"The problem AND the solution always begins with the person in the mirror." To unlock efficiency, we must first recognize that we are the solution.
EXECUTIVE SUMMARY
Unlocking the Potential: Saying Goodbye to Inefficient Month-End Reporting
Just as spring cleaning freshens our homes and planned maintenance keeps factories running, finance professionals too must rejuvenate their processes. In the world of finance, a cumbersome month-end close process can hamper value addition. The transformation from a tiresome close to a dynamic, real-time system begins here.
Old Paradigm: The Cleanup Conundrum
In the realm of finance, practices often get burdened with band-aid solutions triggered by acquisitions, compliance demands, and the ever-looming audit. We have inherited the belief that "it's always been done this way," accepting inefficiencies as the norm. But real change starts by looking in the mirror.
"The problem AND the solution always begins with the person in the mirror." To unlock efficiency, we must first recognize that we are the solution.
The Heart of the Matter: Changing Perspective
A fundamental shift in the way we perceive finance processes is the key. Our training has instilled the ritual of closing the books, focusing on significant dollar items, and tolerating small imbalances. But we can break free from this cycle.
The Balance Sheet Dilemma
The focus on balance sheets is imperative. While we agree that estimates and judgments are part of finance, not addressing the balance sheet can lead to inaccuracies and errors. Ensuring the accuracy and support of balance sheet accounts is the foundation for error-free financial statements.
Financial Reporting: A Continuous Discipline
Regulatory requirements may demand quarterly reporting, but we propose a monthly discipline. Treating each month-end close with the same rigor as a quarterly report keeps our practices sharp.
Shifting the Paradigm
Finance processes should be effective, efficient, and logical. The ultimate goal is to create processes that function seamlessly and eliminate the need for spring cleaning.
Our upcoming articles aim to foster a paradigm shift in the world of finance. It's time to move from being back-office paper pushers to front-office support systems, contributing real value to organizations. A balanced approach, combining robust internal controls with value-added analysis, can drive continuous positive cash flow and create a brighter future for finance functions.
INTRODUCTION
The wages of sin may be death, but nothing kills the usefulness of reporting, like a slow and valueless month-end reporting process.
Welcome to the end of the inefficient and dreaded month-end close process and to the beginning of the new paradigm in value added finance and the non-event of a month-end close process.
SPRING CLEANING...WHY DO WE DO IT?
Many home owners are familiar with activities of organizing our homes and performing an annual ritual of spring cleaning followed by yard sales and donations to rid ourselves of unwanted items. Similarly, those of us who have worked in companies with manufacturing operations are familiar with the annual shutdown of plants to perform planned maintenance and other repairs, as needed. Many accountants also perform a similar spring cleaning exercise or initiate maintenance processes, but it is often called by another name.
Each of us can attest to band aid solutions put in place as a result of acquisitions, divestitures, compliance and regulatory reporting, tax reporting, etc. In such cases, we had to improvise to ensure we could perform the essential accounting function of closing the books; albeit often in an untimely manner, but within a timeframe to allow auditors to audit the consolidated financial statements to be released to the public. Are we predisposed to letting issues build up leading to the need for periodic cleanup activities? It appears our paradigm is set to focus on just getting things done, often inefficiently based on what we have inherited with the reasoning of “that’s the way it has always been done”, “this is good enough…for now”, OR “it can be fixed later”, and not necessarily creating lasting processes that continue to move finance activities towards a more accurate, value-added, and continuous improvement path. We should not just seek to find out WHAT the problem is, but also WHO is the problem, as the problem AND the solution always begins with the person in the mirror. Excuses and pointing at others or processes for the reasons why things are inefficient or ineffective, never solve the issue, unless we first look within ourselves and realize we are the solution.
We acknowledge that this may be difficult for many to accept as no one works in a vacuum and therefore we all need to depend on others to get work done and accomplish certain tasks. However, our view is that even in such cases, it is more effective when you have an attitude which drives action to do your part in improving the process or assisting others in doing so. This inevitably benefits the company as functions such as finance provide increased value. We believe that this is more rewarding than the alternative of having a defeatist stance on why we are ineffective and inefficient in getting things done.
