Most large enterprises and many medium-sized and small businesses have installed enterprise resource planning (ERP) systems, often from the market leaders SAP or Oracle, to provide the technological underpinning for their business activities.
These large, complex software suites have taken automation to a new and much improved level, but for optimum financial efficiency – and that includes closing the monthly or quarterly accounts quickly and accurately – technology alone is not enough.
Experts agree the watchword today is: get the finance right and enable that through technology.
Peter Lumley, business intelligence specialist with PA Consulting, argues that even with the best ERP systems, organisations will struggle if they have not paid attention to good accounting practices.
“Just getting the basics right is what delivers speed in closing the accounts. I have been working with a company that had multiple general ledger structures: when it came to consolidating their results they had to do a huge amount of re-orienting, restructuring and moving data around.
“We helped implement a new general ledger structure across Europe and that has made a big difference”.
How do you move finance on to a technological footing? Mr Lumley says there are a number of factors to consider.
“The first is about master data: getting the organisational structure right – common data structures, consistent use of document types, common policies, common controls. The next is about end-to-end business work flow, where you can have lots of people all doing things slightly differently”.
He gives the example of an issue whose resolution may lie outside the finance department – clearing an invoice for a customer payment. “Technology can help, but it will not solve the problem. You have to understand where these external processes affect you” he says.
Craig Jepson, a financial consultant with IFS, an ERP vendor, points out that financial information in an ERP system has often to be manually checked against data in other systems or documents in order to verify, and close accounts.
“Does the stock valuation in the general ledger, for example, agree with the stock valuation analysis by product code in the ERP application’s distribution module? Or, do wage control accounts balance, and did the business pay the correct deductions to the pension company?”
Mr Jepson says this process can be made easier using software tools such as automated postings and general ledger matching, available in ERP applications. These integrate financial systems with other areas of the business such as human resources, payroll and distribution. However, “in ERP applications that are not integrated,” he warns, “such automated processes are more difficult to do and usually require customisation”.
An efficient “financial close”, the process by which a company completes its accounting cycles and produces financial information both for internal management analysis and for legally required external reporting, is a cornerstone of good business practice.
The benefits include: rapid access to financial data that can allow managers quickly to identify and deal with problem areas; more time for accounting staff to analyse data and provide information and improved control systems.
According to a discussion document by SAP, “the cost impact of a fast close is substantial. A streamlined close process offers time savings in terms of manual intervention, error reconciliation, variance analysis, and data processing and collection ... These time savings can then be quantified into numbers of staff days, which, in turn can result in reduced headcount, fewer temporary staff working on low-value activities, and reduced recruitment costs.”
Prizes well worth having. And the answer may well lie in the ERP system itself.
Paul Massey, managing director IFS Europe West, calculates that up to 90 per cent of ERP systems in use feature financial applications that are linked to other applications and can be used to facilitate the closure process.
The level of integration varies significantly, however. Only 30 to 40 per cent are integrated to the level at which some kind of manual reconciliation will be unnecessary, he thinks.
The issue is complicated by companies taking project dimensions into account – that is, accounting for work in progress in a period when there have been no sales. So what should an organisation do if its current ERP system is less than fully integrated? “Buy a fully integrated system” Mr Massey smiles.
Using the system to drive the business is good practice, experts agree, but the need is for one that is scalable and able to cope with the numerous upsets business will throw at it.
Built-in alerts to warn of problems and the creation of a work flow system to improve efficiency are all part of the solution according to Mr Lumley of PA.
Building a work flow system is reasonably simple, but a sound understanding of the way the organisation works is critical, he says.
Large companies will have those skills. Smaller organisations may struggle without help.