Moving to a Lean Finance Function A Journey Worth Making

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This document breaches copyright if it has not been received directly from David Parmenter

Moving to a Lean Finance

Function – A Journey

Worth Making

by David Parmenter

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ŽŶƚĞŶƚƐ

ϭ ĂĐŬŐƌŽƵŶĚͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺ ϰ ϭ͘ϭ &ŝŶĂŶĐĞƌŽůĞŝƐĐŚĂŶŐŝŶŐͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺϰ ϭ͘Ϯ &ŝŶĂŶĐĞƚĞĂŵƐŶĞĞĚƚŽĞŵďƌĂĐĞƚŚĞůĞĂŶŵŽǀĞŵĞŶƚ ͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺϱ ϭ͘ϯ ĂĐŬŐƌŽƵŶĚƚŽƚŚĞůĞĂŶŵŽǀĞŵĞŶƚͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺϲ ϭ͘ϰ >ĞĂŶŝƐĂďŽƵƚĞůŝŵŝŶĂƚŝŶŐƚŚĞĞŝŐŚƚǁĂƐƚĞƐ ͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺϳ ϭ͘ϱ /ŵƉŽƌƚĂŶĐĞŽĨĂďĂŶĚŽŶŵĞŶƚ ͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺϴ ϭ͘ϲ dŚĞƉƵƌƉŽƐĞŽĨƚŚŝƐǁŚŝƚĞƉĂƉĞƌͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺϴ Ϯ dŽǇŽƚĂ͛ƐϭϰƉƌŝŶĐŝƉůĞƐĂŶĚƚŚĞŝƌƌĞůĞǀĂŶĐĞ ͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺ ϵ Ϯ͘ϭ ƌĞĂƚĞĐŽŶƚŝŶƵŽƵƐƉƌŽĐĞƐƐĨůŽǁƚŽďƌŝŶŐƉƌŽďůĞŵƐƚŽƚŚĞƐƵƌĨĂĐĞ ͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺϭϬ Ϯ͘Ϯ >ĞǀĞůŽƵƚƚŚĞǁŽƌŬůŽĂĚ;,ĞŝũƵŶŬĂͿ ͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺϭϬ Ϯ͘ϯ ƵŝůĚĂĐƵůƚƵƌĞŽĨƐƚŽƉƉŝŶŐƚŽĨŝǆƉƌŽďůĞŵƐ͕ƚŽŐĞƚƋƵĂůŝƚǇƌŝŐŚƚƚŚĞĨŝƌƐƚƚŝŵĞͺͺͺͺͺͺͺͺͺͺͺͺϭϬ Ϯ͘ϰ hƐĞǀŝƐƵĂůĐŽŶƚƌŽůƐŽŶŽƉƌŽďůĞŵƐĂƌĞŚŝĚĚĞŶͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺϭϭ Ϯ͘ϱ ,ĞůƉǇŽƵƌĞǆƚĞŶĚĞĚŶĞƚǁŽƌŬŽĨƉĂƌƚŶĞƌƐΘƐƵƉƉůŝĞƌƐƚŽŝŵƉƌŽǀĞͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺϭϭ Ϯ͘ϲ hƐĞŽŶůǇƌĞůŝĂďůĞ͕ƚŚŽƌŽƵŐŚůǇƚĞƐƚĞĚƚĞĐŚŶŽůŽŐǇƚŚĂƚƐĞƌǀĞƐǇŽƵƌƉĞŽƉůĞĂŶĚƉƌŽĐĞƐƐĞƐͺͺͺϭϭ Ϯ͘ϳ 'ŽĂŶĚƐĞĞĨŽƌǇŽƵƌƐĞůĨƚŽƚŚŽƌŽƵŐŚůǇƵŶĚĞƌƐƚĂŶĚƚŚĞƐŝƚƵĂƚŝŽŶ ͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺϭϮ Ϯ͘ϴ DĂŬĞĚĞĐŝƐŝŽŶƐƐůŽǁůǇďǇĐŽŶƐĞŶƐƵƐ͕ĂŶĚƚŚĞŶŝŵƉůĞŵĞŶƚƚŚĞĚĞĐŝƐŝŽŶƐƌĂƉŝĚůǇͺͺͺͺͺͺͺͺͺϭϮ Ϯ͘ϵ ĞĐŽŵĞĂůĞĂƌŶŝŶŐŽƌŐĂŶŝƐĂƚŝŽŶƚŚƌŽƵŐŚƌĞůĞŶƚůĞƐƐƌĞĨůĞĐƚŝŽŶĂŶĚĐŽŶƚŝŶƵŽƵƐŝŵƉƌŽǀĞŵĞŶƚϭϮ ϯ dŚĞĨŝƌƐƚƐƚĞƉʹƐƉĞĞĚƵƉŵŽŶƚŚͲĞŶĚ ͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺ ϭϯ ϰ >ĞĂŶƚĞĐŚŶŝƋƵĞƐ ͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺ ϭϰ ϰ͘ϭ WŽƐƚͲŝƚƌĞĞŶŐŝŶĞĞƌŝŶŐͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺϭϰ ϰ͘Ϯ ŶŝŶƚƌŽĚƵĐƚŝŽŶƚŽ^ZhD ͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺϭϴ ϰ͘ϯ <ĂŶďĂŶŽĂƌĚͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺϮϬ ϰ͘ϰ hŶůĞĂƐŚ<ĂŝǌĞŶĂŶĚĂďĂŶĚŽŶŵĞŶƚͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺϮϭ ϰ͘ϱ hƐŝŶŐǀĂůƵĞƐƚƌĞĂŵŵĂƉƉŝŶŐͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺϮϮ ϰ͘ϲ DŽƌĞǁĂůŬĂďŽƵƚͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺϮϯ ϰ͘ϳ >ĞĂŶŵĂŶĂŐĞŵĞŶƚƚĞĐŚŶŝƋƵĞƐ ͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺϮϰ ϱ >ĞĂŶǁŝŶƐŝŶƚŚĞŶĞǆƚƐŝǆŵŽŶƚŚƐͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺ Ϯϱ ϱ͘ϭ ZĞƉŽƌƚŝŶŐƉĞƌŝŽĚďĂƐĞĚŽŶϰŽƌϱǁĞĞŬƐ ͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺϮϱ ϱ͘Ϯ >ŝŵŝƚǇŽƵƌĂĐĐŽƵŶƚĐŽĚĞƐĨŽƌƚŚĞWͬ>ƚŽůĞƐƐƚŚĂŶϲϬͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺϮϲ ϱ͘ϯ ŽŵƉůĞƚĞǇŽƵƌĂŶŶƵĂůƉůĂŶŝŶϭϬǁŽƌŬŝŶŐĚĂǇƐͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺϮϳ ϱ͘ϰ >ŽŽŬƚŽŝŶƚƌŽĚƵĐĞƌŽůůŝŶŐĨŽƌĞĐĂƐƚŝŶŐĂŶĚƉůĂŶŶŝŶŐͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺϮϳ ϱ͘ϱ &ŝŶŝƐŚƚŚĞĂŶŶƵĂůĂĐĐŽƵŶƚƐŝŶƐŝĚĞƚŚƌĞĞǁĞĞŬƐŽĨǇĞĂƌͲĞŶĚ ͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺϮϴ ϱ͘ϲ /ŶǀĞƐƚƚŝŵĞĂŶĚŵŽŶĞǇŝŶĂĐĐŽƵŶƚƐƉĂǇĂďůĞ ͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺϮϵ ϱ͘ϳ ĚŽƉƚŝŶŐƚŚĞƉƵƌĐŚĂƐĞĐĂƌĚʹĂĨƌĞĞWƐǇƐƚĞŵ͊ͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺϮϵ ϲ /ŵƉĂĐƚŽĨůĞĂŶŽŶƌĞƉŽƌƚůĂǇŽƵƚ͕ƌĞƉŽƌƚĨƌĞƋƵĞŶĐǇĂŶĚƉĞƌĨŽƌŵĂŶĐĞŵĞĂƐƵƌĞƐͺͺͺͺͺͺͺͺ ϯϬ ϲ͘ϭ ZĞƉŽƌƚŝŶŐŽŶĂƉĂŐĞͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺϯϬ ϲ͘Ϯ dŚĞƌŝƐĞŽĨǁĞĞŬůǇĂĐĐŽƵŶƚŝŶŐͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺϯϯ

