These activities often tie up finance and accounting professionals in a long cycle of repeatedly reviewing and taking action on hundreds—or even thousands—of individual items. This labor-intensive stage includes many repeated steps within the legal, local and corporate entity closes as well as record-to-report processes that follow. A typical end-to-end entity close process can take as much as two-thirds of the time and effort of the entire close.
The laborious manual activities involved include reconciling, posting and documenting items such as accounts receivable to sales orders; accounts payable to purchase orders; inventory, fixed assets, and even cost allocations between multiple business units. In larger organizations most of the heavy transaction processing takes place at shared service centers or business units, with the general ledger close handled at corporate HQ.
Why is this the Status Quo?
Part of the reason this situation remains is because most local close activities are distributed across many different people in the finance and accounting team—or within a shared service center—which makes it very difficult for upper finance management to see exactly how much effort is required overall. Frequently, these teams rely on a complex network of spreadsheet bridges—along with countless meetings, phone calls and emails—to patch together steps in the processes. The effort required at this level remains significant. In fact, it grows exponentially with multiple reconciliations and close activities required across hundreds of entities.
With a multitude of separate legal entities often involved in the financial close process, many companies manually complete a long list of identical and redundant processes at this stage. For example, they may repeatedly reconcile many accounts payable entries to general ledger entries hundreds—or even thousands—of times during every close. As those involved know all too well, this is usually completely manual!
At even the largest companies, finance and accounting professionals rely on a mixed bag of point solutions and repeated manual oversight to complete the many tasks within the entity close—with mixed results. PwC sums it up concisely: "Leading firms spend over 50% of their analyst effort just getting the numbers right."
Manually highlighting, validating and re-validating numbers and figures within the local entity close can be a long, dull and inefficient process, but that's not all. On the rare occasions that a real irregularity or error emerges, it can tie up even more valuable manpower and time for the finance team in the slow process of manually determining where the problem may lie.
On top of all of these challenges, everything the finance or accounting team members do at this stage must also be logged and recorded manually in real time. Typically, this task falls to the individual engaged in all of the button-pushing to add "logging process" to their long list of manual activities. Some organizations accomplish this by instructing team members to check off progress on a financial close task list or even a spreadsheet.
Of course, the threat of incorrect or incomplete accounting for manual work is always present. No matter what the outcome, in this stage of the financial close, most companies habitually and often blindly waste time and effort from some of their most strategically important and highly-paid professionals in finance and accounting.
Reduce Manual Effort
With the right automation solution, organizations can eliminate this manual effort completely and automatically document steps as they are completed. Automated processes at the local entity close level can greatly accelerate progress by using predefined thresholds and rules to determine what constitutes an exception. No one has to sit for hours on end pushing a button and checking thousands of numbers to find a single problem. Members of the finance and accounting teams are only notified about issues that occur outside of predefined limits, increasing focus and efficiency.
According to Giovanni Perone of PwC, "Leading finance teams have automated 70% more of their key controls than typical functions." Automation guarantees a consistent and high-quality end-to-end entity close without the effort. In fact, it can be applied to every repeatable step in the heart of the close cycle—such as bank reconciliations or purchase order to accounts payable reconciliations and more.
Unlike other software tools for the financial close that can function as disconnected end-user tools to manage manual activities, or simply a checklist, process automation solutions eliminate manual effort and the risk of error in every aspect of the close. They allow the finance and accounting teams to focus their effort on what the numbers mean—not just if they're accurate or auditable. Process automation simplifies the close and brings it back to human scale and it frees up valuable time..
Manual intervention should become the exception, not the rule. If implemented properly, financial close automation will prove nothing short of a game-changer for corporate accounting and finance.
Peter Minck is vice president of Business Solutions at Redwood Software and heads Redwood's North American Financial Close Automation team.