Remediating financial planning and reporting weaknesses
- Details
- Category: Submitted recommendations
- Published: 12 May 2012
The "last mile of finance" refers to processes that are executed after the financial close, including additional close, reconciliation and disclosure management functions. According to analysts, corporate performance management (CPM) systems have begun to incorporate an increasing number of last mile functions within their suites. These tools can shorten the "close to disclose" timeframe -- how long it takes an organization to produce financial reports for external disclosure.
In recent years, the cost of executing the last mile of finance has increased as regulatory requirements have become more complex. CFOs looking to save money should consider automating the financial reporting process, experts say.
Until recently, the prevailing sentiment among CFOs about the financial reporting process was "if it ain't broke, don't fix it." That process, often called the "last mile of finance," involves all the steps a publicly traded company must take to close its books each quarter, perform accounting reconciliations, prepare consolidated financial statements and publish official documents that explain performance results to the Swiss Financial Market Supervisory Authority (FINMA) and the investing public. According to recent research, companies are now looking at the last mile and concluding it's time for repairs. What has sparked this shift? There's not one big gorilla of a reason. Rather, three issues have converged to form a palpable argument for change.
Last mile costs
First, the costs of financial reporting are going up, in part because disclosure requirements are growing more condensed and expansive simultaneously. After the financial collapse of 2008-2009, shareholders and regulators started pushing companies for increased transparency. The idea was that if companies would tell their shareholders more about how they conduct business, the capital markets would be safer. The intent was noble but the outcome was imperfect. CFOs now say they're stuck dealing with regulatory overkill, and this is sending the costs of financial reporting soaring.
Companies see their financial reporting costs take off as they work to comply with the new rule. Another dimension to the cost picture shows that if steps are taken to make the last mile of finance less labor-intensive, a company can capture significant savings.
A recent research by the APQC (American Productivity & Quality Center) gathered the performance of 148 U.S. organizations with annual revenue greater than $1 billion that took the survey on financial reporting and answered the question about process cost. The results were then sorted into quartiles. The top quartile is the performance level above which 25% of all responses occur. The bottom quartile is the performance level above which 75% of all responses occur. The median is the middle value in a set of values that are arranged in ascending or descending order.
The data shows that the bottom performers spend five times more on the process than the top performers. Surely, this comes as no big surprise. CFOs have known all along that they could capture good amounts of savings if they were willing to invest in process redesign and automation. But until now, the ROI just didn't seem to outweigh the hassle factor. And the absolute cost itself, for many, was simply not blinking red in the grand scheme of things. What has turned things around is that the cost picture, when lined up with two other drivers, spells the need for action. Those two factors are (a) pressure to speed up reporting time and (b) pressure to ensure the potential for error is stamped out.
Cycle time
A recent APQC research demonstrated that when it comes to cycle time, the top performers close their books, perform all the necessary post-close accounting steps and publish official statements in half the time it takes the laggards to do the work. This research indicates that that the top-performing organizations for quarterly cycle time tend to spend less to perform financial reporting per $1,000 in revenue.
Why is faster cheaper? Reduced cycle time mean less time and personnel are needed to complete the close-to-disclose process, thus resulting in lower total reporting costs. In other words, reducing cycle times and minimizing total cost are logically interconnected, and focusing on improving performance in one area will inevitably improve performance in the other area.
Vendors automating the last mile of finance are quick to point out how their solutions help to speed things up and bring costs down. For example, a well-designed piece of disclosure management software will include an automated alert system that tells person B when person A has finished her required link in the chain. Person B cannot get moving until that has happened. Thanks to the software robot, person B doesn't waste time on hold or pestering person A with email traffic asking how she's faring. Everybody involved can do a better job of load balancing and multitasking. Moreover, the software maintains detailed status information on each task in the process: who started his task when, who's in process, who completed her task after having to do a makeover and when was that accomplished, who completed his task without a glitch, etc. The software orchestrates a potentially unruly process and helps senior management ensure that in the end it is well-managed. It's not hard to imagine that a well-designed process and a sound software solution could make the whole shebang faster and cheaper for the CFO of a fast-growing $10 billion company with more than 20,000 employees operating in four countries with four different currencies.
Legal issues
The third and final reason to consider automating the last mile involves a CFO's ability to get a good night's sleep -- that is, without having to worry about accuracy issues. Research from BPM Partners shows that 70% of organizations still rely on spreadsheet as a data source for performance management and reporting, both internal and external. That's a big worry when it comes to the potential for error in official financial statements. Spreadsheet reliance is a notorious reason why errors are introduced into collaborative processes. In the current era of hyper-vigilance about performance reporting by large publicly traded companies, and the punishing public impact of missteps in the realm of accounting -- think of HP's recent woes -- the reasons to repair the last mile of finance are manifold.
