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Point of View / Information Exchange:Leading Practices in FP&A and Close

Financial Executives Networking Group

Workshop Presentation

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Agenda

Forecasting, Budgeting & Planning Guidance and Leading Practices– Bottoms-up vs. Tops-down vs. Rolling– Best Approach for Low Volume / High Configuration Companies?

Close and Consolidation Leading Practice– Reconciliation Frequency– Allocation Level of Detail: Full allocation vs. Some allocation vs. Corporate bucket– Level of Allocation Accuracy

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Forecasting, Budgeting & Planning - Guidance and Leading Practices

Leading Practices – What are other companies doing? Approaches – How can the processes, policies, and systems be improved and transformed?

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Leading practice forecasts focus action on closing the gapbetween anticipated performance and strategic goals Integrated forecasts linked to external

environment, based on demand, supply and finance

Gap between target and actual business performance is regularly analyzed and closed by identifying initiatives for improvement

Extensive use of business drivers to convert existing operational plans into financial forecasts using relationships

Forecasts are regularly maintained, shared and transparent. Collaborative input is required across the organization through embedding into operational planning day job

Emphasis on analysis (why and what if), insight and judgement.

Speed and agility are critical. Forecasts should be completed within 5 days.

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Highly effective companies have redesigned their planning processes…..and improved strategic relevance, forecast accuracy and reduced cycle times and costs

Integrated planning

Rolling Forecast

Estimate

BusinessPlan

Model

Measuring & Reporting Targets & Rewards

TARGET CASCADERESULTS &

FEEDBACK

STRATEGY

Strategy Definition & Evaluation

MANAGEMENT

OPERATIONS

TARGET CASCADE

RESULTS &FEEDBACK

Rolling forecastRealised Sales

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1 3 5 7 9 11 13 15 17 19 21 23

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Sales

Collaborative planning

Consistent Integrated

AutomatedTransparent

BusinessUnits

Systems

Strategic plans

Projected sales Production

plans

Shared Information

Customer commitments

KPI’s

Inventories

Distribution

Focus on Gap Closure

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Lifetime customervalue

Costs Lost Sales Sales

Customer satisfaction

Value for money Differentiation of

offer Brand value

Customer/Brand

Employer of choice Living the brand Motivation Skills & knowledge Leadership

Organisational responsiveness

Stock availability Idea creation &

application Quality of

informationPeople

Value created

Internal processes

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What Leading Companies are DoingCompany Leading Practice Observed

Based on top-down targets as an output of LRP (deploying driver-based models )Forecast focuses only against key elements

Top-down targets set in the form of “stretch” in conjunction with retailer goals based on 5-year planWeekly, monthly and quarterly rolling forecasts (18 months); exception-based input Strategy is integrated to operational levels using Balanced Scorecard framework

Corporate growth targets decomposed to BUs as targets; focus on cost reduction and understanding competitionPerformance measured against historical results and competitionDeploys rolling forecast, updated monthly

• Integration of the strategic planning process with the tactical business plan and budgeting processes

• Target setting used to limit number of iterations

• Rolling forecast utilized to reduce content prep and submissions detail; exception-based forecasts

• Less data gathering, more analysis • Predictive “what if“ analysis /

scenarios• Incentives linked to identifiable

target (e.g., year-over-year results)• Use of common planning tool • Enhanced synergy among demand

forecasting and financial forecast accuracy

Leading Practices

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Process ComponentsThe principles underlying these key components build the foundation of best practice

Collaborative Planning Targets & Rewards

Rolling Forecast PrioritizedPlanning Integration

Measuring & Reporting

Focus on Gap Closure• Strong linkage to the Strategic Plan• The critical few objectives are clearly

communicated and woven into the planning process

• Collaborative and inclusive ‘aspirational’ planning process

• Integrated long- & short-range planning

• Annual stake in the ground.• Flexible – designed to promote action

• Target levels based on external indicators and aligned to strategic imperatives

• Targets challenging but achievable (“owned” by the operational leaders)

• Targets set top down and then cascaded

• Rewards and incentives attached to performance of groups and teams

• Rewards based on performance relative to peers, benchmarks, prior periods

• Rolling forecasts rather than a once-a- year process, beyond year-end, and based on relevant cost drivers

• Consistent vision for the forecasting process across levels, organization department, and global regions

