Speed and Accuracy in the Financial Close Process

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A collaborative effort

A CFO and his team working for a large Global MNC concluded the annual financial close process in record time post the end of the Financial Year.  Having implemented an ERP system, they could finalize their books within 10 days post the financial year end.  A lot of hard work, collaboration and burning the candle late into the night led to this achievement.  As a team they relished the moment. Mails, and appreciation notes were exchanged congratulating the team efforts. More importantly, they could honor the timeline commitment given to their board around the finalization of the Accounts and that was a great achievement.

However, within the mind of the CFO, the answers to certain questions remained unclear:

  • Whether the close process and the steps undertaken were accurate?
  • Could the numbers be trusted as there had been a lot of dependence on manual workings using spreadsheets outside of the ERP system?
  • Had they missed any material accounting effect that the auditors might notice?
  • Were there any near misses or lapses in the Internal controls that had gone unnoticed?
  • Would the statutory auditors, analysts etc. highlight any areas of concern in the close process?

Financial close or Annual Close are a collection of tasks that are meticulously performed to mark the completion of the Financial Period for which the Financial Statements are to be published.  It involves close collaboration with extended teams spread over time zones and in many cases also involving hybrid application landscapes.  The timing of this important milestone can ensure the conduct of the Annual Shareholders meeting.  As a part of the close process, various steps as below are systematically executed:

  • Co-ordination within team responsible for the Legal Entities within the Group.
  • Collaboration with multiple stakeholders within the company for necessary data/information.
  • Understand shareholding patterns in case of complex cross holdings
  • Accounting for all transactions for the Financial Period under consideration
  • Inter-company Accounting and Reconciliation
  • Account balance substantiation
  • Transfer pricing adjustments and Profit Reserve calculations
  • Closing of Sub ledgers, Subsidiaries etc.
  • Bank Reconciliations, Business Partner outstanding balance confirmations
  • Group Consolidation
  • Compliance with Account Standards (IFRS, Local GAAP etc.)

This is an activity that involves close collaboration between the CFO’s office and the other key stakeholders within the company or at times involving external business partners (Suppliers, Customers, Financial Institutions) as well. For example, seeking balance confirmations, bank statements, pending invoices for goods and/or services received etc.

The CFO provides a timeline to the board on the date by which the Audited Financial Statement will be ready.  Alternatively, the Board may direct the CFO to help complete the finalization of the accounts by a certain date.  This is to help plan the next steps in terms of the Annual Shareholders meeting in case of public listed companies and other resultant activities like press releases, analyst briefings and strategic announcements.

Historically much of this Financial close activity has been manual involving extensive work using spreadsheets etc.  This involved considerable time and effort after the completion of the Financial Year by when, the audit could be completed, and the Financial Statements published.

However, with the implementation of Enterprise Resource Planning Solutions (ERP), one of the Key Result Area (KRA) highlighted was ‘Reduction in the time to close the Books of Accounts’.

Many of the ERP vendors including customer who had successfully implemented ERP solutions went on record to state benefits derived from the reduction in the number of days in closing the books of accounts after the end of the financial period.  This was one amongst their severable key success areas post the automation of the core business processes on the ERP platform.

It was however noticed that even with automation using ERP systems of the core business processes, practically a lot of activities as a part of the period close were still manual:

  • Manual co-ordination of the financial close activity
  • Spreadsheets
  • Phone Calls
  • Emails
  • Delays in the receipt of external data for the purpose of reconciliation
  • External Auditors increasing the depth and scope of the audit

With the help of IT departments, some organisations, have developed custom solutions and programs to help them with reconciliations that required passing suitable adjustment entries as required.  Some automated their satellite processes with standalone systems that led to data accuracy challenges and concerns.  In some cases, it involved manually moving the financial data out of the ERP system into standalone automation solutions and performing the close activity in those systems and the resultant Financial Statements are prepared manually outside of any system.

The adjustment entries were then accordingly posted back into the ERP system in a special adjustment period configured for the purpose. This helped companies close their books faster.  However, the point around need for more TRUST and CONFIDENCE remained.

An efficient financial close process is where along with speed one can also ensure the accuracy throughout all the steps performed. This in today’s time can be achieved with proper automation of the entire process.  As an example, let us try and understand the SAP solutions that help automate the process of financial close.

The solutions and the steps involved are purpose built to ensure with minimal manual intervention the complete financial close lifecycle from record to report can be efficiently handled to help timely publication of the financial statements in a compliant manner.  This is irrespective of whether the core financial and account operations are automated on Cloud, On Premise or Hybrid.

The following diagram provides a glimpse into how this is achieved using the right combination of SAP Solution offerings.

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End to End Process Record to Report

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Real Time Monitoring of the Close Process

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Financial Statement Disclosure

Irrespective of the size and the complexity of the business operations, the objective of the above approach is to help automate and ensure the best practices in the financial close process.  Some of the benefits are as under:

  • Accuracy of the base financial data though real time accounting and auto replication where necessary using the power of S/4 HANA Cloud or On Premise.
  • Automate Inter-company Matching and Reconciliations with Blackline solutions for SAP.
  • Automate Account Substantiation to ensure all adjustments are duly accounted for and the balance is accurately represented with the help of SAP Account Substantiation and Automation by Blackline.
  • Automate the collaboration of the activities in the close process thus doing away with external mediums like spreadsheets, emails etc.
  • Ensure compliance to Accounting Standards / Guidelines like IFRS and local GAAPs.
  • Automate the publishing of the Financial Statements thus minimising the administrative efforts involved in the process.

It will be interesting to see how this automation capabilities around financial close processes evolve further.  Financial close could be a part of Shared Services or handled by Finance and Accounts function, but irrespective, the technology supporting the financial close process can be a centralized platform for orchestrating the activities involved in the close process. Improved efficiency and accuracy can be achieved by:

  • incorporating Robotic Process Automation, Machine Learning, Artificial Intelligence etc. to drive greater efficiencies and insights.
  • providing a Single Source of Truth for the Financial Close Process and incorporating embedded audits.
  • automating the disclose process of financial statements

All these enhanced capabilities can help provide greater confidence in the close process, thus establishing Efficiency and Trust in the entire process.

For more information on the above SAP solution offerings and approach to help drive efficiency and accuracy in the end to end Financial Close process Click Here

I will be interested in learning from opinions, experiences, and feedback on the above.  Thank you for taking time out to read the above perspective.

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1) read the SAP S/4HANA Finance topic page

2) ask your question here

3) read other blog posts on the topic.