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ϲ͘ϯ /ŵƉĂĐƚŽĨƉĞƌĨŽƌŵĂŶĐĞŵĞĂƐƵƌĞƐͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺϯϰ ϲ͘ϰ ůĞĐƚƌŽŶŝĐŽĂƌĚƉĂƉĞƌƐͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺϯϳ ϳ ĚǀĞŶƚŽĨǀĂůƵĞƐƚƌĞĂŵĂĐĐŽƵŶƚŝŶŐͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺ ϯϵ ϳ͘ϭ sĂůƵĞƐƚƌĞĂŵĂĐĐŽƵŶƚŝŶŐͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺϯϵ ϳ͘Ϯ ŽƐƚŝŶŐŽĨĂƉƌŽĚƵĐƚŐƌŽƵƉďǇƌĂƚĞŽĨĨůŽǁͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺϰϭ ϳ͘ϯ KŶĞŽĨĨĚĞĂůĂŶĂůǇƐŝƐƵƐŝŶŐƚŚĞůĞĂŶĂƉƉƌŽĂĐŚͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺϰϮ ϳ͘ϰ dŚĞƵƌŐĞŶĐǇƚŽĐŚĂŶŐĞƌĞƉŽƌƚŝŶŐǁŚĞŶǇŽƵƌŽƉĞƌĂƚŝŽŶƐŚĂǀĞĂĚŽƉƚĞĚůĞĂŶͺͺͺͺͺͺͺͺͺͺͺͺͺϰϯ ϴ hƐŝŶŐůĞĂĚŝŶŐƚĞĐŚŶŽůŽŐǇƚŽďĞĐŽŵĞůĞĂŶ ͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺ ϰϱ ϴ͘ϭ tŚǇƚŚĞŶĞĞĚĨŽƌĂƉůĂŶŶŝŶŐƚŽŽůͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺϰϱ ϴ͘Ϯ ŝƐĐůŽƐƵƌĞDĂŶĂŐĞŵĞŶƚͲŽůůĂďŽƌĂƚŝǀĞƌĞƉŽƌƚƉƌŽĚƵĐƚŝŽŶŵĂŶĂŐĞŵĞŶƚ ͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺϰϴ ϴ͘ϯ DŽǀĞƚŽĂƉĂƉĞƌůĞƐƐĂĐĐŽƵŶƚƐƉĂǇĂďůĞŽƉĞƌĂƚŝŽŶ ͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺϰϵ ϴ͘ϰ ŽŶƐŽůŝĚĂƚŝŽŶΘŝŶƚĞƌĐŽŵƉĂŶǇƚƌĂŶƐĂĐƚŝŽŶƐŽĨƚǁĂƌĞƚŽƌĞŵŽǀĞƚŚĞĚŝƐƉƵƚĞƐͺͺͺͺͺͺͺͺͺͺͺͺϱϭ ϴ͘ϱ ƌĞƉŽƌƚŝŶŐƚŽŽůƚŽĞŶŚĂŶĐĞĂĐĐƵƌĂĐǇĂŶĚŵĂŬĞƌĞƉŽƌƚŝŶŐƉĂƉĞƌůĞƐƐͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺϱϭ ϵ ŚĂůůĞŶŐŝŶŐƚŚĞƐƚĂƚƵƐƋƵŽ ͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺ ϱϰ ϵ͘ϭ ĐƚŝǀŝƚǇďĂƐĞĚĐŽƐƚŝŶŐŝƐďƌŽŬĞŶ ͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺϱϰ ϵ͘Ϯ dǇŝŶŐƉĞƌĨŽƌŵĂŶĐĞƌĞůĂƚĞĚƉĂǇƚŽƉƌĞͲĚĞƚĞƌŵŝŶĞĚƚĂƌŐĞƚͬ<W/ ͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺϱϰ ϵ͘ϯ ZĞƉůĂĐŝŶŐƚŚĞďƌŽŬĞŶŵĞĞƚŝŶŐƉƌŽĐĞƐƐǁŝƚŚ͞ĐƚŝŽŶDĞĞƚŝŶŐƐ͟DĞƚŚŽĚƐͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺϱϱ ϵ͘ϰ hƐŝŶŐĐŽŶƐƵůƚĂŶƚƐǁŝƐĞůǇͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺϱϳ ϵ͘ϱ hŶĚĞƌƐƚĂŶĚƚŚĂƚƚŝŵĞƐƉĞŶƚƌĞĐƌƵŝƚŝŶŐŝƐƚŚĞŵŽƐƚǀĂůƵĂďůĞƚŝŵĞͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺϱϵ ϭϬ >ĞĂĚŝŶŐĂŶĚƐĞůůŝŶŐĐŚĂŶŐĞ ͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺ ϲϬ ϭϬ͘ϭ >ĞĂĚŝŶŐĐŚĂŶŐĞďǇ:ŽŚŶ<ŽƚƚĞƌͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺϲϬ ϭϬ͘Ϯ >ĞĂƌŶƚŽƐĞůůďǇƵƐŝŶŐƚŚĞĞŵŽƚŝŽŶĂůĚƌŝǀĞƌƐŽĨƚŚĞďƵǇĞƌͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺϲϭ ϭϬ͘ϯ dŚĞĞůĞǀĂƚŽƌƐƉĞĞĐŚƚŽŐĞƚĂŶĂƵĚŝĞŶĐĞĨŽƌǇŽƵƌŝĚĞĂͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺϲϮ ϭϬ͘ϰ dŚĞŝŵƉŽƌƚĂŶƚƐĂůĞƐƉŝƚĐŚ ͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺϲϮ ϭϭ 'ĞƚƚŝŶŐƐƚĂƌƚĞĚͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺ ϲϱ ϭϭ͘ϭ ƌƚŝĐůĞƐƚŽƌĞĂĚͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺϲϱ ϭϭ͘Ϯ sŝĚĞŽƚŽǁĂƚĐŚͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺϲϱ ϭϭ͘ϯ ZĞĂĚŝŶŐůŝƐƚͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺϲϱ ϭϮ tƌŝƚĞƌ͛ƐďŝŽŐƌĂƉŚǇͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺ ϲϲ ƉƉĞŶĚŝǆϭ͗:ŽďĚĞƐĐƌŝƉƚŝŽŶĨŽƌƚŚĞŚŝĞĨDĞĂƐƵƌĞŵĞŶƚKĨĨŝĐĞƌƉŽƐŝƚŝŽŶͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺ ϲϳ ƉƉĞŶĚŝǆϮ͗hƐĞĨƵůůĞƚƚĞƌƐĂŶĚŵĞŵŽƐͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺ ϳϬ ƉƉĞŶĚŝǆϯdŝŵĞůǇŵŽŶƚŚͲĞŶĚƌĞƉŽƌƚŝŶŐͲďǇǁŽƌŬŝŶŐĚĂǇϯŽƌůĞƐƐͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺ ϳϱ ƉƉĞŶĚŝǆϰ͗ZƵŶĂǁŽƌŬƐŚŽƉƚŽ͞ƉŽƐƚͲŝƚ͟ƌĞͲĞŶŐŝŶĞĞƌŝŶŐŵŽŶƚŚͲĞŶĚƌĞƉŽƌƚŝŶŐ ͺͺͺͺͺͺͺͺͺͺͺ ϴϯ ƉƉĞŶĚŝǆϱ͗dŝŵĞůǇĂŶŶƵĂůƉůĂŶŶŝŶŐƉƌŽĐĞƐƐͲϭϬǁŽƌŬŝŶŐĚĂǇƐŽƌůĞƐƐ͊ ͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺ ϴϱ ƉƉĞŶĚŝǆϲ͗YƵŝĐŬĂŶŶƵĂůƌĞƉŽƌƚŝŶŐʹǁŝƚŚŝŶϭϱǁŽƌŬŝŶŐĚĂǇƐƉŽƐƚǇĞĂƌĞŶĚ͊ ͺͺͺͺͺͺͺͺͺͺͺͺ ϵϵ ƉƉĞŶĚŝǆϳ͗ĐĐŽƵŶƚƐƉĂǇĂďůĞŝŶƚŚĞϮϭƐƚ_{ĐĞŶƚƵƌǇͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺͺ ϭϬϱ}

