finance transformation
TRANSCRIPT
Finance TransformationFor the 21st Century
July 2006Sydney, Australia
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Finance Reform
Finance Departments’ are successfully helping to steer their organisation through a turbulent business environment
Often there is little time for departments to focus on their own performance and development
Ernst & Young can assist Finance Department’s improve their effectiveness and efficiency by sharing our
Leadership
Methodologies
Experience
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Finance Reform
0
25
50
75
100
Past Future
Total Cost of Finance
Enterprise Decision SupportManage Risk & Financial Capital; Improve ControlTransaction Processing, Accounting & Reporting
Improving effectiveness and efficiency
Reduce total cost
Reduce transaction processing to reporting cost
Invest in Business Partnering & Enterprise Decision Support
Effectiveness & Efficiency Impact of Financial
Reform
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Finance Functions
Strategy and
Planning
Reporting and
Analysis
Stewardship and
Compliance
Transaction Processing
Strategy, mergers and acquisitions, business and financial structure, operations planning, budgeting, VBM
Board, Statutory and management reporting, forecasting, PI, business case and performance analysis, ABC/ABM
Tax, IFRS, ASX, external and internal audit, approvals procedures, internal controls, risk management
General accounting, asset register, payroll, accounts payable and receivable
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Path to Functional Excellence
People
Processes
Information Systems
Current State Best Practice
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GovernanceTransactional
Centralised Shared Services
Simple Standard
Vanilla ERP
Generalists Lower Capability
STRATEGY
STRUCTURE
PROCESS
SYSTEMS
PEOPLE
Decision Making Value-Add
Decentralise COE
Innovative Flexible
Additional Tools
Specialists Higher Capability
Getting the Strategy Answer the Questions?
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Traditional Finance Function
In your organisation… Is the operations plan aligned with strategy? Is budgeting an onerous process? Do Board, Statutory and management reports and the ITR logically flow into each other? Does your business know; customer profitability; whole of life asset costs; process costs? Does Finance analyse all significant business decisions; approve all operating and
capital projects? Do reports contain leading and lagging, financial and non-financial metrics? Do your systems do most of the work for monthly reporting? Are transaction approval processes duplicated; are they effective? Does your department cost more than it should?
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Path to Functional Excellence
Leadership Understands & committed to
organisation’s strategic context
Apolitical & diplomatic
Initiates change & continuous improvement
Committed to helping staff realise their full potential
People
Processes
Information Systems
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Path to Functional Excellence
Culture & Attitude Purpose is to serve the
organisation
Understand and interested in the business
Maintain close relationships across the organisation
Equal partner in developing solutions to business issues
People
Processes
Information Systems
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Path to Functional Excellence
Capability Appropriate technical skills
Capacity and willingness to learn
Comfortable working outside traditional accounting boundaries
Continuous learning / skills maintenance
People
Processes
Information Systems
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Processes Support the business; not a
bureaucracy
In control
Simplified, e.g. no duplication of effort
Leverage interdependencies between processes
Finance has authority to enforce
Selective use of Shared Services & Outsourcing
People
Processes
Information Systems
Building Blocks of Functional Excellence
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Path to Functional Excellence
Information System Data analysis tools usable by
non-finance staff
Data warehouse for financial and non-financial data
Maximum automation of routine processes
Reliable interfaces
People
Processes
Information Systems
Our Approach to Finance Reform
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Our Approach to Finance Reform
Finance Reform is the term we use for engagements aimed at improving the performance of an organisation’s Finance Department.
Reform consists of many variations, including:
Formulating the department’s strategy
Reviewing IT architecture
Formalising governance structure
Full process re-design & organisation restructure
Shared Services Centre or Outsourcing implementation
We offer our:
Leadership
Methodologies
Experience
We are not associated with any business solution or software vendors.
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Our Approach to Financial Reform
Our approach of combining strategy with shop-floor process improvement has proven to be the most successful approach to delivering sustainable improvement. It harnesses the wealth of knowledge that exists on the shop-floor and ensures the right changes are made.
Top down direction setting
Cross-functional process redesign
Bottom-up problem solving
People
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People
Processes
Information Systems
Finance Strategy formulation
Executive mentoring
Culture assessment
Organisational restructure
Change management
Staff capability reviews
Job design
Technical training
Benchmarking
Functional review
Process re-design
Governance framework
IT Advisory
Our Approach to Financial Reform
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Project Implementation
Our approach to each assignment is tailored to meet client needs.
