-enabled close has become a critical best practice by which modern CFOs and their teams are measured. The faster you can close the books and deliver right-time insights to key decision makers, the more strategic your finance organization can be to the business.

According to Les Stone, Managing Director - Finance & Enterprise Performance, Accenture, a world-class close can be defined as a three-day close for legal entities and then an additional two days for consolidation and reporting, for a total of 5 days. Yet today, only 38% of companies appear to close their books in 5-6 days, down from 47% in 2007.1 While some would like to attribute slower closes to growing business complexity and increased regulatory burdens, Stone and other industry experts believe that the more likely culprits are poorly-designed, manual finance processes and inconsistent data sourced from multiple systems.

To become world-class, finance organizations need to evolve from a traditional close process in which the steps are sequential, to a modern, more strategic close that allows CFOs and

their finance teams to perform key functions in parallel during the close process. A company with a more nimble close process, for example, can take care of a significant number of account reconciliations outside the critical path of the close, rather than right in the middle of it, which is a traditional —and problematic—way to handle reconciliations. If you can achieve such efficiencies and modernize your close process, you can redeploy resources to planning and analytics, providing much greater value to the business.

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Improve Your Close Processes to Improve the Business Modern CFO Best Practices

According to a new global survey commissioned by Oracle and Accenture, the expectations on finance to deliver insights to the business are increasing, especially among high-growth companies which typically use data-driven information to boost customer loyalty and market share.2 Smart finance executives are focused on reducing the close process to meet

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2 “Empowering Modern Finance: the CFO as Technology Evangelist”, Oracle and Accenture, March 2014. 3 Kaigh, Elizabeth, “Six Excuses Companies use to Avoid Fixing the Financial close Process”, February 5, 2014 (cited in http://www.apqc.org/blog/six-excuses-companies-use-avoid-fixing-financial-close-process)

In what I would call the classic close, nothing significant happens until the end of the month. I think where the move has been over the last few years has been towards a more modern close, where you cut off your sub ledgers and transactional systems early, then look at material transactions that may have happened between the date of that early close and the true month end. When you close this way, you can then redeploy finance staff to work on the financial planning and analysis component of the close.”

Les Stone, Managing Director - Finance & Enterprise Performance, Accenture

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Streamline Your Processes to Achieve Ruthless Standardization

Choose Technology that Supports Your Processes

Adopt an Integrated Business Services Model

these new demands; according to the American Productivity & Quality Center, reducing the close process by two days increases the resources available for other high priority projects by 24 days a year.3 The following best practices can help you close the books faster and more accurately:

Overarching these three leading practices is a fourth critical component: governance and data management. “At the end of the day it all comes down to processes and governance,” says Stone. Standardized processes are inextricable from strong governance and managing data to ensure quality.

Governance & Data Management

Process

Technology

Shared Service Model

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1 “Trends in Developing the Fast, Clean Close,” Ventana Research, 2012.

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The goal is to streamline your close through standardization. You should set limits to cap the volume of manual journal entries that can be made late in the close, for example. You can do this by defining what types of entries can be made on certain days in the close process, both in terms of materiality and reporting impact. For example, you might allow any type of entry to be made on day one. But by day three, you can only make an entry of $50,000 or more that impacts more than one financial statement reporting line. The definitions will vary based on your company’s controls and financial structure, but having rigorous standards is the only way to keep up with the pace of business. When setting materiality thresholds, be sure to synchronize the timing with the budgeting and forecasting process.

Allocations can be another bottleneck in the close process that you can minimize through process improvement. Allocations are primarily done to support statutory (tax transfer pricing) purposes. If allocations are made beyond this, they should be done in a manner so people can be held accountable. This is typically done by segmenting responsibility statements between non-controllable versus controllable allocations or by moving to a COP concept (contribution to overhead and profit).

Intercompany accounting is another area that can cause a bottleneck during the close, primarily because of ‘out of balance’ situations between two legal entities. The “book now dispute later” process will help minimize these out of balance situations. This will then be governed by a robust dispute resolution process that allows for dispute escalation from accounting managers up through to the corporate CFO if business units cannot agree on the intercompany charges. A meeting with the corporate CFO to resolve intercompany disputes is probably a meeting that most will try to avoid.

You must look at every component of the close process - aggregating transactions, foreign currency, manual interfaces, intercompany accounting, allocations, journal entries, account reconciliations, and more - and establish repeatable, predictable, and scalable processes for them all.

Streamline Processes to Achieve Ruthless Standardization

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With regard to the close process, it is critical to take a hard look at processes with an eye toward achieving “ruthless standardization”. The key is to establish processes that are repeatable, predictable, and scalable, and then ensure that those processes are overseen with a governance layer, without which things will very quickly unwind. Follow these steps to help ensure a well-governed close:

Designate a global process owner who makes the decisions about whether and when process changes must occur for account reconciliation, allocations, chart of accounts, materiality thresholds, etc.

Ensure that the “tone from the top” reinforces the processes you have established. The corporate CFO and rest of the C-suite must support and make it clear that the processes are to be followed, no exceptions.