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David Parmenter [email protected] www.davidparmenter.com

1 Background

1.1 Finance role is changing

Joseph Heller’s iconic 1961 book introduced a new phase into our language “Catch 22” which the Oxford English Dictionary defined as:

“A situation in which a desired outcome or solution is impossible to attain because of a set of inherently illogical rules or conditions”

I see many finance teams in this situation. The late monthly accounts, the long, drawn-out annual planning process and annual reporting cycle leave no time to break this cycle - a perfect Catch 22.

Management accounting, as practiced by many corporate accountants today is still based around the delivery of services that an organisation might have needed in Henry Ford’s Model T era, see Exhibit 1.1. How does a finance team come into the 21st_century?

Exhibit 1.1 The birth of management accounting

The finance time needs to create time for change, to have more time to implement. Where do we find this time? We find it by attacking the main mistakes corporate accountants make day-in day-out, an extract is shown in the table below.

Process Typical antiquated services Lean services Month-end

reporting

Month-end reporting is all about seeking perfection, the correct answer for month-end no matter how long it takes. Team generates unread reports which have been put together in a rush, often containing unnecessary complexity and errors.

Reporting month-end by day three or less (by next month-end) with a goal of reporting by the close of the first working day.

CEO receives a one page A3 finance report summarizing progress. Reports error free with the larger organisations using collaborative disclosure management software to ensure ‘error free” reports.

Annual accounts

Year-end reporting nearly consuming all of the Finance team’s time in the first quarter of following year.

The annual accounts signed off by the end of the third week of the following year.

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planning process

Overseeing a long drawn out annual planning process where annual entitlements are fought over. The end result being wrong as soon as the ink has dried.

Produced in less than two weeks following modern forecasting rules. Eventually the annual plan is replaced by a quarterly rolling planning process looking out six quarters.

Chart of accounts

A large chart of accounts so any possible question can be answered. Ignoring the fact that it leads to miss-coding and

Having less than 50 account codes for profit and loss (P&L) as there is no need for expense account codes for immaterial amounts (> 1% of total annual expenditure is the minimal threshold).

Procedures and

processes

Processes largely unchanged and heavily reliant on paper documentation. Cost of processing often greater than any benefit.

All systems relentlessly streamlined. Accounts payable volumes reduced by 60%. Internal transactions between departments eliminated. 21st_{century applications used which} utilise mobile phone technology. Technology With most of the finance

team’s IT budget is spent on G/L upgrades the team has to make do with a myriad of error prone spreadsheets.

Robust tools replacing all spreadsheets over 100 rows.

Adoption of a planning tool, a cloud based expense claim system, and

Costings Cost allocations and activity based costing used to arrive at a full product/service cost. Manufacturers using complex absorption of labour and overhead into WIP and closing stock.

Cost allocations seldom performed and activity based costing is thrown out.

Labour and overhead largely

charged to the period in which they occurred.

KPIs All measures called KPIs many being cobbled together without an understanding of the behavioural

consequences of the measure.

Working with no more than ten KPIs in the organisation. These

measures will be thoroughly tested to ensure that they improve

performance and have a minimal dark side.

Reporting period

Monthly reporting based around Julius Caesar’s

calendar as it has been since inception.

Moved to a 4,4, 5 system where each period is either 4 or 5 weeks long and ends on the same day e.g. a Friday. This leads to many

processing efficiencies.

1.2 Finance teams need to embrace the lean movement

The finance team needs to embrace the lean movement to slim down all of their processes so they can be less locked in the past. This change will have an impact on the workload of the team as shown in Exhibit 1.2., which compares an antiquated team and a lean finance team.

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Exhibit 1.2: Lean versus a Non lean finance team

The significant increase in advisory time will lead to: changes in our thinking in accounting (using value streams, absorption of labour and overhead into unsold finished goods, activity based accounting); becoming “warriors against waste”1_{; the} adoption of profound lean practices (Post-it re-engineering, SCRUM, Kanban) and a great application of 21st_{century time management practices (action meetings, stand} up work stations etc).

The end result will be participating in more rewarding work and a happy and more fulfilled finance team.

1.3 Background to the lean movement

The lean movement is largely credited as a Japanese process that was responsible for the meteoric rise of the Japanese multinationals over the period 1960 to 2000. However, when you look at its origins you see the influence of American writers such as Deming. Over the years there have been many institutes and consultancy methodologies that make up the lean movement as we see it today.

Whilst most corporate accountants are aware of the revolution of lean and its

positive impact on private, government and non profit sectors few have realised the profound impact it has on the accounting function. The pioneers of lean accounting have now blazed a pathway that all corporate accountants need to walk along. The “lean accounting” movement has been gaining momentum around the world and is a hot topic. Thus it will not be long before CEOs start asking questions about it. It is thus imperative that corporate accountants, sooner rather than later,

understand the concepts of lean accounting and its implications to their finance team and organisation.

Whilst the lean movement has been part of workshops for over twenty years – lean accounting has been a much more recent phenomena lead by a series of thinkers and dates back to roughly 2004. The key players include:

Jeremy Hope

Brian Maskell Non-lean Lean Advisory Advisory System implementation

Annual planning System

implementation, adoption of new lean processes Month-end and annual reporting Rolling forecasting & planning Month-end and annual reporting w o rk in g h o u rs 7 5 % f u tu re f o c u s

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Jean Cunningham2

Frances Kennedy3

In fact the movement has progressed to such an extent that there is now an annual lean accounting summit which can be found easily on the internet.

1.4 Lean is about eliminating the eight wastes

In lean there are eight types of waste. These wastes are seen within the whole organisation and within the accounting function. I have outlined the eight wastes below in Exhibit 1.3

Exhibit 1.3: The eight wastes that need tackling Eight types of waste Within the accounting function 1. Over-production (Building batches

of products larger than the

customers’ immediate need. Printing marketing brochures in advance)

Our reports too large and go into too much detail

2. Waiting (Production operators waiting because a machine has gone down or a component is not

available. Operators “minding” machines).

The processing of batches of AP or AR transactions where these batches wait for hours or days before processing. Also the month-end, year-end, annual planning processes have much waiting time. 3. Transportation (Moving materials

around the factory. Buying raw materials and components from distant suppliers).

The finance team is always shuffling information around team members.

4. Extra processing (Processes that appear productive but are

unimportant to the customer.

The chart of accounts, the month-end, year-end, annual planning processes all have extra processing within them. 5. Excess inventory (Having

materials, components, work-in-process, and finished goods levels above the immediate need).

The way we have transferred this period’s sunk costs into next period production costs has created a blow –out in inventory.

6. Waste of motion searching for tools, parts, or forms.

The finance function needs a make-over in time and motion. We all need to know where everything is filed and be

disciplined in maintaining this. 7. Defects, scrap and rework in

production. Complex inspection steps to overcome poor processes or poor design.