• Fewer data records at the corporate level

• Budget ‘if required’ - ideally a snapshot of rolling forecast and the first year of the business plan

• Compare forecast to plan to identify actions and steps to close gap

• Allow for changes to current market conditions on the fly

• Real-time (or near real-time) scenario / what-if analysis

• Allow more time for judgement instead of focusing on data manipulation

• Automated recurring what-if & sensitivities

• Integrated Actuals, Forecasts, Budgets, Variance and Story

• Focus on exceptions• Few iterations• Scorecard based on both financial

and non- financial measures cascaded to operations

• Scorecard forms a key component of regular management reporting

• Consistent method applied across divisions and the globe

• Role-based information delivery - open and transparent.

• Automated performance delivery vs. financial delivery.

• Business planning and forecasting process integrated with operational planning.

A Rolling Forecast will reduce the effort associated with planning and improve the quality of the plan

Rolling Forecast versus Annual Budget

Typical Rolling Forecast• Forward-looking, more

market-based, external focus, tops-down planning

• Less overall effort• Few top-down targets• Fewer iterations and less

detailed churn at sites• Fewer data lines sent to HQ• Tightly linked with strategy• Improved decision support• Planning horizon refocused

to, e.g., 15 months - looking beyond year-end

• “Annual event” reduced in the fall, so increases continuous planning mindset

• Improved, uniform I/T tools and infrastructure

• Smoothes resource needs throughout the year

Typical Annual Budget• Internally-focused, historical

perspective, bottoms-up plan development

• Multiple lines of targets provided, but no formal firm targets (e.g., revenue, EBIT)

• Multiple iterations of detailed budget preparation

• Detailed data required at all levels

• Excessive handoffs• Spring and fall plans are

separate activities• Forecast focus is only on

current year• Fall plan process results in

large spike in workload• Incompatible systems /

software used throughout

Without these changes, a Rolling Forecast will INCREASE the planning

workload

Required Changes• Changes are made to

the current plan process and philosophy

• Timely and complete targets

• Reduced data elements• Improved data

collection tools• Close linkage with

other planning processes

• Continuous Planning• Increased line

management focus on quarterly forecasts versus single event

…can be replaced

with this...

…but only if these changes

are made...

…Otherwise…

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Rolling Forecast Illustration

Forward-looking, beyond year-end

Improved predictability of results

Fewer data records

Extensive use of drivers

Based on operational planning

Ideally event-based and maintained regularly

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Understanding where you are now

Key steps: Understand business model and key success drivers (i.e., description of key aspects

of how the business operates, e.g. marketing, sales, logistics, alliances etc) Evaluate current process metrics and costs (including frequency, cycle time, FTE effort

and cost) Apply Benchmarks and Best Practices Understand current applications architecture and existing IT infrastructure Summary of key issues & opportunities

Business Consulting Services

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Identifying gaps between better and best practices

Process ABC Peers ABC Company Facts and Statistics

Budgeting & Planning

Integration with G/L / Use of planning and

budgeting tools

Planning and Budgeting is performed in Excel spreadsheets Results are loaded manually in to Hyperion; data is not loaded to the GL Reports are prepared using Excel spreadsheets

Drill-down Capability Drill-down capabilities for analysis do not exist

Access and Delivery A formal Profit Plan and Quarterly Update books are prepared in Excel Monthly Outlooks spreadsheets are reviewed as part of the Operations Review

Preparation and Ap-proval Process

Regional Profit Plans are prepared annually, Quarterly Profit Plan updates are prepared, and Monthly Outlooks are performed; longer-term plans have not historically been performed; a 3yr. Plan is currently under development

Periodic additional requests for forecast updates are made; Rolling forecast not utilized Profit and key measure targets are provided; however, regions tend to “hold back” projected earnings due

to stretch targets; multiple iterations and submissions Detailed bottoms-up Plans with numerous line items are submitted; 4 month cycle-time Report formats within each Business Group are not consistent The Finance organization incurs a significant effort to prepare all Plans and Forecasts; frequent re-

submissions and reconciliations exist Reports and measures do not use consistent definitions across business groups; results are typically

compared vs. prior period

Link to Strategy Reports and measures do not appear to be derived from or directly linked to strategies and tactics;

however, performance / compensation are somewhat linked to Plan numbers Reports / measures do not appear to link to the drivers of shareholder value

Needs Improvement

World-Class

Illustration

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FP&A – Selected Benchmarks

Days to complete forecast

Cycle time

Days to produce budget

Benchmark

32 days

Median

60 days

Benchmark

3 days

Median

8 days

Cost

# of FTEs per $1bn revenue

Benchmark

2.7 FTEs

Median

7.3 FTEs

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Close and Consolidation Leading Practices

Leading Practices – What are other companies doing?

