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Many senior finance executives say they want their department to play a more strategic role in the management and operations of their company. They want Finance to shift its focus from processing transactions to higher-value functions in order to make more substantial contributions to the success of the organization. I use the term “continuous accounting” to represent an approach to managing the accounting cycle that can facilitate the shift by improving the performance of the accounting function. Continuous accounting embraces three main principles:
- Automating mechanical, repetitive accounting processes in a continuous, end-to-end fashion to improve efficiency, ensure data integrity and enhance visibility into processes
- Distributing workloads continuously over the accounting period (the month, quarter, half-year or year) to eliminate bottlenecks and optimize when tasks are executed
- Establishing a culture of continuous improvement in managing the accounting cycle. Such a culture regularly sets increasingly rigorous objectives, reviews performance to those objectives and makes addressing shortcomings a departmental priority.
Record-to-report is an approach to managing the accounting cycle as a repeatable end-to-end process spanning all of the steps beginning with booking transactions and moving all the way to publishing financial statements; it replaces handling the process as a series of loosely connected procedures. Continuous accounting is an evolutionary step beyond the record-to-report framework. Continuous accounting applies modern finance technology and the more flexible process management techniques it permits to increase both accounting efficiency and finance department effectiveness. It recognizes the need for continuous improvement in managing the accounting function to deal with dynamic business conditions.
Continuous accounting is essential to a strategically focused finance organization. In our research on finance innovation, nine out of 10 participants said that it’s important or very important for finance departments to take a strategic role in running their company. Unfortunately there is a significant gap between this objective and how most of them perform. Almost all (83%) companies perform core finance department functions of accounting, fiscal control, transactions management, financial reporting and internal audit, but only 41 percent play an active role in their company’s management. Just 25 percent have implemented a high degree of automation in their core finance functions and actively promote process and analytical excellence.
Rather than just automating existing practices to improve efficiency, continuous accounting recognizes that longstanding processes may no longer be the best approach because today’s software offers greater flexibility in how and when elements of the accounting cycle are performed. It provides a foundation that enables the finance and accounting organization to better serve the needs of a modern corporation by being more responsive, forward-looking and agile. Moreover, when used as a concept to define and explain a department-wide change management initiative, continuous accounting can facilitate necessary changes in a department’s culture.
As a rule, using software to automate manual tasks improves efficiency and speeds the completion of processes. By eliminating human intervention (and therefore the potential for mistakes and misdeeds), automation can enhance financial control. End-to-end (continuous) process automation is achieved when numbers are entered only once, all calculations and analyses are performed programmatically by the system, and the system manages all workflows. These workflows handle the execution of every step in the same order, enforce approvals and sign-offs and control the roles, rules and responsibilities of those involved in performing the work.
End-to-end process automation improves departmental efficiency. For example, we find that most (71%) companies that automate substantially all of their financial close complete the close within six business days of the end of the quarter, compared to 43 percent that automate some of the process and just 23 percent that have automated little or none of it. End-to-end automation enhances financial control and facilitates audit processes by sustaining the integrity of the accounting data. Data integrity is concerned with the accuracy and consistency of data stored in a system. Properly configured, end-to-end automation enforces data integrity, eliminating the need for extra checks and reconciliations that become necessary when there is no single authoritative source of accounting and process-related data. In contrast, processes that incorporate manual steps (such as performing steps in a spreadsheet and then entering the resulting amounts back into the system) make it possible for errors and intentional fraud to enter the system.
Today’s financial management software offers flexibility that allows companies to reconsider how and when they perform their work. The monthly, quarterly and semiannual cadences of the accounting cycle are not set in stone. Much of what we think of as “normal” bookkeeping and accounting procedures are rooted in the centuries-old limitations imposed by paper-based systems and manual calculations. Periodic processes (performed, say, monthly or quarterly) developed as the best approach to organizing, coordinating and executing the calculations needed to sum up the debits and credits in journals and ledgers. The cadence of these manual systems represents a trade-off to balance efficiency and control. Their timing is the result of having to wait for sufficient volume of entries to justify taking the time to perform manual summations, adjustments and consolidations, while not waiting so long as to jeopardize financial control. Only recently has technology reached a threshold to support transformation of core finance and accounting processes to allow companies sufficient freedom to easily schedule the timing of their accounting cycle tasks to distribute workloads across the period.
The third main principle of continuous improvement is an approach to business process management. It involves ongoing assessments of an organization’s processes and the implementation of changes to improve their efficiency or effectiveness. Continuous improvement works because most often companies must address a set of small issues rather than a single big one to achieve better results. And continuous improvement recognizes that business is not static. As conditions change it’s necessary to adapt and modify processes, policies and procedures.
