In my first article I have elaborated on the importance of the financial consolidation. The consolidated numbers are the most important piece of information coming out of the public companies and the critical information for decision-making on the C-suite level. The CFO and his team should focus on getting the consolidated information prepared as fast as possible with high quality. This makes an automation of the financial consolidation a must rather than nice-to-have.
In this article I will discuss on the potential quantative benefits of automation of the financial and management consolidation.
When talking about automation, it is usually quite easy to evaluate its cost and very complex to evaluate its benefits. The cost of automation (we usually refer to it as TCO – total cost of ownership) usually adds-up as software licence fees (very rare, additional hardware costs are necessary these days) plus consulting on implementation plus further maintenance and consulting costs. To evaluate all these costs one should request estimation from a couple of vendors (let’s say, IBM Cognos Controller, Oracle HFM and SAP BPC) and implementation teams (can be both those of vendors or independent consulting firms). In addition, one may consider acquisition subscription based software payable annually, thus decreasing one-off CAPEX costs and substituting them with regular OPEX costs.
However, it is further very difficult for a CFOto prove the budget on implementation by referencing only to the qualitative characteristics (faster closure, more reliable information etc). I would recommend trying also to evaluate the quantative characteristics and link them to qualitative changes. Ideally, this would lead to calculation of Return on investment (ROI) from implementation.
Our firm’s best practices suggest the following examples of 6 easy-to-evaluate benchmarks to prove the need for automation of the financial consolidation.
|
Qualitative characteristic |
Quantative characteristic |
Potential value |
| Faster closure, better analytics, more time for analysis all lead to faster and better decision-making | Higher profits | At least 1% of gross margin |
| Audit fees leads to better internal controls | Lower audit fees | At least 10% from audit fees for the 2nd year and there on |
| Better perception from the equity holders | Higher business valuation | 0.5% of equity value |
| Better perception from the creditors | Lower borrowing costs | At least 10% of borrowing costs |
| More frequent closure of financial reporting, less routine work, more analysis lead to more efficient work of financial consolidation team | Lower personnel costs | Up to 50% costs of the financial consolidation personnel |
| Quality of the financial reporting | Peace-of-mind of the C-suite | Priceless |
Let’s discuss the benefits in more details.
Faster closure and better analytics for the decision-making. The financial reporting is all about bringing relevant information for efficient allocation of the resources. The more disparate the business gets the more time it takes to prepare the consolidated financial reporting. For example, for a client having 30-50 subsidiaries, the financial consolidation in MS Excel may take up to one month, when the value of the information diminishes drastically. Just compare it to having the financial consolidation within 5 days from the end of the reporting period using automated solutions. To prove the benefits of the automation of the financial consolidation a CFO should find a single case from the last couple of years when this one-month lag in the reporting really mattered and evaluate it in terms of the gross margin or any other profitability ratio. Most our clients proved the need for automation with at least 1% effect on gross margin.
Decrease in audit fees. Auditor’s scope of work and the fees are significantly dependent on the quality of the internal controls of the client. The better internal controls of the financial reporting the client has, the less work the audit should perform and the higher discount the auditor can provide for the audit fees. Automation of the financial consolidation is the best confirmation of the efficient internal controls over the reporting. Of course, the auditor should perform detailed review of the automation of the consolidation and this usually bring higher audit fees in the first year of audit, but afterwards you can easily ask for 10-20% off the audit fees.
Better perception by equity investors and higher business valuation. Business valuation is often a very dark area: companies with great fundamentals are often under-valued by the markets, while high-growth startups with negative margins are over-priced. The value the external investors attribute the company’s equity is often a matter of their perceptions, how the see the company, whether they simply like it or not. Availability of regular high-class financial information, which is free of errors, is always a good sign for the company’s investors. It is like in social media, let’s say Instagram, once you do not regularly post high quality content, you subscribes start to forget about you. The consolidated financial or management information is the same high quality content in the area of finance.
Better perception from the creditors and lower finance costs. Cost of debt is a function of the general borrowing rates in a particular country plus credit risks of a particular industry and company. When negotiating the interest rate, a CFO can efficiently manage only a small portion of it, which relates to the company itself and the credit risk the bankers associate with it.
In general, the bigger the company, the lower cost of debt is. If you have a group of companies, it is often cheaper to borrow from a holding company, rather than from a group’s subsidiary. So bringing in the consolidated financial reporting in negotiations, CFO can significantly decrease the interest rates.
Next, the bankers often use various financial covenants as credit enhancements. For example, the loan agreement may contain conditions on certain levels of current assets or EBITDA to borrowing. All these financial covenants are generally calculated based on the consolidated financial information.
Finally, the more public the borrowing is the cheaper it is. The cost of borrowing from a single bank is always higher than the cost of public debt (for instance, bonds traded on an exchange). The availability of the consolidated financial reporting is a must to have the company’s debt or equity publicly traded.
Lower personnel costs. Unautomated consolidated financial and management reporting takes a lot of time and affects many employees of the company. Automation brings downs the volume of routine work and brings more value-added and interesting tasks related to analysis and support of management decisions by the finance team. We estimate the resulting savings as up to 50% of the total personnel costs (including recruitment fees) of the financial reporting team.
Quality of financial reporting and peace-of-mind of C-suite. As noted earlier the consolidated financial information is often the only financial information available to the external world, the company’s debt and equity holders. The information is so important that the legislation in most countries contain severe punishment for bringing misleading information. Therefore, the quality of the financial information affects peace of mind of CFO and CEO who sign it, which is in our opinion priceless. The C-suite should under all circumstances fully trust the consolidated financial data.
Of course, all the above estimations are subject to judgement and may vary case by case. But I hope they prove useful for the CFO to prove the need for automation to the other C-suite, including CEO.
In the next article I will describe usual IT architecture of financial consolidation.