Approaches – How can the processes, policies, and systems be improved and transformed?

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General AccountingLeading Practices Company Leading Practice Observed

• Implemented an integrated general ledger system globally

• Transactions are entered in the general ledger automatically

• Benefits achieved include time savings and increased accuracy of transactions

• Uses an integrated accounting and reconciliation system to simplify the management of daily business operations across multiple locations

• Reduced its administrative workload by 22 percent

• A web-based, user-friendly system eliminates manual steps and journal entries, and automates bank reconciliation

• A financial portal provides a common tool to process transactions, view activity and analyze data

• Allowed the company to reduce or reallocate resources and reduce bank fees

• Minimize the number of manual journal entries, and apply materiality principles to those that are made

• Integrate systems, automate interfaces and maintain a single source general ledger chart of accounts

• Enable journal entries to be entered and posted real-time

• Develop and communicate a period closing and reporting calendar

• Ensure data quality at the source, and assign responsibility for the accuracy and timeliness of underlying data

• Initiate master data management (MDM) at a global enterprise level to drive standardization

• Implement “global process owner” concept to help manage process commonality

• Shift from a monthly “hard” Close to quarterly Closes with monthly soft Closes

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Close and ConsolidationLeading Practices Company Leading Practice Observed

• Adopted five day Close, consolidation and reporting cycle

• Implemented single-level consolidation system • Web-enabled reporting• Integrated the general ledger with their consolidation

tool• Implemented a single source for finance data and

warehousing of historical reports

• Consolidated reporting standardized across the enterprise

• Common rule set defined and common consolidation process centrally maintained

• Cost allocations minimized and, when necessary, driven by automated routines

• Single-level consolidation system implemented and multiple sub-consolidation systems sunset

• General ledger and planning systems integrated with consolidation tool

• Three workday close and consolidation (including preliminary reporting)

• Single-level consolidation system; common consolidation process centrally maintained

• Link the general ledger to a financial modeling system (data warehouse) that automates reports / schedules and facilitates communication of explanations

• Common rule sets (foreign exchange, eliminations, etc.) applied to enterprise-wide process

• Centralized location for reports and warehousing of historical reports

• Cost allocations are minimized or eliminated / simplified / automated

• The ability exists for consolidations to drill down to the original records in any entity

• Simplify departmental relationships as far as possible for consolidation purposes

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Intercompany Accounting / AllocationsLeading Practices Company Leading Practice Observed

• Automated allocations and journal entries in the Close and consolidation process

• Improved intercompany transaction processing, matching and elimination

• Implemented CitiNetting intercompany system to enable common dispute management and common terms settlement

• Outsourced intercompany reconciliation process• Adopted web-based hub as a clearinghouse for

intercompany reconciliation activity across disparate instances of SAP

• Re-designed intercompany accounting model• Eliminated negotiated transfer pricing to speed

planning cycle• Implemented policy to freeze intercompany transfer

prices for one year

• Maintain single intercompany charge process

• Handle allocations in similar manner across businesses

• Standardize the dispute management process

• Agree on similar terms across the company

• Implement service level agreements as rationale for charge outs

• Freeze intercompany charge rates • Eliminate negotiated transfer prices for

intercompany goods movement• Automate intercompany reconciliation

process• ERP / Hub• Use budgeted amounts for charging non-

volatile costs

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Comparison to Leading Edge Practices – Close ProcessLeading Edge Practices Conventional Practices

Timing

Two day G/L close cycle time; one day consolidation Use effective Close timetables that are adhered to throughout

the organization Pre-close planning and post-Close evaluation meetings Make standard journal entries early in the month, outside of

the critical path of close Limited use of inter-division allocations Reduce the number of adjusting entries and trial balance re-

runs made after the initial trial balance Systematize routine journal entries, distributions, etc. Standard company policies for cut-offs, intercompany, etc. Reconcile key accounts and perform key analyses on an

ongoing basis thorughout the month Closing cycle time reduction efforts must be driven and

supported from top management

5-10 day G/L close; 3 day consolidation; 1-2 days reporting Limited process management ( i.e., closing timetables, post-

