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May 9, 2019 - Traditional hard close ... reconciling cash on a daily or weekly basis could be beneficial. ... When moving from a hard to soft close (c...

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Modernizing the Financial Close Process Presenter: Sandra Schwarzen, CPA BizOps, CFO WEALTH ADVISORY | OUTSOURCING | AUDIT, TAX, AND CONSULTING Investment advisory services are offered through CliftonLarsonAllen Wealth Advisors, LLC, an SEC-registered investment advisor

In this session you will: – Understand the importance of the financial close – Understand the different types of close processes – Learn ways to improve the process with best practice and technology

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Session Objectives

• To create periodic financial statements and reports which will provide key data to support fiscal monitoring and decision making and prevent costly mistakes. – Timely – Accurate

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The Financial Close - Why

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Recent survey by The Hackett Group reports: 1. 28% of respondents trust the numbers reported in month-end close 2. 90% of respondents are under pressure to close faster 3. About 39% of respondents are satisfied with the time and quality of their closing process 4. Nearly 70% of respondents report that manual processes are still the biggest bottleneck in the financial close process

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• • • •

No defined close process Not enough automation No access to real-time data Poor integration with plan and actual data • Manual creation of Financial Statements Create Opportunities

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Signs that your Financial Close Process May be Broken-

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• Traditional hard close

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Determine the Type of Process – All closing processes are held until the month is complete – Can be inefficient and time consuming causing delay’s or errors in reporting

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• Soft close

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Determine the Type of Process (cont.) – Allows the organization to tailor the numbers reported on a monthly basis to its key performance indicators – Eliminates the need (or uses estimates for) a host of accrual, allocation, reconciliation, contingency and reserve accounting entries – The need for monthly GAAP-based regulatory compliant financial statements is called into question Create Opportunities

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• Continuous accounting

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Determine the Type of Process (cont.) – Allows the organization to move from laborious and error prone manual process to a technology driven process – Embeds automation, control and period-end tasks within day-to-day activities – Distributes workload more evenly than the traditional hard close process and it enables constant reporting, verification and analysis Create Opportunities

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Design and publish a close calendar – Clear assignment of duties and due dates of deliverables, for finance and non-finance participants. – Should provide contact information for escalating problems during the close process.



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Best Practice – The Hard Close

Record daily operational financial transaction – Control processes and procedures should be integrated into daily operations to facilitate a quicker and more accurate monthly close. – Key control processes should be documented and tested to measure effectiveness. – Activity should be recorded as it happens rather than waiting until month end.



Reconcile accounting system modules and subsidiary ledgers – Build daily processes that capture, reconcile and record summary data from stand-alone systems and the general ledger. Create Opportunities

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Record monthly journal entries – All recurring journal entries should be automated if the general ledger system allows.



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Best Practice – The Hard Close (cont.) Reconcile balance sheet accounts – Reconcile cash accounts first. Since cash is part of most transactions this is one of the easiest ways to locate missing or incorrect entries. If there are a large volume of transactions reconciling cash on a daily or weekly basis could be beneficial.



Review revenue and expense accounts – Review revenue and expense accounts for accuracy. – Check expenses to determine if they have been recorded, at accurate amounts and in the correct period. – Review and compare actuals to budget. – Track KPI’s to help identify issues Create Opportunities

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Prepare financial statements – Prepare financial statements through the accounting system. If statements must be created outside of the system explore system upgrades.



Management review –



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Best Practice – The Hard Close (cont.)

Senior management review of reports is a critical internal control as the person reviewing is typically outside of the preparation process.

Close accounting systems for the month – Physically closing the accounting period prevents future transactions from inadvertently being recorded in the incorrect period.

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Questions or Comments???

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• Benefits of a Soft Close

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The Soft Close – More current and better analyzed information – More staff time devoted to research what is going on and to anticipate future trends – Finance staff can work proactively with operations staff to identify root cause, re-evaluate and reset operating targets

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• When moving from a hard to soft close

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The Soft Close (cont.) – Redefine the elements of the closing cycle: ◊ Decide which activities can be eliminated, deferred until

a quarterly or annual close or which can be moved outside of the close period. ◊ Accrue only when material and at quarter or annual periods. ◊ Move forecasting process away from close cycle. ◊ Move cost allocations from monthly close by using fixed rates, budgeted rates or prior month.

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• When moving from a hard to soft close (cont.)

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The Soft Close (cont.) – Eliminate interim cycles ◊

Eliminate extra cycles of report production and distribution ◊ Focus on gross change from month to month

– Collapse the level of detail ◊

For example post allocations to a single division-level cost center instead of to every cost center within a division.

– Raise the materiality level ◊

Make only material inter-company, consolidation and eliminating entries.

– Separate and integrate systems ◊

Make systems like the cost accounting and billing independent of but integrated with the general ledger.

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• The closing process

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Best Practice – the Soft Close – Publish a detailed closing process which has defined deliverables, assigned responsibilities and a closing calendar. – Move from a serial, one process does not start until another is finished, closing process to a parallel closing process. Separate individual closing actives so that they can be independently completed. ◊ For example AR, AP, Fixed Assets and Payroll closing

activities can be done independently of each other and concurrently. Create Opportunities

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• The closing process (cont.)

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Best Practice – the Soft Close (cont.) – Set a materiality level◊ Reduce investigation to material variances (dollars,

percentages and designated accounts). ◊ Eliminate small accruals and adjustments. ◊ Distinguish between the level of detail needed for internal and external reporting.

– Interim review◊ Use internal audit to locate transaction issues in advance

◊ Conduct daily (or weekly) reviews of the key financial

statement components.

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• The closing process (cont.)

