A Step-by-Step Guide to Building a Financial Close Process Acceleration Roadmap Giovanni Perone PwC © Copyright 2013 Wellesley Information Services, Inc. All rights reserved.
Disclaimer PwC is pleased to offer this educational presentation regarding multi-national companies and their use of the SAP General Ledger. Certain matters that will be discussed today represent services that PwC may be prohibited from providing to our audit clients. In those instances, the information is being provided to inform you of options as you assess your company’s approach to tools such as SAP G/L. Independence rules are complex and we recommend discussing all services in advance to ensure they are designed within the context of independence rules. Thank you for joining us today. 1
In This Session … • • • • • •
What is driving the closing process for businesses? Findings from PwC’s third annual financial benchmark study Finance Maturity Model PwC’s SAP SmartClose™ approach Tools to accelerate the close Releasing the value of people, process, and technology Understanding business benefits of SAP General Ledger (New G/L) functionalities Build a sustainable business case for SAP General Ledger
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What We’ll Cover … •
• • • • •
Understanding the context and driving forces for more efficient reporting and closes Putting your business on the front foot Closing the books: Tips, techniques, and best practices Exploring SAP functionality to accelerate the close process Taking a look at a use case scenario Wrap-up
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Context — Root Cause •
Multiple competing reporting requirements Today’s world: Many public and private businesses must fulfill multiple complicated financial reporting packages Required by different regulating bodies at different reporting deadlines A process that is being repeated on a periodic basis (monthly, quarterly, and yearly) This requirement is paired with management’s demand for meaningful insight on corporate financial information tied to figures presented at close
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Context — Reaction •
Constant struggle Consequence: Finance function is in a constant struggle to achieve goals by aligning close process between reporting units and corporate consolidated financial statements And balancing competing internal and external reporting requirements Often, only limited time available to analyze and decide how to leverage technology to facilitate the close process by automating time-consuming accounting activities Results: Requirements and time constraints, leading to mushrooming of auxiliary spreadsheets outside SAP systems These spreadsheets are used to produce the financial close and related analysis 5
Context — Solution •
Remediation In this session, we are going to discuss how to replace the spreadsheets with SAP functions to bring back accounting in your SAP system
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External Driving Forces •
Companies are continuously asked to provide higher quality information faster and more efficiently Converging financial reporting standards from FASB and IASB are evolving and not clear For example: IFRS 4, IFRS 8, IFRS 9, impact of IFRS 10, 11, and 12 with IAS 27, leasing deliberations, and revenue recognition project underway Higher expectations of transparency from banks, venture capital firms, and other financing sources Increased scrutiny from the investment community, with larger penalties for restatements and/or material weaknesses Accelerated deadlines for certified results, and greater complexities associated with multi-GAAP reporting 7
Internal Driving Forces •
Executives are seeking greater insight, rapidly and on demand Greater need from the business to provide critical decision support with timely and accurate analysis Demand for automation and integration within financial systems for tax, management, and operational reporting Increased responsibilities beyond traditional components of corporate reporting, including planning, budgeting and forecasting, and business analytics Expectation to deliver insight into how to interpret data to drive decision making and improved performance
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Driving Force Cost Pressure •
Companies continue to face cost pressures for competitive and economic reasons Cost reduction Executives looking to maintain profit margins demanding better value for the money from finance functions (direct EBIT impact) Quality and controls Pressure to do more with fewer resources without compromising accuracy and control continues Adverse influence Significant overtime, higher turnover, and increased resource replacement costs 9
What We’ll Cover … •
• • • • •
Understanding the context and driving forces for more efficient reporting and closes Putting your business on the front foot Closing the books: Tips, techniques, and best practices Exploring SAP functionality to accelerate the close process Taking a look at a use case scenario Wrap-up
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Putting Your Business on the Front Foot •
Overview Typical finance functions operate at over 40% higher cost than top quartile performers (previous year 60%) Top performers spend less, while sustaining high levels of insight, control, and efficiency 2012 showed an increase of 7% in finance efforts for insights
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Putting Your Business on the Front Foot (cont.) •
Overview (cont.) Around 60% of participants still rely on manual spreadsheet manipulation for reporting Only around 30% of participants have a formalized strategy to align technology to business needs
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Putting Your Business on the Front Foot (cont.) •
Insight Top performing finance teams take just seven days to produce their forecasts. The typical function needs 19 days.
