by Birgit Starmanns, Senior Director, Global Head of oCFO COE Thought Leadership, SAP An efficient financial close is key to a best-run finance organization. The key performance indicator (KPI) used to measure this efficiency is usually the number of days it takes to close the books. With the close, especially the quarter and annual close cycles, there are many constituents: the VP and manager levels, who make tactical decisions; the executive board members, who make strategic and forward-looking decisions; and external stakeholders, such as investors. Due to the number of people and the types of tasks involved, the activities associated with the close can be put into two workstreams. The Financial Planning and Analysis (FP&A) workstream concentrates on comparing the actual results to plan for a given period, thereby enabling analytics and predictive planning and budgeting. The Record-to-Report (R2R) workstream ensures the speed and accuracy of the tasks involved in the close, from accounting entries to consolidation to the generation of financial statements and disclosures. Both workstreams are executed in concert to handle both present and future scenarios. After reading this article you will be able to:

• Understand the stages of the financial close, which range from transactions to analytics
• Explain how financial accounting, controlling, and planning work together to enable insight into the financial status of a company
• Define the solutions that are available to support both the R2R and the FP&A workstreams
• Identify how BlackLine applications complement the solutions provided by SAP and how they fit into the overall financial close process

To begin, let’s look at how financial transformation can support finance teams in the close process and add more value to the business.

Financial Transformation and Measuring the Impact of Finance Teams

In looking at the day-to-day activities of finance organizations, historically, the focus has been on finance operations and report generation. This translates into activities such as processing transactions and journal entries, handling exceptions to these transactions, and putting a reporting focus on past performance. As discussed, the primary KPI for finance has historically been measured by the number of days required to close the books. While the typical measurement is the number of days starting with the first day of the new period, most companies actually begin a few days prior, for example, by processing open items and preparing accruals. Other KPIs include the cost of finance, the cost of compliance, the number of automated transactions, and transactional error rates such as errors in outbound bills. Other business-oriented KPIs — while still focusing on operations — include the number of days sales outstanding (DSO), accounts receivable balances, and discounts lost. One of the goals of financial transformation is to use automation to increase the efficiency of the operational finance tasks so less time is spent on these activities, as shown in Figure 1. Figure 1 Automation helps reduce the amount of effort spent on running financial operations, freeing up time for value-added activities and strategic insight This is not about reducing headcount. Instead, the focus is on freeing up team members to engage in more value-added activities for the business. Finance and risk teams are then involved with more strategic, corporate-wide objectives, such as profitability and margin analysis, working capital projections, and managing key risk indicators (KRIs). Finance and risk teams can also use predictive capabilities to advise the company on the potential financial impact of strategic decisions, which ultimately protects the value of an entire organization. Now, let’s identify the workstreams that support the financial close.

Workstreams in the Financial Close Process

As we just saw, while the goal of finance teams is to reduce the time spent on finance operations, certain activities will not simply disappear. Accounts receivable need to be processed to ensure customers pay for company products and services, and to handle collections and disputes. Accounts payable must be processed to pay vendors, for example, for raw materials for production, subcontracting services, and supplies. Asset depreciation must be executed to comply with legal requirements. Financial statements must be generated and submitted for regulatory compliance. That being said, there are internal reports and analyses that help to manage the business aside from by legal entity, such as financial statements by business unit or segment. Also, it is not enough to look at an accounts receivable balance; drilling down to the customer, product, geography, and channel levels will help identify trouble spots, followed by a what-if analysis of different actions that can be taken and the expected outcome of each of these actions. As you can see in Figure 2, there are two workstreams associated with each of the stages of the close — one focused on planning and prediction and one focused on financial operations and reporting. Figure 2 Two workstreams separate the transactional and disclosure processes from the management analysis processes of the financial close The R2R workstream covers the transactional and regulatory disclose side of the house. The FP&A workstream provides management insight that is more granular than just the general ledger (G/L) account level; it also includes what-if analysis based on business drivers, and predictive capabilities based on machine learning. The common denominator of the solutions that are addressed in the following sections is a prerequisite of having implemented SAP S/4HANA Finance, as it is the basis for many of the new applications discussed in this article. Note that the Central Finance deployment option is actually an implementation of SAP S/4HANA Finance, but only with finance and risk scenarios, without including other logistics solutions, such as the supply chain. Remember that the tasks in the financial close process can be executed at any time throughout the period with SAP S/4HANA Finance, so there is no need to wait until the end of the period, be it a month-end close, quarterly close, or annual close. For example, a trial balance or a calculation of specific KPIs of company performance is possible at any time during the period, without the need to wait for results of overnight batch processes at period-end.

