Robert Kugel's Analyst Perspectives

Financial consolidation software assists companies in executing their accounting close process - especially those that use multiple ERP systems or have multiple legal entities - and with other characteristics that can complicate the process such as keeping books in multiple currencies. Not every midsize company needs consolidation software because many find their ERP (or financial management) software satisfies their needs. Our Office of Finance research finds that just 5% of midsize companies (which we define as those with 100-999 employees) use consolidation software to manage the process while 30% use their ERP system and another 51% use desktop spreadsheets either completely or to a significant degree. Using consolidation software can help shorten the close, especially when it substantially reduces the use of spreadsheets. Consolidation software supports the management discipline of continuous accounting.

Smaller midsize companies usually find that their ERP system can handle their periodic accounting consolidation. Eventually, though, successful businesses grow and will often find that the very accounting software that once made things more efficient is now bogging down operations. As organizations grow, their structure and accounting tend to get more complicated. For example, intercompany transactions volumes increase, or there are substantially more legal entities, perhaps even operations in multiple countries with multiple currencies. An acquisition or merger, especially one involving a company of similar size, may make standardizing on one ERP system an unattractive option. Consequently, the accounting staff winds up spending significant time each month and quarter doing an increasing amount of time-consuming manual operations. And, except in the case of a merger or acquisition, the volume of additional manual work may start at a low level that is not a big deal but over time, as the business expands, the workloads become increasingly burdensome.

One important reason for using a consolidation application is to close the books sooner so that financial and managerial accounting can be readily available to executives and managers, enabling them to respond to issues and opportunities earlier and build corporate agility. There is general agreement that corporations should close their books within one business week of the end of the month or quarter, yet our Benchmark Research found that 59% of midsize companies take more than six business days to complete the process. A too-long close is one sign that consolidation software could streamline the process by reducing the number of spreadsheets that are being used to get around the limitations of an organization’s ERP system or consolidate the accounts from multiple vendors’ ERP systems. Our Fast Close Benchmark Research reveals a correlation between spreadsheet use and time spent on the close: just 16% of companies that make substantial use of spreadsheets in the close process complete it within four business days compared to 33% that limit them to occasional use. Conversely, 33% of organizations that limit spreadsheet use in their close take seven or more days versus 54% of companies that use them extensively.

Another important reason for investing in consolidation software is improving staff productivity. Workflows, for example, can streamline the close process, enabling the controller to manage by exception and focus on resolving issues quickly. The value of productivity is measured in staff effectiveness, not costs, because the finance and accounting workers in midsize companies typically wear multiple hats so it is unlikely that improving individual efficiency in one area of responsibility will make it possible to reduce departmental headcount. Not having to spend as much time on the accounting close frees up time to perform other work, including analysis and reporting, that provides a broader range of managerial and financial accounting measurements sooner to improve situational awareness and enhance performance. It is also likely that the department will be able to scale as the business grows without having to increase headcount.

Financial control and financial statement integrity are also factors favoring the use of a consolidation application because the software, among other functions, provides an audit trail, converts currencies and generates financial reports. Desktop spreadsheets are notoriously error prone, lack an audit trail and can introduce inconsistencies in key items such as exchange rates.

Unless a midsize company makes an acquisition that immediately complicates its accounting close, there usually is no bright line that indicates it is time to consider using consolidation software. As businesses grow, they become more complex as they expand geographically, create new legal entities, adopt new business models and otherwise make necessary business decisions that add to the accounting staff’s month- and quarter-end task burden. Two signs that consolidation software is needed are an accounting close that takes more than one business week or where the department makes extensive use of spreadsheets in the process. For those midsize companies, I recommend assessing how consolidation software can have a positive impact on the productivity and effectiveness of the accounting staff.

Regards,

Robert Kugel