Key features of our project implementation approach are:
Reliance on client teams
Small, highly skilled and experienced Ernst & Young team
Provision of project management, progress reports, steering committee attendance & project documentation
Discrete phases
Full and abridged implementation options
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Our Leadership
We provide two-directional leadership; top-down & bottom-up
Top-Down Work with senior management to
determine Strategy Culture Structure
Appreciation of organisational constraints
Management acceptance of change
Prevent formalisation of bad practice
Identify & address obstacles
Bottom-Up Harness shop-floor knowledge Guide client team through change
process Introduce best practice concepts Train client team in process
improvement techniques
“Raise the bar” and set the pace
Assist client-team champion the cause and address obstacles
At times, an extra pair of hands Inculcate sustainable change
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Our Methodologies – Finance Strategy
Executive interviews & short workshops
Confirm commitment to reform initiative
Ensure Finance Department’s strategy is aligned with the organisation’s
Determine where processes and functions belong in the organisation
Secure cross-functional support for process and structural improvements
Assign accountability for benefits realisation
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Our Methodologies – Governance Framework
Approvals & Compliance
Planning & Control
Reporting
Abi
lity
to im
pact
fu
ture
Freedom of
design
Purpose
Mitigate risk of malfeasance
Avoid unplanned contingent liabilities
Ensure regulatory compliance
Financial stewardship to ensure resources are utilised in an acceptable manner
Assist management maximise return on assets
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Methodologies – Process Re-design
Review
Re-design
Staff Interviews
High-Level
Mapping
Cost Analysis
Org. Chart
Review
Bench-marking
Systems Review
Detailed Process Mapping
Work Distribution Analysis
Detailed Process
Re-design
Benefits Analysis
Project Briefs
Org. Structure Re-design
Change Managemen
t Plan
New Process & Structure Implementation
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Executive Mentoring
One of our Partners or Senior Managers develop an enduring one-on-one relationship with a client Executive
We are there to listen, test ideas and offer impartial advice
Useful for discussing general issues, contemplating a major initiative and personal development
Staff Capability Review
Assess your needs and determine skills and personal attributes specific roles require
Use structured interviews, observations and peer reviews
Form objective conclusions about an individual’s capabilities and offer suggestions where they may best fit in the organisation
Our Methodologies – People
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Our Methodologies - Organisation
Change Management
Three layers of change:
Strategic – communicate department’s vision across the organisation
Operational – imbedding new processes, systems and organisation structures, transitioning people
Individual – align individual and team behaviours and performance
Cultural Assessment
Make an assessment using recognised assessment tools
Identify gap between existing and desired cultures
Develop program to shift values, beliefs and behaviours in desired direction
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Organisation Structure Review structure,
including finance work performed in other parts of the organisation
Develop new structure, based on- Finance’s strategy
& cultural objectives
- Leading practice- Process
improvements
Value add work
Transactional work
Specialist finance services
CFO80s
90s
00s
Our Methodologies - Organisation
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Our Methodologies – IT Advisory
Financials
Human Resource
s
Marketing Mgmt
Inventory Mgmt
Purchasing Mgmt
Quality Mgmt
Sales Mgmt
Product Technolo
gyStructuredQuestionnaires
StructuredInterviews
StructuredWorkshops
1. Select systems for review
2. Assess against best practice
3. Deliver recommendations
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Our Methodologies - Benchmarking
Ernst & Young has a specialised Benchmarking service line and leads the Western Australian and South Australian Benchmarking Consortiums
Two stage benchmarking exercise in Finance Reforms:
1. Quantitative analysis using standard data template to compare client performance with relevant peer group
2. Qualitative analysis using structured interviews to assess client practice with best practice
We use our global network to regularly update our quantitative and qualitative templates
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Our Experience
In recent years no or only margin savings have been realised from improvement
initiatives, common errors include:
Failure to address what actually drives the work
Failure to identify value destroying activities
Formalised or centralised poorly performing processes
Alienated the business
Sole reliance on automation
Ignored culture
Relied on Shared Services or Outsourcing as an end result
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Our Experience
Referees
Denise Dawson
Chief Financial Officer
Sydney Water Corporation
Chris Hern
General Manager – Finance & Budgeting
Telstra Corporation
Megan Enders
General Manager
Rio Tinto Shared Business Services
Appendix:Leading Practice - Processes
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Budgeting and Forecasting – Leading Practice Features
Process Features
System Features
Strategic plan drives operational budgets, targets, milestones and timings
Provides broad economic and market trends
Includes business linked key performance indicators
Action orientated with achievable targets
Detailed budget completed in less than 6 weeks
Budgets focused on business needs eg PBB, zero based
Budgeting is extension of the business planning and long term forecasting processes
Target performance related to pay award
Budget review is focused on the strategic objectives and KPI's
Budgets are consolidated at level appropriate to business needs eg process, function, BU