Record-to-Report Metrics

KPIs associated with the R2R workstream focus on the more tactical tasks, which are also easier to measure. From a practical standpoint, if it takes almost a month to close the books and see the financial health of the company, the data is provided too late to support (or refute) options for a strategic decision. In addition, tax jurisdictions — from countries to states, provinces, counties, and cities — have hard deadlines for reporting on a quarterly and annual basis. SAP Performance Benchmarking tells us that companies spend 26% fewer days to close annual books in an integrated G/L system so that no reconciliations are necessary, which is supported by the use of the Universal Journal. Other KPIs also influence the time that it takes to manage financial operations. For example, if the error rate of transactional tasks increases, team members need to invest unplanned time to correct them, as well as reach out to anyone affected to maintain goodwill, including customers and vendors.

Recording

Recording of financial transactions occurs throughout each period. Journal entries are entered manually or can be posted as an ongoing recurring posting template, and the clearing of open items on both the receivables and procurement sides. Many of these transactions can be automated either through automated recurring entries, or with the help of machine learning apps. However, most financial transactions are generated from other business transactions. For example, when a delivery for a sales order is processed, a goods issue transaction takes place; that logistics transaction automatically generates a financial journal entry in the background, in real time, with no intervention required from the finance team. The same is true of manufacturing processes, using product costing and transfer pricing for more accurate valuation of inventory and the true cost of producing products. SAP S/4HANA Finance uses the Universal Journal as the single, integrated repository for all transactions. This includes all the common core functionality for financials (FI) and controlling (CO), such as cost centers, profit centers, internal orders, projects, and profitability analysis, as well as sub-ledger accounting, including asset management, accounts payable, accounts receivable, and the material ledger. And if a Central Finance scenario has been implemented, transactions can originate in a back-end SAP or non-SAP system.

Financial Accounting

In this stage, period close processes are executed with a focus on a single legal entity or company code. These tasks are needed to support the financial close, and with SAP S/4HANA Finance, they can take place at any time throughout the period on a continuous basis. These activities include accrual postings; the substantiation of transactions sourced from external systems, such as bank and credit card statements (please see the subsequent section on BlackLine solutions for additional details); point-of-sale (POS) systems; and payroll. Accruals management will automatically adjust procurement accruals based on the posting of actuals in the period. And machine learning supports additional processes, such as the matching and clearing of open items of goods receipt/invoice receipt (GR/IR) and cash application to receivables.

Financial Closing

Organizations can monitor all levels of the financial close through the new cockpit referred to as the SAP S/4HANA Cloud solution for advanced financial closing, which essentially replaces SAP Financial Closing cockpit. This includes the legal entity close (as represented by company codes), the group close across company codes or legal entities, and the corporate close. Each close activity is captured, including transactions, manual steps with documentation for audits, automated steps, and even batch jobs with dependencies on the outcome of any previous jobs, which can all now be executed in real time instead of in overnight jobs. Collaboration between team members and planning/re-planning activities can also be included. In addition, intelligent apps can be developed using the robotic process automation (RPA) capabilities to automate repetitive steps in the close process. SAP S/4HANA Finance for group reporting is the go-forward solution for consolidation processes and includes the best practices of the financial consolidation solutions that came beforehand. It enables the close across legal entities — including elimination entries that need to take place across those legal entities — and the resulting reporting at the company group level or across business units and segments. The source of the legal entity data can reside in multiple back ends, including both SAP and non-SAP systems.