Close evaluation meetings) Practice of performing entries outside the close cycle is limited

in use Extensive use of allocations Multiple iterations of trial balance prepared and reviewed Limited systemization of entries Close policies and guidelines are limited Reconciliations performed during month end close Lack of standard policies for cut-offs, intercompany, etc. Month-end reconciliation during Close Close cycle time not transparent to management

Quality

Track errors that are made and assign responsibility Collect Close process measurements Provide cross-training for employees of the key accounting

functions Use one general ledger and a common chart of accounts

across all business units Provide for electronic approval of journal entries

Limited performance tracking and Close measurement utilized Limited cross-training of staff Multiple chart of accounts Moderate use of automated approvals

Materiality

Establish a clear statement of materiality levels for cut-offs and reports

Set aggressive materiality limits for intercompany transactions in order to speed the closing process

Materiality limits not defined Intercompany transactions reconciled to the penny (generally

after the Close)

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Comparison to Leading Edge Practices – Consolidations

Leading Edge Practices Conventional Practices

Process

• Single level consolidation (i.e., all reporting entities submit directly to HQ)

• Elimination entries recorded and final consolidation reflected on the ledger

• Process should automatically include allocations and elimination of intercompany transactions

• Currency conversions performed at the field locations where the transactions originate

• Automatic consolidation and eliminations

• Multi-level consolidation (consolidations at BUs, regions, or countries plus HQ)

• Entries made on spreadsheets , off the ledger

• Allocations and eliminations manually prepared using spreadsheets

• Currency conversions performed by Corporate Consolidation team

• Manual consolidation process

Technology

• Use on-line data collection for all units

• Use pre-formatted requirements to streamline month-end reporting to headquarters

• Report monthly P&L and balance sheet results to headquarters electronically

• G/L report writer supports consolidated process; standard reports automatically generated

• Certain units not on-line

• Format established but not entirely adhered to

• Reports extracted from Excel files

• Report writer not utilized or manually prepared

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Close Continuous Improvement RoadmapD

ays

to C

lose

Transformation

Today Tomorrow

Standard non-finance processes Common integrated non-financial systems Financial and non-financial systems are integrated

Common detail level GL (BU legacy GLs sunset) Common project costing (legacy project costing sunset) Common financial sub-systems (legacy sub-systems sunset) All financial systems are integrated and share a common

configuration Scaleable systems to support M&A activity Flexible systems able to support a calendar Close

Process improvement and standardization including pre-Close activities (lean) Enterprise-wide consolidation tool (sunset legacy consolidation tools) Single level consolidation Enterprise-wide GL Flexible systems able to support weekly Flash reports

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5

3Continuous process

simplification

& standardization

Virtual

days

days

days

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Close Process Improvement Approach

Technological changes

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4

8

12

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Day

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Clo

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Effort

Process management

Process changes

• Significant cycle time reductions can be made through system-neutral efforts, managing the process and making process improvements.

• However, to achieve a virtual close, the system environment must be extremely well integrated which often demands system transformation

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The Benefits of an Accelerated Close Process

Facilitates world-class cost reduction in the Finance function

Real-time information dissemination drives proactive decision making regarding strategies, plans, and forecasts

Shortened cycle time drives efficiency and quality at the source

Focuses Finance on the critical set of information needed to run the business

Enables management to spot and capitalize upon positive trends – or respond to negative ones more rapidly

Promotes investor confidence by telegraphing that Finance is on top of their numbers and well-managed

Mitigates risk through continuous feedback on key performance indicators (KPIs) and financial performance

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Close Reduction Methodology“How-to” Hints and Suggestions: Timing

Measure in hours, not days Make use of effective closing timetables that are followed throughout the organization Adhere to a well-defined close cycle throughout the division Perform minimal or no sub-consolidations or management reports prior to Close Provide daily reconciliation of receivables and payables to the general ledger Automate the accruals process, the inter-company process, and bank reconciliations Move activities from the critical path (clear “bottlenecks”) Establish a “pre-Close meeting” early in the Closing to discuss any unusual results Allow no re-runs of the general ledger during the Close Use quarterly or annual true-ups to adjust as necessary Reconcile key accounts and perform key analyses on an ongoing basis during the

month Determine the critical path of all closing tasks and reassign month-end tasks to re-

balance workloads (again, clearing “bottlenecks”)

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“How-to” Hints and Suggestions: Costs and Allocations

Eliminate or minimize allocations and inter-company transfers wherever possible Consider: what is gained by making the allocation? Can it be achieved another, simpler way?