People skill set enables global budget changes to be administered efficiently
Final budget communicated to budget holders quickly, before start of year
Operational and process functions are responsible for forecasts
Rolling forecasts linked to the planning and budgeting cycle
Forecasting process facilities action based planning
On-line budget guidelines and indicators set centrally
Integrated systems used to aid budget process
Software provides ability to test different budget scenarios
Flexible budget phasing facilities
Facility to hold alternative budget scenarios
Coherent budgeting systems eliminate rekeying of data
System allows automatic calculation of KPI's and holds non financial data
Data can be downloaded to final budget documents preparation or to EIS
Systems provides sensitivity analysis of data
Software supports on-line forecasting by operational management
Flexibility to allow rolling updates of forecast data
Forecasts linked to KPI's budgets and planning
System provides comprehensive on line variance reporting
Reporting includes on-line graphics and non financial data where appropriate
Set budget guidelines& targets
Prepare budgetsReview and
consolidate budgetsPrepare forecasts
Monitor and analyseperformance
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Formal credit checks applied to all new customers within 24 hours using credit bureau
Monitor credit status/terms on regular basis
Customer account managers provided with up to date credit status
Treasury policy set on late and prompt payments
Authority levels clearly defined Credit policies defined and agreed Terms and conditions agreed with
customers
Consolidated periodic invoicing for high frequency shipments
Bank remittance notices issued with sales invoices to facilitate reconciliation
Self billing invoices by high volume customers
Consider outsourcing regular invoice/payment eg utilities
Regular review of invoice queries and credit notes
Reconciliation of AR balances to GL control accounts on a regular basis
Bundle packages and portfolio. Consolidated invoices/statements easier for collection
Credit insurance arrangements evaluated periodically
Customer account managers responsible for sales and cash collection
Constant monitoring of debtor days, daily collection, ageing of debt
Customer contact records maintained
Outsource cash collection where appropriate
Determine and report on credit targets
Monitor overdue debts and take action within agreed policy
Establish credit levels
Issue sales order Issue invoiceMonitor credit/ collect
cash
System Features Consolidated credit position
for group of customers System provides on-line
customer payment history and terms
Use of workflow software to monitor process and help resolve queries
Standard credit control reports
Common SOP and AR customer database
Invoices automatically generated from SOP and shipment data
Self billing invoices automatically matched to customer orders
Multi currency invoices Automatic commitment and
accruals Automatic reconciliation
facilities between integrated SOP AR and GL systems
Sales orders prepared using pricing database with pricing profiles for products and customers
No order processed without valid customer PO reference
Delivery note acts as invoice for low-frequency shippings
SOP linked to debtors ledger to ensure customer credit limits not exceeded
Sales documents sent via EDI for all major customers
Integrated order & billing systems available on line & hard copy
Payments received electronically where possible
Automatic matching of payments to invoices
On-line diary facility to monitor calls Automatic flagging and reporting of
high risk accounts Automatic dunning letters issued
within agreed trading terms Auto routed hold/cessation of
service Integrated systems to facilitate
customer query handling Forecast cash receipts available for
treasury purposes
Accounts Receivable – Leading Practice Features
Process Features
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Authorise and set up new suppliers payment details
Maintain supplier payment details
Segregation of duties between supplier set up, voucher processing and payment processing
Accounts payable process vouchers: invoices, expense claims, credit notes, debit memos and prepayment requests
Suppliers required to use PO number on all documents and three way match wherever possible
Consolidated periodic invoicing for high frequency suppliers
Single supplier database Single employee
database Audit trail of changes to
supplier payment details
Purchase invoices transacted via EDI with major suppliers wherever possible
Electronic validation and approval of invoices
Automatic matching of invoice to order and goods received note (GRN)
Interface with General Ledger, Purchasing, Fixed Assets and Project Accounting
Use of workflow software to resolve queries and monitor process
Process Features
System Features
Maintain supplier details
Process vouchers
Optimisation of early payment discounts
Payment runs properly authorised
Electronic payments Default payment terms held on
supplier file with manual override at P.O. and invoice
Production of forward payment entry schedules to aid cash flow management
Interface with General Ledger, Fixed Assets, Project Accounting and Cash Management
Facility to suspend payments
Process payments
All transactions completed before period closed
Reconciliation of Accounts Payable activity and reconciliation with General Ledger control account
Management reports run once period is finally closed
Integration with General Ledger minimises reconciliation adjustments
Transaction processing prevented for closed periods
Evaluated Receipt Settlement
Period end processing
and reporting
Accounts Payable – Leading Practice Features
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Maintain fixedasset register
Control acquisitionsand disposals
Manage periodicasset depreciation
Verify and valueasset base
Process Features Determine asset categories
for internal and statutory purposes
Monitor asset maintenance charges
Apply insurance valuation to key assets
Ensure asset responsibility at BU level
Identify asset usage
Set up appropriate control of asset acquisition and disposals across company
