Sunday, December 12, 2010

Speed up your close


It’s been 10 years since companies like Cisco pushed the financial close envelope to its limits and set out-of-this-world standards for closing their books within 1 hour.  Cisco was one of the leaders in the “virtual close” space moving from a 14 day window to being able to close their books and produce consolidated financial statements within hours.  As a result, they cut their finance costs in half and were able to provide Cisco executives with the data they needed to achieve sales targets, manage expenses, and make daily decisions that resulted in increased shareholder value.  

In the last 10 years, much has changed in the world of finance.  In addition to the global financial crisis, finance outsourcing and off-shoring has become a large topic.  As a result of this, many finance operations have been significantly downsized; complicating the picture still are a set of accounting rules and regulations that are becoming more complex.   Data from BPM International suggests that while some improvements have been made to average close cycle times, significant improvements have not occurred.  Further, the data suggests that for leading companies, many have actually increased the number of days it takes to close.  

This article highlights several aspects of a financial close improvement program. If you have not reviewed your close cycling with an eye toward efficiency, now is this time. 

How fast should I close?

Research by the Hackett Group indicates that the top 10% of global companies close their books internally within five days.  Further research by BPM International indicates that there is a direct linkage between the number of days to close and the health of the finance group, finance processes and systems that support the financial close.  If your close is taking longer than 30 days, there are significant issues, in plain sight or hidden, within the financial close process. 

Benefits of a faster close

In addition to the cost benefits due to the reduction of manual input and reconciliation, a faster close supports better decision making due to timely access to information.  This allows managers to work from the same set of facts.  Since the data is timely and consistent, proper behaviour can be measured throughout the organization.  Shareholder value is increased as more time is allowed for analysis of market opportunities since time spent performing the close is reduced.  

Financial System Changes

One of the key aspects of Cisco’s success is that they adopted a fully automated financial system through their organization.  The solution was fully integrated and included an automated financial consolidation system.  

Cisco also implemented an automated intercompany accounting system which allowed transactions to occur between entities without the need for accounting and finance intervention. 
The final aspect to Cisco’s strategy was leveraging an online analytical processing database that allowed users to run their own ad hoc queries and analysis.  This OLAP engine had a web portal front end that also allowed for a central distribution of reports.  

Cisco’s strategy serves as a model for companies improving their systems with reduced financial close as the goal.  In summary, the financial systems strategy goals are:
  • Fully automated financial system including automated financial consolidation system
  • Automated intercompany accounting system
  • Online analytical processing database
  • Web portal

Close Calendar

As a finance leader, ask yourself the following questions:
  • Do you have visibility into the close cycle?
  • Do you have a standard close checklist? Can you evidence that your staff uses it?
  • Has the checklist been reviewed in the last year?
  • How are issues captured and resolved?
  • Do you feel like there is accountability and ownership for all close activities?
If you don’t have a flight plan, how will you arrive at the right airport on time?  Developing a close calendar can provide finance with the ability to identify dependent sources of information for key activities and track progress against milestones. Additionally, assigning ownership to individual tasks can help improve status reporting and accountability.

The close calendar displays the key events that occur every month during the company’s monthly financial close process. Each month’s closing schedule follows a recurring pattern that involves the first few working days of the month. Everything else follows from that.  Each task should have an owner so accountability can be achieved. 

Exam your policies

  • Are the policies and procedures accessible to all relevant employees?  Is there a single version of the truth?
  • Are manual processes documented?  Are they sustainable?
  • Are policies linked to procedures and procedures linked to activities?
Finance governance is difficult to achieve if everyone is not fully up to date on what the processes and procedures are.  As a finance leader, it is difficult to hold people accountable when process bottlenecks and procedure breakdowns occur if you don’t know who to hold accountable.   Utilize a web portal to communicate current policies and procedures and make sure the web portal contains the most up to date versions. 

Internal Control Holdup

  • Have you examined your control environment recently in light of potential changing materiality (due to financial crisis)?
  • Does clear accountability exist for control performance?
  • How is control performance and review tracked and managed?
A high percentage of key and entity-level controls relating to the financial close are usually tested as part of Section 404 compliance. If your external auditor is not comfortable with the governance of the financial close and consolidation process, the company can quickly be exposed to a risk of a material weakness. Strong entity-level controls enable a company to manage the process with a smaller set of controls, permitting greater internal process efficiency and significantly reduced time to close. 

Summary

Financial close excellence is achieved when people, process, and technology are combined to optimize and streamline financial close processes.  The results are lower operating costs, increased business performance, avoidance of risks, and increased visibility into market opportunities. 

Thursday, December 2, 2010

99 Day Plan for New Finance Execs

Several surveys conducted over the last few years indicate that there is pent-up-demand in the workforce with people dissatisfied with their current roles.  As the global economy continues to rebound from a deep recession, opportunities to take on new challenges will appear.  Whether you are moving to another division in your current firm or you are taking on a new role at a new company, you will need a strategy to hit the ground running.  Here are some of the tasks that should fill your first 99 days.

Understand, Formulate, Implement

Whether you outline a 99 day plan, a 90 day plan or a 100 day plan, the basic outline is the same: spend the first 3rd seeking to understand, listen, confirm and ask probing questions in order for you to determine what strategically and tactically needs to happen; spend the second 3rd formulating your strategy and confirming it with your sponsors, your peers and your team; and spend the last 3rd beginning to implement your strategy.

Understand: Confirm How Value Is Created

Joining at any level and any leadership position requires that you understand how value is created at your firm.  In short, how does the company make money?  Assuming you joined from an outside firm, it is likely that you have a general sense of what the company does.  After all, as part of the interview process, a review of the company’s website, 10k, press releases, and a few analyst reports would have been in order.  But there is nothing like being able to see how the company really works from the inside out.
The key question to ask is “how does the company create shareholder value and what is the best way for my group to support that mission”.

Understand: Get to know your stakeholders

Surveys indicate that when CFO’s reflect on their time in roles, the one thing they wished is that they had spent more time with their peer group in the first 99 days.  During your first day, set meetings with the following groups of people (in descending order of priority):
  • Business Unit Heads
  • CEO
  • Finance Staff
  • Executive Committee
  • Board of Directors
  • Investors/Analysts


You need the support of your peers in order to implement the strategic changes you are likely to make.  Spend some time proactively understanding what their pain points are, who you can rely on, and what the various personality types are.
Getting to know the CEO and how your vision integrates with his vision and working style is next on the list.  As equally important as understanding your boss is understanding your own team.  People (more so than process and technology) largely dictate the success or failure of an organization.  Take inventory of who are your stars are and where you have weaknesses on your staff.  Gauge whether the weaknesses are correctable or not and begin to counsel those individuals out that aren’t a fit for your new team.

Understand: Expectations

Surveys indicate that the CEO expects the CFO to (order of importance):
  • Being active member of senior management team
  • Contributing to company’s performance
  • Ensuring efficiency of finance organization
  • Strengthen Core Team


When polled using the same questions, finance staff responded with the opposite priority list.  This is an important distinction of expectations that should be an input into your strategy.

Formulate: Clear and Simple Communication

As you formulate your strategy and seek to confirm your plan in the 2nd month, remember to communicate simply and clearly.  Backing up insights with hard facts is great but PowerPoints filled with tables of numbers rarely impress.  Place a high level of importance on making your leadership messages clear and simple to understand.

Implement: Ruthless Execution of Quick Wins

As you transition into your 3rd month, you are likely to have formulated your strategy and have begun to implement key provisions.  If you’ve identified any quick wins, use this time to ruthlessly execute those and celebrate your victories.