Financial Disclosure

Finally, companies are required to disclose their financials. From a regulatory standpoint, companies need to provide their financial statements for their quarterly and annual close to all jurisdictions in which they do business, typically in the electronic standard of eXtensible Business Reporting Language (XBRL). This must be done in the corresponding accounting standard for each jurisdiction, such as the International Financial Reporting Standards (IFRS) and country-specific Generally Accepted Accounting Principles (GAAP) rules. Disclosure management handles all workflows and versions of the creation of financial statements, including balance sheets, profit-and-loss (P&L) reports, and statements of cash flow. It also generates XBRL submissions as well as printed documents, including the annual report for shareholders. In addition, there are specific solutions that help meet IFRS standards — for example, for contract and lease arrangements as well as revenue recognition for the sale of goods, services, and rental assets. A separate solution for advanced compliance reporting addresses legal and tax submissions and reporting, which is also necessary to provide to auditors. Figure 3 shows the solutions that support each stage of the financial close for the R2R process. Figure 3 Multiple capabilities come together in SAP S/4HANA Finance to support each stage of the R2R financial close process As we have seen, the solutions in this workstream focus on transactional activities and reporting to support regulatory requirements. They include automation to reduce the time needed to execute these processes, with an associated reduction in cost and errors. Note again that SAP S/4HANA Finance is at the core of these processes. Several of these solutions, such as SAP S/4HANA Cloud for advanced financial closing, have been developed on SAP Cloud Platform, so that the same application can be run with SAP S/4HANA Finance solutions that have been implemented on premise as well as in the cloud. Now let’s look at specifically where the applications that SAP offers as solution extensions from BlackLine are complementary to the financial close process.

BlackLine Solutions in the Financial Close Process

SAP extensively vets the solution extensions from partners to ensure their cross-solutions and cross-industry functionality strategically complements SAP solutions. As you have seen in the prior section and in Figure 3, BlackLine solutions are prominent in the R2R financial close process. Figure 4 highlights the components of the solution extensions by BlackLine. Figure 4 BlackLine solutions complement SAP capabilities, whether the systems of origin for transactions are SAP or non-SAP systems BlackLine solutions are delivered in the cloud and can be implemented with both on-premise and cloud solutions. Input data can originate in SAP ERP, SAP S/4HANA Finance, or Central Finance; additional information may be in other legacy or external systems, such as credit card and payroll applications. The additional substantiation data is required by auditors to validate and sign off on corporate financial statements. The output is in turn used for consolidations, reporting, planning and budgeting, management reporting, auditing, and regulatory disclosures.

Account Substantiation

First, let’s address the difference between reconciliation and account substantiation. Prior to the advent of SAP S/4HANA Finance, many accounting teams would spend time reconciling different tables within their system landscape. For example, in SAP ERP, there were totals tables that were updated every time a transaction was posted; many customers would download these totals tables and the transactional tables for a manual comparison to ensure the balances were reconciled. Then there would be the reconciliation between the core SAP ERP system and other components. In the past, many customers had implemented SAP Business Warehouse (SAP BW), and there was often logic applied in the transfer from the source systems into SAP BW. With SAP S/4HANA Finance, such reconciliations are no longer necessary; totals tables have been eliminated with all finance and controlling information being captured in the Universal Journal. SAP Analytics Cloud provides a consistent user experience for all types of analytics, ranging from the operational to the executive points of view. The SAP Account Substantiation and Automation application by BlackLine pertains to the accuracy, validity, and completeness of the balances of the G/L accounts to verify the accuracy of the information, which is especially critical to supply to auditors. Substantiation capabilities allow for the attachment of documentation of supplemental information, which can include bank statements, credit card statements, payment advice documents, invoices, contracts, POS data, and payroll benefits. This “reconciles” internal information with data provided by external entities. BlackLine originally named this application “SAP Account Reconciliation and Automation,” but then decided that name did not do justice to the actual capabilities being provided. The gathering of line items, matching, validation, certification, and sign-off can be automated for many processes, allowing finance teams to focus on the exceptions. The “premiere edition” capabilities include transaction matching and automatically posting of journal entries, such as adjustments for unmatched items.