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Putting Your Business on the Front Foot (cont.) •
Efficiency Leading finance teams employ nearly 40% more people in “business partnering” roles And pay around 25% more than typical functions to help attract quality professionals
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Putting Your Business on the Front Foot (cont.) •
Controls Leading finance teams have automated 70% more of their key controls than typical functions
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Interpretation •
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•
• •
Tools, technology, and support services to deliver top-quality finance function performance at lower costs are readily available Shared services are back – Helping to offload some of the day-today routine work to transitional specialist Cost for qualified staff is increasing, indicating that the war for talents is on (again) Still, the spending on IT is not fully paying off How do you make the finance spending sustainable?
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What We’ll Cover … •
• • • • •
Understanding the context and driving forces for more efficient reporting and closes Putting your business on the front foot Closing the books: Tips, techniques, and best practices Exploring SAP functionality to accelerate the close process Taking a look at a use case scenario Wrap-up
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Closing the Books A.
B.
C.
Close-to-report process starts with transaction accumulation and sub-ledgers close Corporate close includes the close of business units general ledger, adjusted trial balance, and consolidation of financial statements Cycle concludes with analysis, reporting, and filing of the financial statements, also known as the final mile
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Days from Close to Report • •
Average closing cycle takes 8.2 days Regulatory requirements lead to an increase in days needed for closing process Average Top Bottom Days Quartile Median Quartile Monthly 8.2 5.0 7.0 10.0 Quarterly 12.1 6.0 10.0 15.0 Yearly 27.6 10.0 17.0 32.5
Min. 1.0 1.0 1.0
Max. 30.0 63.0 270.0
Source: PwC Global Practices Benchmark, 2011
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Finance Maturity Model
•
Objective Standardization and automation of processes has a higher degree of efficiency with lower total cost of administration How do you assess your finance organization in regards to efficiency and effectiveness?
Days to Close
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Sub-optimal Good Practice Best Practice Cost of Close
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Finance Maturity Model (cont.) •
Sub-optimal Financial close takes longer than average Limited strategic financial vision Significant amount of manual entry Processes subject to numerous adjustments Non-standardized business processes Heavy dependency on overtime and “heroics” each month Certain management reports are not available, and therefore, need to be developed ad hoc No insight or data modeling Limited automation Unmanaged, multiple versions of the truth 21
Finance Maturity Model (cont.) •
Good practice Financial close is at or below average Financial strategic vision set Manual entries are manageable, near average Some business process standardization Automation of targeted areas Staff spends time on close and analytics Business insight on spreadsheets Some business modeling Monthly management reports assembled Multiple versions of truth, but managing 22
Finance Maturity Model (cont.) •
Best practice Close process near top quartile Finance vision aligned with corporate strategy Staff focused on continuous improvement Finance serves as true business partner Business processes are standardized Automation of time-intensive processes Business insights and scenario-based modeling Single version of the truth Monthly management report packages address management needs 23
Assess Close Process • •
Use the closing pipeline as the starting point Key questions are: How do you work today? What are your current pain points and bottlenecks?
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Assess Close Process (cont.) •
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Identifying the Critical Accounting Policies and Estimates (CAPE) is key for accelerating the close Key questions are: How do you handle them today? What are the dependencies in regards to CAPE information?