Continuous accounting is an essential discipline for finance organizations that want to play a more central and strategic role in their company. It provides a foundation for finance transformation and thus can separate innovative organizations and leaders from those content with the status quo.
Robert Kugel – SVP Research
The theme of transforming the finance organization is hot again. The term “finance transformation” refers to the longstanding objective of shifting the focus of finance departments from transaction processing to more strategic activities such as providing the rest of the organization with forward-looking analysis. I focus on the technology and data aspects of this type of business issue in these analyst perspectives because they are usually essential to achieving some business objective. However, technology rarely fixes a problem by itself. If it were a simple matter of just buying software or having better data stewardship, it would be relatively easy to achieve finance transformation. But it’s not simple at all. When it comes to changing how the finance and accounting organization operates, there’s no substitute for leadership. Doing that requires changes in the habits of the department, which include the CFO changing how the department works with the rest of the company.
Our benchmark research on the Office of Finance confirms that most company executives want their finance department to take a more strategic role in running the company. It also shows little progress in achieving finance transformation. To be sure, there are enough examples of the finance organization taking the lead to provide trade publications and vendors with case histories, but for the majority progress has been slight. When we compared the attitudes of executives and managers about the finance department’s performance generally, we found a big disconnect between how well people in Finance think they’re doing and what the rest of the company believes: Half of research participants who have finance titles said that the department plays an important role in their company’s success, but just one-fourth (24%) of the rest of the company said that. In fact, most people outside of the department said that Finance is doing only an adequate job.
As with most situations in business, there are multiple factors that prevent finance departments from becoming more strategic. The accounting close illustrates the range of challenges that finance executives may have to overcome in improving the department’s performance. Closing the books within one business week is generally acknowledged to be a best practice in finance. Yet our research finds that only 40 percent of companies complete the quarterly close in six or fewer business days and 53 percent close monthly in the same period. To accelerate the close, finance executives often must address multiple issues to improve performance.
Technology plays an important role in accelerating the close. Our research correlates using more automation and fewer manual spreadsheets in the close process with closing the books sooner. But that might not be the only thing that’s holding up the close. Another factor – one that’s hard to measure – is the impact of other parts of the business on preventing the department from finishing the process in a timely fashion. For example, nonfinance processes (such as doing inventory) that aren’t completed until the second or third week of the following month may hold up completion. The accounting organization has no direct control over when work performed in other departments is done. And those outside the finance organization may resist making these changes, which may seem to them arbitrary or unwarranted burden-shifting.
Some issues that hold up the close or create avoidable work in finance and accounting departments are not always easy to spot. For example, I recently wrote that companies that have even slightly complicated revenue recognition requirements under the new accounting rules ought to write and manage their contracts with customers with the explicit aim of minimizing the workload of the accounting department. Contracts that are poorly or inconsistently drafted or that do not enforce common language will make finance departments hire additional staff or temporary accountants and potentially delay the quarterly close. In addition, those working outside of the accounting department often don’t realize that they are doing things that complicate the accounting process. This is especially the case when, for instance, data is collected in spreadsheets rather than in a dedicated enterprise system or when the data entered is incomplete, inconsistent or not collected at all. Often, it’s less burdensome to address the source of the accounting hassle at the source. Here is another situation in which leadership matters. Unless the senior leadership team understands the ultimate impact of, say, people not following procedures or neglecting to fill in a couple of fields on a form, it’s unlikely they will be motivated to enforce the changes that must be made. It’s even harder if the CFO does not have a good working relationship with the rest of the organization or cannot effectively communicate the need for change.
A truly strategic finance organization is one that embraces continuous improvement, uncovering the root causes of time wasting activities, addressing them methodically and investing the time saved into finance transformation projects. Addressing the sources of time-wasting finance and accounting processes requires a CFO who is unwilling to accept the status quo and has sufficient interpersonal skills to drive change. The senior leadership team also has to support a more strategic finance department. For example, the CEO needs to make it clear that closing sooner is everyone’s business and with good reason. How soon after the end of a period the finance organization closes its books affects the timeliness of the information it provides to the rest of the organization: In our research, half of companies that complete their monthly close within four business days said the information the finance department provides is timely, compared to just 29 percent of those that take five to eight business days and 19 percent of those that take nine or more business days.
Implementing change in business is never easy. Finance transformation almost always requires fixing information and technology issues, especially those that automate and enhance control of finance and accounting processes. Without leadership by the CFO, though, very little will happen.
Robert Kugel – SVP Research