Intercompany Processes

As part of the group close, financial entries that occur between legal entities must be eliminated to avoid overstating balances in the G/L. Examples of such entries may include accounts receivable, accounts payable, the sale of goods and services, allocations, and other cross-charges. If adjustments are needed, they can be made in source systems followed by reprocessing these consolidations, or they can be made as top-line adjustments. These top-level adjustments then require notes and other substantiation documentation to provide an explanation for financial statements and auditors. The native SAP solution SAP Intercompany Reconciliation provides the capabilities to handle the G/L reconciliation items, including open item accounts, G/L accounts and balances, and customer and vendor open items that often cross legal entities. Outstanding issues are found and called out on reports, but investigation and correction postings are typically executed through a manual process. The SAP Intercompany Financial Hub application by BlackLine will take data from SAP Intercompany Reconciliation if it has been implemented in SAP S/4HANA Finance or Central Finance. If the source of the data is in SAP ERP in a mixed landscape, SAP Intercompany Financial Hub by BlackLine will take the information directly from the source systems. Additionally, it takes a more proactive approach, where teams from different legal entities agree on the types of activities for which intercompany postings will be necessary, prior to the postings taking place. Finance teams can then accept or reject posting proposals, reducing the manual work involved in researching and posting elimination journal entries. Now, let’s look at the FP&A processes and how they are managed for decision making as part of financial close analytics.

Managing FP&A Processes

For FP&A processes, the focus is on management accounting, planning, and what-if analysis. It is critical that this information be available at any time throughout the period; new business situations that require decisions won’t wait until the end of a period close. Information must be immediately available to determine the financial impact of decisions and how they could influence corporate-wide KPIs — such as profitability, operating margin, and projections of cash flow based on existing commitments and contracts with customers and partners. As a matter of fact, SAP Performance Benchmarking has found that companies have a 76% higher operating margin where financial systems provide historical as well as forward-looking views into financial and operational performance. In addition, these processes and calculations can be made at lower levels than the legal entity or a particular G/L account. These dimensions include the business unit or segment, product and product group, individual customer and customer group, channel, and geography. Figure 5 shows these analytical processes as they relate to the stages of the financial close. And as with the R2R workstream, the underlying assumption is that SAP S/4HANA Finance is at the core of these processes to enable real-time analytics based on current financial transactions. Figure 5 Multiple solutions come together in SAP S/4HANA Finance to support each stage of the FP&A analytics processes associated with the financial close

Plan and Predict

Where R2R concentrates on the actual results of a financial period, one of the assessments performed for management decisions is typically a comparison of those actual results with the planned values for the period. There are many different comparisons associated with different time periods: plan vs. actual in the current period and year to date; plan vs. actual in a comparison to the prior year, both as year-to-date values and within a period (the latter of which is important especially in industries with seasonal trends); and a comparison on a rolling-period basis, such as a rolling 12-month plan vs. actual comparison. Planning is also done using various dimensions in addition to the G/L account level, such as customer, product, channel, and geography, which enables what-if analyses and simulations by one or by a combination of many dimensions. In addition, predictive accounting anticipates period-end results, even where a financial transaction has not yet taken place. For example, a sales order implies a commitment made by a customer, but financial postings are not made until the goods issue and an invoice is processed. The sales order value is then treated as predictive revenue. On the other side, a purchase order implies a commitment to a vendor, and is then treated as predictive spend. The revenue and spend is also mapped to cost objects such as projects, internal orders, cost centers, profit centers, and so on.