When We Change The Way We Think, The Things We Think About Also Change
Despite our focus on activities at or leading up to month-end reporting, this publication is more about changing the way finance professionals view the activities that are necessary for the preparation of accurate and timely reporting of results.
We have been programmed from our formal training and experience to focus on closing the books as a ritual, and to maybe occasionally or annually look at significant dollar items and the small differences between account balances and their reconciliations to clean them up and start anew. We sometimes even use terms like “materiality” to assure ourselves that it is not a worthwhile effort to improve accuracy or to reduce our error rates. Should we not know that the account balances are accurate or reasonably so, instead of continuing to transact and having to wait for the month-end close process or clean-up (sometimes coinciding with the arrival of auditors) to provide certainty which invariably is almost always not completely accurate, but hopefully not materially inaccurate?
How often have you had to ‘clean the balance sheet’ or “scrub the balance sheet”? Does your finance team refer to “soft close” and “hard close”? Can anyone say to us “upon merging with or acquiring a company, the balances were appropriate and reasonable 100% of the time”? If you have, then we would argue that your definition of ‘reasonable’ deserves a review. Some may argue, “Why should the balance sheet be cleaned or remain clean, when it is a fallacy to believe that with so many estimates and judgments, that a balance sheet can ever be truly clean”? While we share the concern and the view that estimates on significant and material balances are indeed common place, we assert that not focusing on the balance sheet can lead to more inaccuracies and material errors and hence the focus on balance sheet accounts is the ONLY way to ensure financial statements are free from material errors; albeit arguably so, given the judgments involved. Of course, most know that we are true believers in the fact that CASH FLOW is the only true measure of financial effectiveness and health of a company. However, despite the fact that cash management can benefit from some spring cleaning, we are dedicating this series of articles to other aspects of the finance function activity and will ensure to dive deeper into cash management in future articles.
We, along with many others, believe that if you have ensured that the balance sheet account balances are appropriate and sufficiently supported, the fall out of any differences MUST be in the Statement of Comprehensive Income or Profit and Loss Statement (“P&L”) and the only issue you should then have is whether the amounts were recorded in the correct P&L account and/or reported on the correct P&L line item. We would like to emphasize that reporting amounts on an incorrect P&L line item is not effective or acceptable and therefore we should always analyze the P&L line items to ensure amounts are classified correctly and consistently.
The focus on the financial processes of organizations should be to create processes that are logical, effective and efficient
It goes without saying that the focus on accuracy of reporting is a daily task and begins with each transaction and the processes, controls, AND more importantly, the PEOPLE in place to ensure that every transaction is appropriately recorded. Our view is that while from a regulatory standpoint, the focus should be at least quarterly, we recommend monthly, as it should be part of a Finance team’s ‘modus operandi’, to create a discipline of treating every month-end financial close process with the same focus on accuracy as you would in preparing for quarterly financial reporting. The practice of doing this monthly is a good way to ensure that these good practices are routine and as the old adage goes “practice makes perfect”, though we prefer a slight change to this adage with “practice makes improvement”, as no one or process is perfect; and one can always improve, no matter how efficient a process. Our view is not based on theoretical thoughts of what could work, but of proven changes in thinking and processes that we have implemented and have seen clear and visible benefits based on these simple changes.
The Paradigm Shift In The Way We Think And Do Things
The focus on the financial processes of organizations should be to create processes that are logical, effective and efficient. If we create a culture of creating such processes we would not need to spend time on spring cleaning activities. While the list of activities in this article is broad, it is not exhaustive. In our experience, we have had to address some of these due to existing practices to which we believe you can relate. If you take away anything from this article, you should be reminded that all we are trying to achieve is to make the Finance function worthwhile and contribute real value to organizations.
Having untrained people with inefficient processes only leads to the daily churn with no actual benefit received by management to assist in making business decisions, as most of the time is taken up in reconciliations and checking/ticking boxes to ensure internal control procedures are met. While all of this is important from a regulatory and practical standpoint, it does very little in assisting management in creating value for shareholders. This is why a paradigm shift in behaviour and thinking is paramount to changing Finance functions from back-office paper pushers to front-office support systems. The key is to find the balance and ensure that effective and efficient internal controls are in place to allow finance professionals to spend more time on value-added analysis in support of the business in meeting its goals of continuous positive net cash generation.