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SmartClose™ for SAP •
•
Achieving sustainable improvement in the close-to-report cycle requires a holistic approach that considers factors across all business dimensions The following dimensions need to be assessed: People Organization Technology
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Dimensions and Assessment Criteria — People •
Are the resources and financial talents of the organization high performing? Evaluate roles and responsibilities in the organization Review closing calendar; determine whether or not defined milestones support accountability Evaluate workload distribution and resource alignment Determine effectiveness of communication throughout the organization Measure performance and rewards
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Dimensions and Assessment Criteria — Organization •
Are financial processes streamlined, simplified, and standardized throughout the cycle? Determine effectiveness of sequenced activities, and whether or not work is performed away from the close Evaluate appropriate use of estimates and materiality thresholds Review issue resolution process and determine effectiveness of root cause analysis Assess the quality and value of the monthly cash-to-receive cycle
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Dimensions and Assessment Criteria — Technology •
Are the capabilities of systems and tools properly leveraged? Identify opportunities to further leverage technology Evaluate employee technology proficiency for the current systems or applications Determine whether or not intensive manual activities are automated Evaluate the use of data to appropriately meet organization reporting needs Leverage tools to track status real-time and promote accountability
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Leading Practice for Close at Work Day 5 Day Activity Complete
Production/Process Order Closure
-1
Payroll
-1
Inventory
-1
Material Close
0
Accounts Payable
1
Fixed Assets/Depreciation
1
Cash
2
SG&A Accruals
2
Revenue
2-3
Operational Costs
2-3
Accounts Receivable
2-3
Intercompany
Close Process
Close Activity
3
Legal Entity Ledger Close & Review
3-4
Consolidation Activities & Review
4-5
Management Reporting
7-8
WD5 30
What We’ll Cover … •
• • • • •
Understanding the context and driving forces for more efficient reporting and closes Putting your business on the front foot Closing the books: Tips, techniques, and best practices Exploring SAP functionality to accelerate the close process Taking a look at a use case scenario Wrap-up
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Common Characteristics of Optimizing Close • • • • • • •
Smart use of accruals and estimates Proactive issue resolution and error correction Streamline transaction processes Automation or elimination of manual entries Elimination of non-value-added activities Automation of reconciliations Elimination of duplicate data entry
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Common Characteristics of Optimizing Close (cont.) • • • • • • •
Utilization of materiality thresholds Workload distribution away from period end Accountability and enforced deadlines Publish the closing calendar and track status Cross-trained finance personnel Clear and regular communication Continuous process improvement
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SAP Functionality to Accelerate the Close •
Several automation tools are positioned to assist organizations with accelerating the close process 1. Financial Closing Cockpit 2. General Ledger 3. Enablement for Financial Shared Services 4. Business Planning and Consolidation 5. Improved Analytics through HANA, BI Accelerator, Xcelsius, and Crystal 6. Optical Character Recognition and Data Entry tools in Combination with workflows 7. Disclosure Management and XBRL 34
SAP Functionality to Accelerate the Close (cont.) •
Several automation tools are positioned to assist organizations with accelerating the close process (cont.) 8. Mobility 9. Intercompany Transfers 10. Accrual Engine 11. Credit Risk Management 12. Financial Supply Chain Management 13. Local Chart of Accounts (CoA), Operational CoA (Company Code), and Group CoA
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What We’ll Cover … •
• • • • •
Understanding the context and driving forces for more efficient reporting and closes Putting your business on the front foot Closing the books: Tips, techniques, and best practices Exploring SAP functionality to accelerate the close process Taking a look at a use case scenario Wrap-up
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Use Case Scenario •
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Outline For this exercise, assume the close and consolidation process does not meet the needs of the business People Controller’s resources were primarily centrally located in Corporate Headquarters Resources were involved in the close and consolidation of multiple manufacturing operations Close process was characterized by tight deadlines, numerous manual adjustments, and excessive use of spreadsheets A series of complex reports are produced for both management and external purposes 37
Use Case Scenario (cont.) •
Organization Tasks within the close-to-report process are not efficiently sequenced Produces many post-close adjustments and a confusing number of financial statement versions Estimates and accruals are difficult and time-consuming Insufficient time is available for review and reconciliation, leading to inaccuracies in the first reporting package Significant reliance on spreadsheets produces multiple versions of the truth
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Use Case Scenario (cont.) •
Technology Current systems environment includes both SAP and a planning/forecasting tool Significant issues arise from manual system interfaces and inconsistencies of data between systems SAP’s capabilities are under-utilized An assessment of the SAP functionality in use and a gap analysis to leading practices is expected to reveal significant opportunities for improvement
