Finance transformation

Some key changes to your finance organisation can have a big impact on the value it creates

Transforming the finance organisation is on the agenda of most CFOs nowadays. This is mostly due to the fact of multiple demands to finance: the business expects finance and the CFO to provide as much value as possible, remove ambiguity from financial data, safely steer the financial aspects of the company in highly volatile times and at the same time be as cost-efficient as possible. These requirements create a high volume of tasks to tackle that can easily be overwhelming for the finance organisation.

According to our experience, focusing on only a few key areas can already create significant change and at the same time keep the efforts within the organisation’s capabilities. To define these most important tasks in your organisation, we want to share insights that enabled an effective transformation in other companies:

  • Harmonize internal and external accounting
  • Set priorities: focus on being valuable to the business and maximize efficiency in all other tasks
  • Establish clear responsibilities for the main outputs of the finance organisation
  • Advance IT knowledge within the finance organisation and implement proper organisational interfaces to the IT department

Let us explore these insights in more detail.

Harmonize internal and external accounting

A harmonized view on all accounting data is preferred by many managers as state-of-the-art. Especially in the German-speaking area, it is traditionally quite common to separate legal (external) accounting from internal accounting. While external accounting is focused on preparing the legally required financial information (i.e. balance sheet, P&L-statements), internal accounting has much more freedom to adapt the numbers to management-oriented views. Differences between both views can result from alternative depreciation methods, valuation methods, implying discounting factors and many other variables. However, we observe a trend that management wants to base its decision more and more on the external financial data, since differences between data from internal and external accounting need too much explanation and reconciliation. Moreover, these differences also complicate benchmark-oriented comparisons. Thus, finance departments base all sorts of analyses and reporting on the same data, which needs to be the data from external accounting.

In line with this, SAP offers with S/4HANA changes to the technological structure to cope with this alignment of internal and external accounting. SAPs older generations of ERP-system (SAP R/3 and SAP ECC) clearly separated internal and external accounting by representing that structure in different modules and storing the data in separate tables, as these elder generations were based on the at the time leading accounting approach of two views Consequently, many finance organisations set up their business structures and processes on this technological infrastructure and determined the way they do cost accounting by it. Beginning with the introduction of SAP’s “New General Ledger” in SAP ECC, SAP started slowly to dissolve this clear separation and bring the data-pools closer together. Now, with the introduction of SAP S/4HANA, internal and external accounting work on the same database and are therefore required by technology to align their data much more closely. The first finalized introductions of SAP S/4HANA are showing that this change in technology has the expected impact on the way work and processes are designed and that it requires internal and external accounting to collaborate much closer.

The combination of pressure from business and technology to align internal and external accounting also requires a response on an organisational level. For example, one way to redesign the finance organisation based on this trend could be to create a central accounting department as opposed to splitting up internal accounting postings and external accounting postings. The central accounting department prepares all accounting postings, including “primary data” (e.g. posted invoices, revenues, personnel cost, depreciation, etc.) and “secondary data” (e.g. allocation postings, order settlements, etc.). Depending on the company’s size, the department could contain teams that fulfil the central accounting role for subsidies or business units. The output of these teams are the datasets that all further analysis and reporting is based upon. Consistently, processes and workflows need to get adapted to this setup, especially closing processes, reporting workflows and the preparation of data for decision-making.

Set priorities: focus on being valuable to the business and maximize efficiency everywhere else

Most of the finance organisation’s value is created through enabling financial steering to the business by providing relevant information, making sure decisions are taken rationally and resources are allocated as efficiently as possible. Examples of such high value tasks could be the setup of a scenario-based Forecast on business unit level that is the basis to define action-measures or recommendations for resource allocation based on a comprehensive and standardized evaluation model for projects, initiatives and other investment opportunities.

CFOs should therefore determine what their most relevant and important high-value tasks are. Based on this, they should focus on maximizing the value-output of these tasks to support the business as best as possible. We often observe that finance organisations do not have a clear picture on which tasks are important. Instead, they tackle too many tasks at once – causing an insufficient value-output and stressed-out employee. Based on a clear focus, CFOs can allocate resources accordingly and make sure that their organisation’s time and effort are spent on the right tasks.