Increase thresholds for allocations and inter-company transfers, as this reduces manual transactions and error rates

Simplify cost-center structures Close expense systems marginally early and use estimates where necessary Use predetermined allocations that are automatically charged each month regardless of the

real costs incurred – track variances through the year, but only true-up at year-end (once) Commissions:

o Early discussion of critical caseso Streamline process (reduce number of runs)o Introduce estimation process (analyze and book non-material differences in the next quarter)o Reduce complexity and consider materiality aspects

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“How-to” Hints and Suggestions: Materiality

Review Transactions for materiality, not accuracy Establish a clear statement of materiality levels for cut-offs and reports Consider eliminating accrual process for unpaid invoices at month-end: either accrue

ahead of month-end for material items, or avoid the effort if amounts are not material All adjustments made at month-end are based on materiality guidelines Do not allow missing data to stop the consolidation process Stratify accounts by risk, materiality, volumes, etc. and then reconcile less-risky, low-

materiality, and low-volume accounts on a cyclical basis

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“How-to” Hints and Suggestions: Timing and Cut Off

Measure in hours, not days Make use of well-defined and detailed closing timetables Consider use a “non-calendar-based” Closing schedule (task-driven, not time-based) Provide daily reconciliation of receivables and payables to the general ledger Move activities from the critical path – reduce bottlenecks Establish a “pre-Close / post-Close” meeting cadence to discuss any unusual results Allow no re-runs of the general ledger during the Close Use quarterly or annual true-ups to adjust as necessary Eliminate “nice to have“ elements of reporting packages Standardize and integrate audit process (start earlier) Develop a Close process manual

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“How-to” Hints and Suggestions: Physical Adjustments

Physically consolidate transaction processing sites Locate closing staff where they can physically see the users of the closing data Centralize the accounting function and assign global process owners (manager) for

significant processes such as the month-end Close Reduce the number of accounts and/or transaction codes Allocate responsibility for all key accounts to named individuals Minimize month-end interfaces - feed from subsystems more frequently Ensure that profit center and legal entity reporting are driven from the same data source

and ensure that they always balance Have all / most journal entries prepared by subsystems Insist that there be automatic generation of accruals from the payables system

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“How-to” Hints and Suggestions: Data Quality

Attack root cause of identified data quality issues Insist that all data is edited prior to its delivery into the closing process Track errors that are made and assign responsibility

o Use the term "unacceptable" to describe invalid transactionso Insist that the supplier of unacceptable data is responsible for correcting it

Eliminate inspection and review points in the close process Minimize reclassifications, accruals, error corrections and adjusting entries performed

during the Close—base those that are performed on predefined materiality guidelines Collect close process measurements Standardize corporate reporting data sets

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“How-to” Hints and Suggestions: Systems

Minimize month-end interfaces; feed from the subsystems more frequently Insist that all feeder systems are processed during the weekend in order to provide the

complete data needed on the first workday of the close process Exploit all aspects of current technology to assist you (or re-new):

o Have all / most journal entries prepared by subsystemso Insist that most entries to the general ledger are automated from other systemso Insist that there be automatic generation of accruals from the payables systemo Use intranets and the internet to communicate financial information and to increase the

accessibility of financial datao Interface consolidation systems with feeder ledgers and sub-ledgerso Implement a single data warehouse for all business datao Distribute reports electronically, allowing on-line queryo Use rules engines to calculate multi-GAAP results

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Close & Consolidation – Selected Benchmarks

Measure Median * Benchmark **

Cycle time in days to perform monthly close at the site level. 5.0 3.0

Cycle time in days to perform annual close at the site level. 11.0 6.4

Percentage of journal entry line items that are corrective/adjusting. 2.5% 0.5%

Notes: * Median is the 50th percentile performance from the sampled organizations** Benchmark is 80th-percentile performance from the sampled organizations