Accounting function generates many spreadsheets that have a dubious function. They are completed because they were completed last month.

8. Unused employee creativity Based on Toyota, we would need to have 10 innovations implemented per team member per year within the finance function.

Waste needs to be attacked.

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“Most business process are 90% waste and 10% value-added work.” Dr Jeffrey Liker

Boeing reduced over a trillion of internal transactions through adopting lean.

“Your time is limited, so don’t waste it living someone else’s life. Don’t be trapped into living with the results of other people’s thinking. Don’t let the noise of other’s opinions drown your own inner voice.”

Steve Jobs

1.5 Importance of abandonment

Before I venture further, before we can embrace new concepts, we need to embrace some advice from the management guru Peter Drucker4_{. I consider Drucker to be} the Leonardo de Vinci of management, and he frequently used the word

‘abandonment’. I think it is one of the top ten gifts Drucker gave us all. He said

“The first step in a growth policy is not to decide where and how to grow. It is to decide what to abandon. In order to grow, a business must have a systematic policy to get rid of the outgrown, the obsolete, and the unproductive.”

“Don’t tell me what you’re doing, tell me what you’ve stopped doing.”

He frequently said that abandonment is the key to innovation, in other words the key to adopting a lean methodology.

Peter Drucker observed in one organisation that the first Monday of every month is set aside for “abandonment meetings at every management level.” Each session targets a different area so that in the course of a year everything is given the once-over.

The act of abandonment gives a tremendous sense of relief to a team for it stops the past from haunting the future. It takes courage and conviction—abandonment is a skill that one needs to cultivate.

Knowing when to abandon and having the courage to do so are important in the adoption of lean. With the adoption of the lean methodology one needs to:

abandon processes and procedures that are not lean let go of the past

have a commitment to changing the rules, and

help staff move on who no longer feel comfortable, or are able to perform, in the new lean environment

1.6 The purpose of this white paper The aim of this white paper is to:

convince you to invest time and energy into lean accounting get some quick wins on the board to free you to start the journey give you some pointers on the way forward

show you some tools I have prepared for you

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6 Impact of lean on report layout, report frequency and

performance measures

Lean has a significant impact on report layout, report frequency and on performance measures.

6.1 Reporting on a page

Management has always been pleading the same message “report on a page please.” Being lean makes brevity a necessity. To be consistent with lean we should not produce reports that are merely information memorandums. They need to be decision based tools that are received on a timely basis and encourage action in the right direction.

To kick off I want to talk about two one page reports that will make a difference. A3 page summary report for the CEO

All CEOs like a great summary page where they can see the whole picture. In my research I came across this one-pager that I believe is an excellent example of clever reporting. On one A3 page (U.S. standard fanfold), the finance team has summarized the areas to note, referred to the last end-of-year forecast, reviewed the major business units, and commented on the summary P and L and balance sheet (see Exhibit 6.1 ).

The concept here is to give the CEO a summary of the financial report that is easier to read than the full finance report. Once you have designed this carefully, you will find, I am sure, that this page becomes the main report. Both sides of the page can be used. The back side of the page could include summary business unit

performance, or ranking tables for retail branches, or a dashboard summarizing financial and nonfinancial information.

Whatever you include on the back side, ensure you do not go below a 10 - point font size.

A3 dashboard for the Board

There is a major conflict in most organisations that have boards, as to what information is appropriate for the board. Since the board’ s role is clearly one of governance and not of management, it is appropriate to be providing the board with information to concentrate on what it does best: focusing on the horizon for

icebergs or looking for new ports to call and coaching the CEO, as required. A dashboard should be a one page display such as the example in Exhibit 6.2. The commentary should be included on this page.

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Exhibit 6.1 An A3 one page report for the CEO

Features: An A3 page summary report prepared by the finance team of a government agency for the CEO. The concept here is to give the CEO an A3 summary of the financial report which is easier to read than the full finance report.

You can also use the back for analysing the business units. For a retail operation I suggested they put their 200 retail shops in three league tables, the large, medium and small shops based on sales per square foot or employee, shading the top and bottom quartiles. If designed right this A3 page will become the main report.

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Exhibit 6.2 An A3 page dashboard for the Board

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6.2 The rise of weekly accounting

Lean has no time for monthly reporting, even if you can achieve your month-end on the first working day it is still too late, the horse has bolted.

Lean has moved the focus of timeliness to the here and now. Cells (a collection of staff working together in a value stream) or processes will need daily and weekly information. They need information to see how they are doing and what they should tweak. Visual management is a cornerstone of lean management. Lean accounting requires visual presentation of both financial and non-financial measurements. The "Box Score" format, see Exhibit 6.3, commonly used in lean accounting provides a one-sheet summary for a value stream showing the

operational performance, the financial performance, and how well the capacity is being used.

Exhibit 6.3 Weekly cell reporting using a box score

Staff Scoreboards are also common in the lean environment, as shown in Exhibit 6.4

Exhibit 6.4 Staff scoreboard

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6.3 Impact of performance measures Measurement initiatives are often cobbled together without the knowledge of the organisation's critical success factors and without an understanding of the

behavioural consequences of a measure. Every performance measure has a dark side, a negative consequence. The key is to understand it. Well over half the

measures in an organisation will be encouraging unintended behaviour. The importance of understanding this dark side and the careful selection of measures should never be underestimated.

How performance measures can go wrong, can be illustrated by three examples. Example: Plant Utilisation

Utilisation graphs are a classic anti-lean performance measure. Graphs like the one shown in Exhibit 6.5 promote plant supervisors to maximise long runs, producing items for stock rather than for actual customer demand.

