At the heart of financial operations is the accounting and reporting cycle—the process by which all financial information is captured and organized within an organization. When the leadership of an organization feels a lack of transparency and control over its operations, most often the root cause can be traced back to its core financial processes within the accounting and reporting cycle.
Many organizations undertake finance process improvement projects in the hopes of alleviating this lack of transparency and control, but many fall short of this goal. The failure to meet desired expectations becomes a reality all too quickly, especially during times of organizational stress.
To ensure that this does not happen at your organization, go back to the basics. The major processes within the accounting and reporting cycle can be broken down into three interrelated components that make up the scaffolding by which the business operates: transaction processing, reporting and analysis, and planning.
Transaction processing. This requires the accumulation and review of documentation around transactions. Every transaction produces some type of documentation collateral—invoices, receipts, contracts, checks, deposits, bank withdrawals, etc. The financial effects of transactions are then organized into appropriate categories within a period through journal entries that are posted to a ledger following the accounting equation of Assets = Liabilities + Equity. Core financial processes include Record to Report, Order to Cash, and Procure to Pay.
Reporting and analysis. Financial reporting for external stakeholders often includes the core financial statements of a balance sheet, income statement, and statement of cash flows, and may also include a more detailed breakdown and narrative, such as in a Form 10-K filed with the SEC. This also includes management reporting and analysis, which encompasses all reporting going to internal decision makers throughout the organization. It is typically much more detailed than financial reporting, incorporates analysis of the business, and is used to drive decisions of future actions.
Planning and forecasting. Planning and forecasting are often performed prior to or in tandem with reporting and analysis. Planning involves setting targets and forecasting involves making estimates of future business activity. These activities are the natural outgrowth of reporting and analysis. The planning and forecasting process is a key element of management control, as it reflects the expectations for future performance and helps determine if actual results are good or bad.
Getting information to the people who matter
These key financial processes each month can take an organization anywhere from 1 or 2 days to more than 30 days to complete. Multiple factors drive the large time variances, including the following.
- Size of the enterprise. The larger the organization, the higher number of transactions that need to be recorded in the correct categories.
- Complexity. The more complicated a transaction, the harder it is to capture the data and the underlying assumptions to determine the financial impact.
- Means of transaction. Credit card transactions can be settled virtually instantaneously, but cash still needs to be deposited, trades must be settled, and currency converted.
- Application of assumptions. As the complexity of transactions increase, consistent interpretation of governing literature requires more complex support on which assumptions are based.
Additional considerations include structural factors that create delays in cycle times, such as: manually intensive operations; rework within processes; exhaustive data validations; lack of a centralized data source or conflicting data definitions; many or duplicative Excel reports; and limited forecasting or analysis of the business.
When an organization is placed under increased stress—due to rapid growth or decline, a merger/acquisition, carve-out, control breakdowns, escalating costs, new system implementation, change in leadership, or a change in the operating model of the business—small issues can quickly turn into large problems.
Decrease risk, increase efficiency, and improve operating leverage
An organization can decrease risk, increase efficiency, and improve operating leverage through the effective use of process optimization. Most organizations naturally look to technology to transform their business but automating a poor process may only produce bad or useless information faster. After current processes are documented, the process of intelligent automation can be applied to embark on high-ROI projects and can be implemented quickly using:
- robotic process automation (RPA)
- workflow automation/business process management
- machine learning and advanced analytics
Other areas worth exploring that can improve efficiency and provide value include corporate performance management (CPM) tools and robust data management practices.
MorganFranklin’s highly skilled professionals partner with organizations of all sizes to improve an enterprise’s financial building blocks by identifying the right people with the right skills, optimizing the processes in which people work, and leveraging the latest technology to effect change. We take pride in our hands-on approach, rolling up our sleeves to manage the various initiatives that improve organizational performance. Contact MorganFranklin today to optimize your organization’s core processes.