Management Accounting

Management accounting goes beyond the traditional G/L account level to provide more granular insights. There may also be multiple ledgers for different purposes, such as country-specific requirements for revenue recognition. The Universal Journal in SAP S/4HANA Finance handles parallel ledgers seamlessly. The more granular level usually involves different centers of responsibility within a company, which may or may not mirror the legal entity structure. A business unit can cross legal entities, or it can divide a legal entity into lower levels. Profit centers and cost centers provide additional details and may have allocations that occur across legal entity levels. Here, these controlling objects can also provide a breakdown to the other dimensions of customer, product, channel, and geography. Profitability is often managed at a lower level, and different financial analysts may prefer different ways to drill down into the data. One financial analyst may prefer to start with a geographic region and drill down to the customer level to determine which customers are most profitable; another team member may begin with product information then drill down to geography and then to customer. Each team member can create his or her own models for these analyses, as well as simulate the effect of particular actions on these results. Profitability can be measured as low as the profitability and margins on a single sales order. Product costing and transfer pricing capabilities also affect the financial results.

Margin Analysis

Contribution margins and operating margins are routinely calculated to measure performance and break-even points at multiple levels, especially for legal entities and business units. The return on investment (ROI) and break-even points are important when looking at particular investments, such as product development and associated sales. Such KPIs are calculated in real time, again based on the information available in the Universal Journal, and are visualized with SAP Analytics Cloud, which also supports dashboards. Drilldowns are available from these calculations. Automation is also in play — for example, with SAP Financial Statement Insights, which uses machine learning capabilities to identify trends across time, or highlight specific business exceptions, while identifying the potential sources of each exception and potential actions. It also provides comparisons with planned data and proactive, personalized alerts when an exception occurs.

Simulate and Optimize

In this phase, financial analysts can leverage multiple ways to visualize the information at various levels of detail, as well as use powerful prediction tools. Predictive KPIs, such as margins, can be modeled with various dimensions. More sophisticated combinations of data are available where the origin comes from different logistical systems and processes. For example, to provide a 360-degree view of a customer, information from a customer relationship management system is combined with financial information; the customer that has the highest number of sales orders may not be the most profitable — either because the sales are all for low-priced products or because relatively high revenue is eroded by high service costs, including expedited deliveries and a high rate of product returns. There are multiple levels where such simulations can take place. A spend analysis at the cost-center level provides predictive capabilities for future spend, based on historical trends, and can accommodate changes in assumptions. At a business-wide level, a common scenario is an analysis of mergers and acquisitions (M&As). For M&As, different scenarios are modeled, all with different assumptions and drivers. Different aspects in this example include looking at the potential acquisition costs and projected ROIs, even a comparison of a make-vs.-buy scenario, to come up with a strategic recommendation.

Summary

The financial close is critical to providing the financial information needed to meet both regulatory requirements and corporate KPIs as well as a breakdown to lower levels of detail for management reporting to support evaluations and recommendations that bolster strategic decisions. SAP’s solutions span across all aspects of the financial close — from transactional to analytical — to meet both internal and external requirements at any time throughout a period to result in a continuous close. For more information about the accounting and financial close with SAP S/4HANA Finance, including customer stories, please visit here. Birgit Starmanns is Senior Director, Global Head of the Office of the CFO (oCFO) Center of Excellence (COE) Thought Leadership in the Global COE for Finance and Risk, focusing on market-facing content and programs. Her experience includes the go-to-market of new finance and risk solutions that leverage new technologies such as machine learning and cloud, and the business benefits they can bring to organizations and finance. Her functional experience is in finance and management accounting, including SAP S/4HANA Finance, as well as core SAP ERP and SAP solutions for enterprise performance management. Birgit has more than 30 years of experience across the oCFO COE, solution marketing, solution management, strategic customer communities, and management consulting organizations. Prior to SAP, she was a principal in management consulting organizations, including Price Waterhouse and several boutique firms. Birgit holds a BA and MBA from the College of William and Mary.