The last mile of finance (LMOF) deals with all the activities required to create, analyze and publish a final set...
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of financial results monthly, quarterly or annually. The initial inputs to the LMOF are the business transactions for the month, quarter or year.
Four steps are required to complete the LMOF. First is the financial close, when transactions are created that best reflect the state of a corporation at month, quarter or year end. These transactions might include the allocation of overhead to individual accounts or an allowance for bad debt.
The second step is financial consolidation. In this step, different lines of business or geographies may have gone through a financial close, and the consolidation is used to create a financial statement that aggregates across all business units.
The third step is financial reporting, which allows for the creation of financial statements for use internally, as well as by lenders and external shareholders. Moreover, done correctly, financial reporting helps give the management team key insights into how to run the business more effectively in the future.
The fourth step is financial disclosure, which provides guidelines for the externalization of financial documents, often using the XBRL markup language.
To optimize the LMOF, finance and IT should understand the following points.
Processes in the LOMF. Once the standard business transactions have been completed, a complex set of activities are required to close the books.
Closing activities include allocations, eliminations and various account reconciliations. In terms of successful automation, both IT and finance must understand the closing transaction activities, where they are made and how they are approved by financial management.
Consolidation activities represent the last set of activities to create the final set of financial transactions. Here too, there needs to be a clear understanding of how each business unit creates its final close, and what steps are required to create a consolidated set of financial statements. With proper closings and consolidations, a corporation can close the month, quarter or year with a set of transactions that best reflects its financial health.
Financial reporting and management insight. The closed and consolidated sets of transactions are now ready for financial reporting. Part of the reporting process involves publishing financial statements (P&L, balance sheet, source and application of funds) that follow generally accepted accounting principles. Increasingly, the publication of statements requires the use of the XBRL markup language and follows approaches including International Financial Reporting Standard (IFRS) and Sarbanes-Oxley (SOX).
But often overlooked is the use of analytics on the consolidated set of transactions. There is a great opportunity to derive insights into how better to run the company. The analytics can be followed by simulations (financial modeling) to pursue future strategic alternatives.
Improving LMOF metrics. The LMOF, as a set of internal processes, should be subject to constant scrutiny for improvement. Key metrics are:
- Faster. A corporation, for example, should set ambitious goals for the number of days after month end it takes to close, consolidate and report financial results. Some companies take so long to achieve the LMOF, the next month is upon them.
- Less costly. Without constant scrutiny, the LMOF can take on a "manual" life of its own, and use more person days to complete its activities than are required. This adds unnecessary costs.
- Better. A better LMOF results in a final set of transactions that can satisfy internal and external stakeholders. In particular, better financial results can lead to better insights for management.
The last mile of finance is important for statuary reporting and for financial analysis. Finance and IT must collaborate to ensure that the closing process is efficient and that meaningful financial data sets are created. Consider vendors that offer suites of LMOF software as well as specific functions.
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Automating the last mile of finance
Many software products are available that let you automate financial closing, consolidation, financial reporting and disclosure, including ERP from SAP, Oracle and some of their competitors. Here is an overview of vendors with more specialized offerings.
- Financial close:
-- RR Donnelly
Enterprise performance management (EPM) vendors that include LMOF functionality:
- The "Big 4" of EPM
-- SAP/Business Objects
- Niche EPM vendors that offer LMOF functionality:
-- Host Analytics
The benefits of digital financial reporting
Four steps to financial consolidation
How to close the books faster