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Best Practice – the Soft Close (cont.) – Automatically create operating reports through the system. – Standardize the close package. – Cycle internal reports on a monthly, quarterly or annual basis.

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Process improvements among the systems that feed into the closing process can have a significant affect on the finance function performance.

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Best Practice – the Soft Close (cont.)

Following are examples of such processes.

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• Procurement/Disbursement Cycle

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Best Practice – the Soft Close (cont.) – Employee expense reports ◊ Replace the total review of all expense reports to an

occasional audit or ◊ Automate to an online expense reporting system with built in approval system and the ability to ACH funds directly to the employee.

– Accounts Payable ◊ Automate the PO process- whereby approvals are

limited to a single event or document and, to receipt of invoice and install approval for payment at the receiving dock. Create Opportunities

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• Procurement/Disbursement Cycle (cont.)

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Best Practice – the Soft Close (cont.) – Accounts Payable (cont.) ◊ Automate recurring processes and edit checks to

improve accuracy. This helps eliminate the need of holding the close process open.

– Payroll ◊ Payroll staff should be dedicated to payroll

functions as much as possible. ◊ Shift deduction changes to employees ◊ Automate vacation accruals ◊ Simplify or standardize commission structures Create Opportunities

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• Procurement/Disbursement Cycle (cont.)

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Best Practice – the Soft Close (cont.) – Payroll (cont.) ◊ Merge all payroll systems into one system and

combine the HR database with the payroll database.

• Revenue/Receipts Cycle – Billing data entry problems◊ Use computerized data-checking methods ◊ Automate field entries or smart entry systems that

flag initial entries and verify or reject.

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• Revenue/Receipts Cycle (cont.)

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Best Practice – the Soft Close (cont.) – Elimination of unnecessary documents and/or document processing ◊ Direct entry of shipping information by the shipping staff

at the shipping location reduces processing time , rekeying data and lost documents. ◊ Smarty entry systems with internal audit review will improve quality and timeliness of shipping information. ◊ Eliminate documents considered unnecessary by the customer such as month-end statements, multiple midmonth statements and inter-company invoicing. ◊ Utilize electronic transactions

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• Administrative/Reporting Cycle

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Best Practice – the Soft Close (cont.) – General ledger ◊ Reduce the chart of accounts ◊ Reduce the use of journal entries ◊ Integrate non-gl systems into the general ledger

◊ Use data warehousing for report distribution

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Questions or Comments???

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Continuous accounting, which builds off of the soft close process, is a holistic approach that utilizes technology, processes and people to realize continued improvements across the accounting organization. Using technology to automate procedure increases the overall productivity of the accounting staff.

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Continuous Accounting

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• Technology

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Continuous Accounting (cont.) – Upgrading business performance through automation is significant. ◊ According to PwC, best-in-class finance

organizations run at a 40% lower cost than their peers but spend 20% more time on analysis vs. data gathering.*

* See “How to Create a World-Class Finance Function” at CFO.com

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• Technology (cont.)

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Continuous Accounting (cont.) – Tools ◊ Data Connectivity

◊ Rules-based automation tools ◊ Account balance substantiation ◊ Task management tools

◊ Finance performance management reporting

and analytics

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• Process

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Continuous Accounting (cont.) 1. Analyze the current state ◊ Talk to your team to determine your greatest

challenges, exposure risk and most painful accounting processes.

2. Design the future state ◊ Start with low hanging fruit and based on a “What

If” game design your plan for the future.

3. Automate and optimize the process ◊ Split and batch processes into smaller tasks and

schedule the tasks more often and within day to day activity. Create Opportunities

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• Process

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Continuous Accounting (cont.) 4. Monitor metrics and results ◊ Constantly review output, investigate exceptions

and make improvements in real-time.

5. Review outcomes and controls ◊ Periodically review outcome of the Continuous

Accounting journey and compare outcomes to the plan.

6. Continuous improvement ◊ Apply the knowledge obtained in step 4 and 5 and start

the process again. Create Opportunities

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• Under a manual system

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Reconciling a Bank Account – Manually tick and tie transactions to complete the reconciliation on a spreadsheets, print and file in a binder.

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• Under continuous accounting

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Reconciling a Bank Account (cont.) – Adopt software for account reconciliation (typically available thru the general ledger system). – Automate transaction matching, which will make reconciling high-volume accounts much easier. – Adding journals-management software the organization can systemize entry creation across systems and ensure that entries are always tied to the associated reconciliation. This adds consistency and control in the journal while allowing instant visibility in all reconciliations. Create Opportunities

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• Moving to Continuous Accounting

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Continuous Accounting (cont.) – Start with the low-hanging fruit ◊ Use a bottom-up approach

– Talk to everyone ◊ Particularly those who are doing manual processes, their

insight will be valuable.

– What is the most critical information? ◊ Look at finance automation that can help with obtaining this

information the most timely and accurately.

– Take a holistic approach ◊ Remember this is not just technology, but a people-focused

exercise which will make the staff’s work-life easier.

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• Moving to Continuous Accounting (cont.)

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Continuous Accounting (cont.) – Don’t think that this is just a technology only approach – Don’t automate bad processes ◊ Critically review a process, just because you have always done

it this way does not mean it’s the best process.

– Understand that this is an iterative process ◊ The systems and processes should be continually reviewed and

improved as necessary.

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Questions or Comments

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Thank You! Sandra Schwarzen, CPA [email protected]

WEALTH ADVISORY | OUTSOURCING | AUDIT, TAX, AND CONSULTING Investment advisory services are offered through CliftonLarsonAllen Wealth Advisors, LLC, an SEC-registered investment advisor

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