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Use Case Scenario (cont.) •
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Goal Enhance the close-to-report cycle to improve the quality of financial reporting Objectives Streamline and automate manual tasks, utilizing SAP functionality where appropriate Reduce or eliminate errors and post-close adjustments Reduce reliance on spreadsheets and improve standardized reporting Identify and implement “Quick Wins” during and throughout the work Re-sequence close schedule activities so that more time can be focused on “Analytical Review” of results 40
Scoring and Prioritization •
Summary of opportunities to accelerate the financial close processes prioritized by potential of acceleration and ROI Identify the observations with the biggest impact
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Change and Improvement Opportunities •
After the assessment, the following opportunities for improving the close process have been identified: 1. Opportunities exist to automate existing discrete manual processes using existing SAP functionality 2. Opportunities exist to accelerate cut-offs to create more bandwidth for review time during the close 3. Existing systems and related interfaces are not fully optimized, often requiring manual upload, balancing, offline calculations, and manual reconciliations 4. Multiple processes within corporate and at the reporting units can be accelerated to pre-close to achieve greater bandwidth for review 42
Change and Improvement Opportunities (cont.) •
After the assessment, the following opportunities for improving the close process have been identified: (cont.) 5. Month-end reporting is a cumbersome process with multiple data sources, formats, and manual tasks required 6. Over-utilization of systems requires inefficient manual uploads to enable analysis and under-utilization of technologies with higher degrees of automation 7. Develop long-term, technology-enabled roadmap 8. Implement long-term, technology-enabled business strategy 9. Users are not familiar with SAP functionality
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Scoring and Prioritization — People Dimension •
People opportunities Standardization and automation SAP end-user training
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Scoring and Prioritization — Organization Dimension •
Process opportunities Move forward closing activities that are not strictly tied to the closing date Harmonize data sources and formats
Organisation
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Scoring and Prioritization — Technology Dimension •
Technology opportunities Automate existing interfaces for data transfers and uploads, and eliminate source of errors at the data source Monitor regulatory and IFRS developments in regards to technological solutions for early adaption and continuous process improvement
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Possible Benefits •
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Increased amount of time available to review results during the three-day close Streamlined several manual tasks through automation and leveraging of SAP ERP functionality, such as service procurement and accrual Re-sequenced several close activities, such as moving Accounts Payable (A/P) to Work Day 1 Reduced reliance on spreadsheets and leveraged more standardized reporting Created a foundation for future continuous improvement activities Improved the business user community’s knowledge of SAP Prepared the organization for longer-term technology enablement 47
What We’ll Cover … •
• • • • •
Understanding the context and driving forces for more efficient reporting and closes Putting your business on the front foot Closing the books: Tips, techniques, and best practices Exploring SAP functionality to accelerate the close process Taking a look at a use case scenario Wrap-up
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Where to Find More Information •
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Putting your Business on the Front Foot: Finance Effectiveness Benchmark Study 2012 (PwC, January 2013). Drifting or Driving? Finance Effectiveness Benchmark Study 2011 (PwC, 2011). SAP Release Strategy for All Major Software Products. Status: March 2013, published by SAP https://websmp205.sap-ag.de/releasestrategy * SAP Note 1070629 – FAQs: New General Ledger Migration
* Requires login credentials to the SAP Service Marketplace
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Where to Find More Information (cont.) •
PwC Open University A free online library of executive business courses developed by PwC thought leaders Open access to PwC insights on current business issues – with free CPE credits! More than 280 virtual courses covering multiple industries and topics www.pwc.com/openuniversity
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7 Key Points to Take Home • •
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Accelerating the close process is about aligning people, organization, and technology Starting point and clear-cut definition of end state are important for scoping the functionalities in SAP to accelerate the close process Opportunity to integrate information into the ERP system and streamline business processes A project to optimize the close process can be started at any time (except maybe for the year end) Increase your level of comfort over controls and take IFRS development into consideration for continuous improvement Opportunity to develop finance staff in regards to business analytics Clear communication is key 51
Your Turn!
How to contact me: Giovanni Perone
[email protected] Please remember to complete your session evaluation 52
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