Exhibit 6.5 Capacity / utilisation graph

0% 20% 40% 60% 80% 100% J a n x x F e b x x M a r x x A p r x x M a y x x J u n x x J u l x x A u g x x S e p x x O c t x x N o v x x D e c x x J a n x x F e b x x M a r x x Capacity / utilisation

Press Rolling Cutting

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Example: City Train Service

A classic example is provided by a city train service that had an on-time measure with some draconian penalties targeted at the train drivers. The train drivers who were behind schedule learned simply to stop at the top end of each station, triggering the green light at the other end of the platform, and then to continue the journey without the delay of letting passengers on or off. After a few stations a driver was back on time, albeit the customers, both on the train and on the platform, were not so happy.

Management needed to realize that late trains are not caused by train drivers, just as late planes are not caused by pilots. The only way these skilled people would cause a problem would be either arriving late for work or taking an extended lunch when they are meant to be on duty. Management should have been focusing on controllable events that led to late trains, such as the timeliness of investigating signal faults reported by drivers, preventative maintenance on critical equipment that is running behind schedule, etc.

Example: Accident and Emergency Department (repeated from previous section) Managers at a hospital in the United Kingdom were concerned about the time it was taking to treat patients in the accident and emergency department. They decided to measure the time from patient registration to being seen by a house doctor. Staff realized that they could not stop patients registering with minor sports injuries but they could delay the registration of patients in ambulances as they were receiving good care from the paramedics.

The nursing staff thus began asking the paramedics to leave their patients in the ambulance until a house doctor was ready to see them, thus improving the

"average time it took to treat patients." Each day there would be a parking lot full of ambulances and some circling the hospital. This created a major problem for the ambulance service, which was unable to deliver an efficient emergency service.

Management should have been focusing on the timeliness of treatment of critical patients and thus they only needed to measure the time from registration to consultation of these critical patients. Nurses would have thus treated patients in ambulances as a priority, the very thing they were doing before the measures came into being.

Understanding the psychology

To succeed with KPIs you need to have a CEO and executive team that are conversant with psychology. In other words, they need to be amateur

psychologists. The frequency in which measures are set to fail, by at best naïve or at worst corrupt management, is breathtaking. Dean Spitzer’s book vi_{is littered} with stories of failure. Many were obvious from the start that they would

encourage action to take place in a contradictory direction.

It is safe to assume that every measure can have a dark side, a negative

performance trait. The key is to find it first and then tweak how the measure is used so that the behaviours it will promote are appropriate.

As Spitzer says “People will do what management inspects, not necessarily what management expects”

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One of the most primitive beliefs is that the primary driver of staff is money. Thus one needs incentives in order to get great performance. Whilst this is the case with employees who are sitting in the first two rungs of Maslow’s hierarchy of needs it does not apply to many staff. Recognition, self worth and self

actualisation are more important drivers. This factor has a big impact on how we treat KPIs. Spitzer in his book has a vast array of dysfunctional performance. Here are some of my favourite stories:

A fast food restaurant manager striving to achieve an award for zero wastage of Chicken – the manager won the “chicken efficiency” award by waiting until the chicken was ordered before cooking, the long wait time meant a huge loss of customers

A company measuring product left on time had a 100% record yet 50% of customers complained about late delivery - nobody cared about what happened next after it left the factory

Sales staff are legendary at meeting their targets at the expense of the company, offering discounts, extended payment terms, selling to customers who will never pay, you name it they will do it, to get the bonus!

Purchasing departments awarded for receiving large discounts started to buy-in too large a quantity creatbuy-ing a buy-inventory overload

Stores maintaining low inventory to get a bonus and having production shut down because of stock outs

Experienced case workers in a government agency will work on the easiest cases and leave the difficult ones to the inexperienced staff because they are measured on cases closed

Thus the greatest danger of performance measures is dysfunctional behaviour. As Spitzer says “the ultimate goal is not the customer- it’s often the scorecard.” Spitzer has heard executives, when being candid, saying “We don’t worry about strategy; we just move our numbers and get rewarded.”

How to avoid dysfunctional behaviour

To avoid putting in a measure that will not work you need to:

Commence the grooming of an in-house expert in performance measurement. Dean Spitzer suggests using the title “Chief Measurement Officer” (see

below). If you want chaos, allow teams and managers to invent their own measures.

Ensure that you are measuring something that matters. The key here is to understand the critical success factors. In the hospital situation it was the treatment of critical patients, hence we measure the timely treatment of these patients. In the train case the critical success factor was the timely maintenance and timely rectification of signal failures. The measures that would assist with timely trains would include:

1. Signal failures not rectified within xx minutes of being reported. These failures being reported promptly to the CEO who will make the career limiting phone call to the appropriate manager

2. Planned maintenance that has not been undertaken, reported to the senior management team on a weekly basis, keeping the focus on completion

Consult with staff so that you have some idea of the possible unintended consequences of the measure. You have to ask staff “If we measure _______ what action will you take?”.

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Pilot the performance measure, to enhance its chance of success. Putting measures in without this piloting is simply being naive.

There needs to be a new approach to measurement—one that is done by staff who have been suitably trained, an approach that is consultative, promotes partnership between staff and management, and finally achieves behavioural alignment to the organisation’s critical success factors and strategic direction.

Appointment of a Chief Measurement Officer

Performance measurement is worthy of more intellectual rigor in every

organisation that is on the journey from average to good and finally to great. The Chief Measurement Officer would be part psychologist, part teacher, part

salesperson, and part project manager. He or she would be responsible for:

Testing each new measure to ensure the dark side is minimal

Vetting and approving all measures in the organisation

Leading all balanced scorecard initiatives

Promoting the abandonment of measures that do not work

Developing and improving the use of performance measures in the organisation

Learning about the latest thinking in performance measurement

Being the resident expert on the behavioural implications of performance measures

Replacing annual planning with quarterly rolling planning.

I envision this position having a status equivalent to the senior IT, accounting, and HR officials. The position would report directly to the CEO, as befits the knowledge and diverse blend of skills required for this position. Only when we have this level of expertise within the organisation can we hope to move away from measurement confusion to measurement clarity. I have provided you with draft job description of this position in Appendix 1.