Report on acquisitions and disposals on a monthly basis
Monitor tax issues related to acquisitions or CIP
Ensure BU responsibility for assets in their use and for disposal losses
Depreciate at point of asset use Apply depreciation rules to
asset classes Depreciation rates in
management accounts in line with statutory rates
Links asset depreciation to production and product costs/development
Revalue key assets on a regular basis based on book value and high risk
Comprehensive asset verification on regular periodic or rolling basis where asset cannot be verified via technical assumptions (most telco’s do not verify network assets: the fact that the network works is verification enough)
Verify non capitalised assetsSystem Features
On line asset register holding key data and current cost allocation
Cost code validation with GL Automatic links to AP and
Project Accounting system to capture acquisitions
Revaluation of features and mass transfers of assets to new cost centres
Leased asset features compliant with accounting standards
Acquisition linked to purchase order and accounts payable ledger
Disposals linked to sales ledger CIP linked to capital project
accounting Effective tax management
integrated with the fixed assets system
Depreciation charged automatically to cost centres in GL
Forecast asset depreciation for budget purposes
Variable depreciation rules for classes of assets
Assets can be grouped for depreciation rules
Variable asset valuation mechanisms eg historic, current replacement
Complete asset reports by physical location and cost centre
Report on identified or missing assets
Hold non capitalised physical assists for verification
Bar coding of assets for verification
Fixed Assets – Leading Practice Features
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Establish and maintain standing
data
Establish and applyaccounting controls
Apply andallocation rules
Produce periodicfinancial reportingand information
Produce statutoryaccounts
Process Features Common chart of accounts Minimal number of accounts
to meet information needs Regulated control of new
account creation Periodic check of inactive
accounts
All users of financial systems fully trained in standards and controls
Clearly defined procedures cover reconciliation of control accounts
Standard journal and authorised input forms are used
Clear month end cut off process
Electronic approval of journals
Clear authority levels
Management accounting information is sourced from GL (no reconciliation to financial accounts required)
Level of detail is driven by business requirements
Allocation rules are based on agreed rates or service level agreements
Consistent use of account codes across business allowing comparison of costs
Rigorous period end and year end routines to ensure accuracy of data
Detailed procedures applied to reconciliations, accruals and prepayments
Period and financial reports produced within 5 working days of period end
Flash results within 1 day Cyclical reconciliation of
balance sheet accounts Balance sheet accounts
allocated to GL staff Soft close for non quarter
months
Regular liaison with auditors to minimise ad hoc trail and reporting requirements for statutory reports
Corporation disallowable and allowable tax data controlled through use of chart of accounts
Period end timetable communicated to all relevant staff
System Features Integrated system eliminates duplication of maintenance
Local variation to common core chart of accounts
Comprehensive security and access controls
Efficient copy and editing facilities
Extra segment (s) provided for future expansion of requirements (fundamental change to business)
System allows control prior period posting
Variable journal input types such as standard, reversal, recurring
System controlled month end procedures and processes
On line training and help facilities
System provides control over combination of accounts and cost centres
Controls applied for use of balance sheet and profit and loss accounts
Real time allocation to cost centres
Automatic reconciliation of management and financial accounts
Automatic period end reports produced
Comprehensive report writer facilities to provide user defined reports
One line reporting of information and drill down
On line graphical display or links to EIS system
Screenbased exception reporting
System allows prior year postings and automatic balances carried forward
System is sole source of consolidated statutory reporting requirements and holds non financial data
Drill down facilities provides full audit trail on financial data
Additional period used solely for year end accounts
Multi-currency, multi-country consolidation
General Accounting – Leading Practice Features
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Process Features
Standardised and documented close process
Soft close
Financial information which the business has requested
Detailed analysis by business specialists
Reports preparation Variance Analysis Finance Analysis
System Features
Integrated systems that extend across all business units
Common chart of accounts Common financial language Consolidation system
Web based reports Drill down functionality on
reports
Reports centred on key performance indicators
Initial variance analysis and commentary
Standard reports Flexible systems
Management Reporting – Leading Practice Features
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Process Features Standardised and
documented close process
Soft close
Financial information which the business has requested
Detailed analysis by business specialists
System Features
Integrated systems that extend across all business units
Common chart of accounts
Common financial language
Consolidation system
Web based reports Drill down functionality
on reports
Reports centred on key performance indicators
Initial variance analysis and commentary
Standard reports Flexible systems
Financial information which the business has requested
Detailed analysis by business specialists
Web based reports Drill down functionality
on reports
Statutory Reporting – Leading Practice Features
Prepare Accounts Review Accounts Sign Accounts
Distribute Accounts
© Ernst & Young 2006
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