Appoint a “close czar” who is the owner of the close, establishing a schedule and making sure it is communicated and enforced.

“I like to think about a world-class close as similar to Olympic gold medal execution: a process that you execute with athletic precision, and that is flawless.”

Les Stone, Managing Director - Finance & Enterprise Performance, Accenture

Scaling back the chart of accounts makes a tremendous difference as well. Stone helped one company reduce its chart of accounts by about 80% so they could speed up the close process “without killing their people”. Clear definitions of each chart segment were developed and communicated, thus reducing manual journal entries since there were fewer mispostings. It also helped reduce the excessive number of account reconciliations that were being performed - a great example of how process improvements go hand in hand with data management and governance. Companies often hesitate to thin out their chart of accounts, but it’s critical to achieving data harmonization across the enterprise and simplifying transaction entry.

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There are a host of technology tools that facilitate a faster close. First and foremost, a global accounting integration and reporting platform allows you to standardize the accounting from multiple third-party transactional systems. The ability to bring together financial information from a variety of systems without disrupting those existing offers great benefit to companies with a complex IT environment that have grown through acquisitions, such as Oracle. The ability to adopt such a platform over time without disrupting current processes is also key. Oracle, for example, deployed its Fusion Accounting Hub product as a first step toward moving to a full instance of Fusion Financials, and in the process streamlined the close process by one day.

Integrating Acquisitions at Oracle with Fusion Accounting Hub

Legally combining companies is a very complicated process, especially for acquisitions governed by unique laws and regulations. The acquirer must roll in the acquired company’s legacy systems – including vital operations such as accounts receivable and general ledger - without disrupting day-to-day operations.

These were just some of the accounting challenges facing Oracle, which had acquired over 100 companies since 2005 as part of its strategy to become the #1 software provider worldwide. Oracle’s finance team decided to standardize on Fusion Accounting Hub (FAH) to design a global chart of accounts to manage its business more uniformly, and to lay the foundation for moving to a full Fusion Financials instance. In conjunction, Oracle’s finance team is using Oracle Hyperion Data Relationship Management (DRM) to centralize and automate governance of its global chart of accounts and related hierarchies, which will help the company lower costs and greatly reduce risk.

FAH has simplified the process of consolidating general ledger data. Oracle’s finance teams can submit primary ledgers running in E-Business Suite (EBS) R12 directly to FAH, eliminating the need for more than 90 redundant consolidation ledgers. With FAH, it is also possible to submit incrementally, so if an adjustment needs to be booked in a primary ledger after close, it can be done without reopening it and resubmitting. This affords earlier visibility to period-end actuals during the close, providing management with valuable performance information for decision-making purposes.

You can also use tools that are easy to use and/or already familiar to everyone involved to speed up the close process. For example, the close owner could establish a schedule for close tasks by setting up deadlines in the corporate calendaring app. A certain journal entry must be made by a specific date and time—possibly with a 30 minute grace period. If that entry isn’t booked by the date and time required, that triggers an alert up the chain of command.

Similarly, collaboration tools to enhance communication and accountability can help facilitate a faster close and support other finance activities. At Oracle, the finance team

Choose Technology That Supports Your Streamlined Processes

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is phasing out email altogether as a means of communicating around a variety of critical functions such as the close process and finance transformation initiatives. Instead, they use a next-generation internal collaboration hub, the Oracle Social Network (OSN). Social networks such as OSN that are tied to the transactions themselves can be exponentially productive since finance personnel can immediately see the status of exceptions within context. Responsibility is clearly assigned and schedules can be closely adhered to, and learnings and best practices can be continuously monitored and refined.

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Modern CFOs can dial up the effectiveness of the finance function, which includes improving the close process, by leveraging shared services centers and centers of excellence. Start by asking, “What needs to be very close to the business and what can be handled by a shared services center?” Accenture sees leading companies moving towards the integrated business services (IBS) model, which expands on the traditional shared services foundation of solid service management and focuses on multiple functions with process standardization throughout the organization. With the IBS model, it is not uncommon to find 60-65% of transactional activities in a shared services environment.

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Adopt an Integrated Business Services Model

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An added benefit to shared services can be lowered costs through reduced resource requirements, but the true endgame is to increase efficiency and become a better business partner. To accomplish this, leading companies are moving from shared services to an IBS model. The operational decisions made by IBS organization are no longer focused solely on cost management but are now balanced with the responsibility—shared jointly with the business—for managing risk and driving growth.4 The goal is to provide the analytics, infrastructure, discipline, and expertise necessary to cope with market volatility and associated risks. With that foundation, modern CFOs can make an impact far greater than streamlining the financial close process.

Any mechanism that reinforces ruthless standardization without introducing unnecessary complexity and risk can help finance teams play a more strategic role in shaping the business that goes beyond the necessary but less glamorous

4 “CFOs Benefit from Shared Services Shakeup,” David Axson, CFO.com, March 13, 2013.

financial close. Following the best practices outlined here will help you modernize and speed up your organization’s financial close and help stay nimble in the face of volatile markets and ever-more-complex regulatory demands.

Modern Finance Best Practice Guide SeriesApril 2014Author: Anne Ozzimo

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