I was commissioned to write a paper for IBM. This white paper is available for FREE. Visit www.IBM.com and search Parmenter to find the paper “The new thinking on KPIs”

6.4 Electronic Board papers

Many of the procedures that support a Board meeting have changed little since Charles Dickens’ time. Board members would receive large Board papers that they had difficulty finding the time or inclination to read. In the twenty-first century we should be using technology in this important area.

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The financial report should be made available as soon as it has been finished via a secure area of the organization’s intranet. Other Board papers likewise can then be read, as and when they are ready, instead of the last paper determining when the papers are sent to the board.

There are organizations who specialize in electronic board paper systems which have led to paperless board meetings where the board members have a screen in front of them and the chairperson simply says ”let’s turn to page 50 and discuss the purchase of XYZ.” Immediately the first page of the paper is on the screen, and board members can access their notes they made when they read the paper. These systems offer many features including:

Access to papers from anywhere, anytime, as soon as they are available. Intuitive and simple to use.

Notes easily attached to pages.

Instantaneous edits, page numbering, and so on. Absolute security of board papers.

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Appendix 3 Timely month-end reporting- by working

day 3 or less

1. Establish reporting rules within the finance team

I always point out to accountants that we are all artists. Every month we sculpt a month-end result and it can never be the right number, as there is no such thing as a ‘right’ number, it can only be a “true and fair “number. If 10 accounting teams prepared the month-end numbers for one company for five years there would be 10 different results each month. Each accounting team will have made different judgement calls, yet over the five years the cumulative result will be very similar.

The finance team has to realise that they only need to do enough work to arrive at a ‘true and fair’ view. All work done after this point has been reached will thus not be adding value. We therefore need some rules that the month-end reporting (MER) should adhere to.

MER should not be delayed for detail

MER needs to be consistent between months, e.g., same judgment calls, same format

MER can only be a true and fair view e.g. hunting for the perfect number is now unacceptable.

The final report will have extensive quality assurance checks to ensure it is free from any report-writing errors

The final report will be concise - less than a 10-page finance pack e.g., only include a one-page report on each major business with minor businesses being reviewed by the CFO and omitted from the pack

Reporting on a page e.g. P/L has summary numbers, trend graphs and bullet point comments all on one page

I have prepared a draft finance team rules for you and these are in the accompanying electronic media.

2. Ban spring cleaning at month-end

Month-end reporting is not the time for spring cleaning no matter how tempting it can be. This requires a re-education within the finance time and with budget holders.

All miscoding, unless resulting in a material misstatement of the P/L, are processed during the following month. Budget holders are educated to review their cost centre numbers via on-line access to the G/L during the month and are requested to highlight any discrepancies immediately with the finance team. We want to have a regime where we catch all material adjustments and see the net result of them before any decision is made to adjust e.g. only a material month-end misstatement will result in processing an adjustment.

Set up Two ‘overs and unders’ spreadsheets, see Exhibit 1, at the close of the last working day. One to trap major adjustments, say over £5,000, £20,000 or £50,000 depending on the size of the company, and one for smaller items. If they find adjustments, the accountants will enter them on the appropriate

spreadsheets that reside on a shared drive on the local area network. More often than not you will note that adjustments have a tendency to net each other off.

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If there is a material misstatement of the net result we will process one or two appropriate adjustments and then remove them from this schedule. This will bring the total of the overs and unders to an acceptable figure. We then process all the other adjustments during the quiet time in the following mid month

Exhibit 1: maintaining an ‘overs and unders’ schedule

3. Avoid high processing at month-end

The last thing the AP team needs is to receive a tsunami of invoices on the last day of cut-off, as shown in Exhibit 2. It is important to push processing back from month-end by avoiding a payment run at month-end. It is a better practice is to have weekly or daily direct credit payment runs with none happening within the last and first two days of month-end.

Change invoicing cycles on all monthly accounts such as utilities, credit cards etc. e.g. invoice cycle including transactions from 28th_{May to 27}th_{June and being}

received electronically by the 28th_{June. The accruals for these suppliers can then}

be a standard one, two, or three business days of transactions depending how the working days fall.

Exhibit 2: AP invoice processing volumes during month

4. Avoid inter-company adjustments

Clever organisations ban all inter-company adjustments at month-end except for major internal profit adjustments. They have automatic interfaces with inter-group transactions where one party does the transactions for both General Ledgers!

Source Raised by

Dr Cr Dr Cr

xxxxx Pat 1 Dr fdgdfhsdfhsdfhfgg ergergqerry ertyqe 45

Cr fasd fasd as asdas d 45

xxxxx John 2 Dr xxxx xxxx 10 Cr xx x x xxxxxxxxx 10 xxxxx Jean 3 Dr xxxx xxxx 25 Cr xx x x xxxxxxxxx 25 xxxxx Dave 4 Dr xxxx xxxx 15 Cr xx x x xxxxxxxxx 15 etc 80 70 -70 Net impact on P/L 10 P/L impact B/S impact Adjustment 0 100 200 300 400 500 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Actual Desired Volume Working Days

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When there is a difference, instigate a rule that the accounts payable (AP) or accounts receivable (AR) ledger is always right, and adjust accordingly leaving the inter-company parties to sort the issues out in the following month.

This change requires a memo from the CEO, see Appendix 2 for a draft.

5. Early closing of the accounts payable ledger

If accounts payable is held open after month-end you will find it difficult to complete prompt month end reporting. What benefit does holding open the accounts payable for one or two days do? We could hold the accounts payable open for six months after month-end and still not get the plumber’s invoice that arrives when they are doing their year end and realise they have forgotten to invoice for work done.

Better practice is to cut-off accounts payable at noon on the last working day. In my workshops I have come across organisations that cut-off accounts payable even earlier, on day -2 and day -3. They manage this by more reliance on recurring reversing accruals supplemented by budget holders accruals for the larger one-off amounts. They place timeliness above preciseness. This requires good communication to budget holders, and suppliers with the latter sending their invoices earlier through changing the billing timings, as mentioned above.