All other activities in the finance organisation should be performed as efficiently as possible. Especially all transactional tasks (e.g. incoming invoice handling, consolidation, data preparation, closing activities, etc.) should require as little resource input as possible. Most resources should be focused on the valuable tasks mentioned above and the finance organisation will positively contribute to the company’s financial performance. Therefore, CFOs should use the entire instrumentation of efficiency tools and apply them strategically to process and tasks. They can include process improvements, process automation, RPA, outsourcing, creating SSCs and more.

Establish clear responsibilities for the main outputs of the finance organisation

In the same way that CFOs should determine how they add value, they should get a clear understanding of what the core outputs of the finance organization are. They include all the tasks to provide value to the business (see above), but do not stop there. Additionally, outputs like providing a reliable plan, forecasting, closing statements (balance sheet and P&L), preparation of data and reports, tax matters, providing liquidity, and more need to be identified.

After identifying these core outputs, CFOs must assign responsibilities to every one of these core outputs. The responsible managers must make sure that the outputs are created and delivered in the right way, have the right quality, and are made available to the right people at the right time. These responsibilities should be assigned holistically throughout the finance organisation – meaning that they should span across tasks that might not be in the initial responsibility of the manager, e.g. because they are done in a different team. For example, a manager responsible for delivering management reporting on time does not only need to deal with the reporting team which ultimately builds the reports but also with management accounting, treasury and controlling who deliver input data and are responsible for some sections of the reporting. Through that, CFOs can design a responsibility network that overcomes the traditional organisational chart and therefore can be process and output oriented rather than department oriented.

To make this work, CFOs must make sure that the responsible managers are equipped with the necessary mandate to enable their outputs. For example, a monthly closing process usually requires input from different departments within finance and beyond. An accounts payable accountant might have multiple other tasks at the time of monthly closing, and these tasks might be equivalent in value for the own departmental superior. However, the responsible manager for monthly closing needs certain tasks to be completed within a deadline, so this manager needs to be able to set priorities within a predefined framework. Predefining these procedures or frameworks is essential to overcoming intra-financial-department-boarders and enabling an output-oriented task management.

Advance IT knowledge within the finance organisation and implement proper organisational interfaces to the IT department

Almost all finance tasks these days are enabled by technology or completely technology dependent. Thus, technology is not an option but one of the key resources of a healthy finance organisation. Too often, gaining a comprehensive understanding of technology and a deeper understanding of the IT systems that are used mostly is perceived to be an IT task. This creates a dependability to IT resources and disables finance to make the most of the technology at hand.

Instead, finance must be able to handle that core resource of technological understanding on its own to a certain, predefined extent. The width of this extent is different from company to company. However, best-practice companies actively seek a common understanding between finance and IT and jointly define who is responsible for which level of technology interaction. This is not a static definition, but rather an ongoing conversation of constant readjusting. Naturally, this requires IT-skills and attributed time within the finance organisation. Instead of cutting this time away, CFOs should consider this as an investment that gets paid back by greater independence, better technology usage and saved time in dealing with IT.

Of course, technological skills within finance can only go so far. IT should be the department where all deep technological knowledge is anchored. Thus, an interface must be established for all major topics between finance and IT. That interface needs to include which tasks are handled within finance and when IT takes over, it predefines a communication flow between the departments, it predefines how relevant tasks are prioritized and establishes clear responsibilities. The aim should be to make finance and IT close allies instead of enemies that argue about unreasonable demands and missed deadlines.

Set a roadmap and begin to transform step-by-step

Transforming the finance function is a long journey for most CFOs. In our experience, however, results can be seen rather quickly if a clear roadmap is defined that brings different initiatives into a proper order and aims to transform step by step. To build this roadmap, CFOs should first analyse their status quo as honestly as possible – only then an assessment of the most relevant steps can be effective. While planning the roadmap and the steps ahead, it is crucial to always consider the organisation’s ability for change. An underestimation of that capability results in a loss of valuable time for the transformation, while an overestimation can create stress, anxiety, and poor results.

The roadmap of necessary actions should start with responses to the most pressing issues. Thus, impactful results can be created which helps to gain traction for the transformation within in the finance organisation and in the management board. Step by step, other initiatives can then follow.

If you want to get more information on how to advance your finance organisation, feel free to contact Fabian Winckler (fabian.winckler@draxingerlentz.de)