“Your month-end result doesn’t become more accurate the longer you leave it. It just becomes more expensive to produce”

Quote from a CFO with blue chip international experience

I have not come across a company that can justify closing off accounts payable after the last day of the month. Whatever date you pick to close AP you will never trap all the invoices. Remember we are after a true and fair view and we are sculptors rather than scientists!

In order to lock in this change you may need to run a workshop with the budget holders and follow up with one-to-one educational support, as required.

6. Early accruals close-off

One smart accountant I have come across worked out that budget holders know little more about month end purchase invoices at day +2 than at day -2. So, the accountant introduced accrual cut-off on day -2, the day before month-end. Budget holders were required to send their last invoices for processing to meet the month-end AP cut-off by noon day -2 which gave AP 24 hours to process them before the day -1 AP cut-off. He also told them to prepare their accruals in the afternoon of day-2, directly into the G/L.

Cutting off accruals early recognises that month-end invoices will not arrive miraculously by day +1 or day +2 so staff will need to phone some key suppliers to get accrual information regardless of when the cut-off is. Another point to note is that the accrual cut-off does not need to be after the AP cut-off!! All that is required is a guarantee that all invoices approved for payment by budget holders within the deadline will in fact be processed prior to the AP cut-off, or accrued directly by the AP team.

7. Don’t reconcile suppliers’ statements

Supplier statement reconciliations are flawed for the following reasons:

The supplier accounting systems are often flawed and unreliable

Missing invoices will be picked up through supplier phone calls

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It is not an internal control process so the auditors do not require it

The time spent on them costs the organisation more than the benefits derived from doing the reconciliations

You should invest the time in having good systems in-house picking up liabilities as they arise (the fence at the top of the cliff).

Join the smart organisations that do not do supplier statements. They simply throw them in the bin.

8. Early closing-off of accounts receivables

Immediately close off accounts receivables on the last working day, or better still noon on the last working day with transactions in the afternoon being carried forward to the first day of the new month. Closing off earlier is more important if you have an organisation where the sales representatives make a lot of sales on the last working day of the month, e.g., car dealers. You simply say to them, “All sales made on the last day of the month will now be in the following month”. This will start their game a little earlier.

Remember that training will be required in dispatch and A/R to ensure cut-off is clean each month-end.

9. Early capital expenditure cut-off

Why are we performing depreciation calculations at month-end when clever organisations have this already done much earlier? They close-off capital projects at least one week before month-end. Any equipment arriving in last week is therefore treated as if it arrived next month. It still can be unwrapped and plugged in!

The depreciation is calculated and posted by day -3. In my workshops I have found accountants, with organisations where depreciation is not significant, who use the depreciation calculations from the annual plan and correct to actual at month 6, 11 and 12.

10. Early inventory cut-off

Sophisticated organisations can get their month-end inventory cut-off immediately at close of business on the last working day (day -1). However many manufacturing organisations take a few days into the next month to manage this process. This creates an unnecessary delay in month-end accounts. If the last day of the month’s production is delaying your month-end, make the inventory cut-off at the close of business on day -2 with all production on the last day being carried forward to the next month. This gives one day to check the valuation and records.

Always avoid a month-end stock count as these should be done on a rolling basis and be held no nearer to month-end than the third week of the month e.g., one jewellery chain I know counts watches one month, gold chains the next month at a quiet time during the month.

Once again training will be required for production staff to avoid any teething problems with this new technique.

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11. The first 24 hours from 5pm on the last working day to 5pm the first working day

What happens in the next 24 hours is critical to the success of month-end

reporting. At 5pm on the last working day all the cut-offs should be done. We can print off the first cut of the numbers. This report would be designed for a detailed review and would contain current month, the last three to six months’ numbers and the month’s numbers from last year in a series of columns. All the reporting and management accountants should take a copy home and look for areas where they think the numbers could be wrong.

Budget holders should be sent their accounts and they should be given until noon Day +1 to complete their commentary on major variances. The variance must be over $•• (based on materiality level for whole organisation) and >10% of budget before a comment is required.

At 9 A.M. the following day, all the accountants meet to discuss the areas where further work is needed to be sure that the numbers are “ true and fair. ” At the meeting, “Who is reviewing what?” is decided and a time is set to meet again before the flash report numbers are finalized that day.

Between 3 and 4 P.M. on the first day, you call all the accountants back and ask, “What did you find?” and then look at the net effect of all adjustments on the ‘overs and unders’ schedule. More often than not you will note that adjustments have a tendency to net each other off. Book only the adjustments required to restate the numbers as “true and fair”. You are now in a position to prepare the one - page flash report for the CEO.

12. Issuing a flash result to the CEO by close of the first working day

Issue a flash report on the profit and loss statement (P/L) bottom-line to the CEO stating a level of accuracy of, say, + or –5%. Immediately inform the CEO of any real problems with the flash report numbers in the next couple of days. You may find that a flash report is not required if you can report within three working days. See Exhibit 3 for an example of a flash report.

It is important not to provide too many lines because you may find yourself with another variance report on your hands if you have a CEO who fails to look at the big picture. Remember to state your degree of accuracy (e.g., +/–5%, +/–10%). Never attempt a flash report until the AP, AR, and accrual cut-offs have been successfully moved back to the last working day of the month. Otherwise you will be using the accruals to change final numbers so they can closely match your flash numbers! A practice I would not recommend.

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Exhibit 3: Flash report to CEO at end of day one

The flash result will act like a great appetizer, and the CEO’s appetite for month-end information will be largely satisfied. This creates a great opportunity to reduce the volume of reports we give the CEO, further making the month - end process more efficient.

13. Major quality assurance tasks after day 1

When the flash report is done and has been discussed with the CEO, we need to focus on the reporting pack. The important issue to remember here is that the month-end can never be right, it can only be a true and fair view.

Flash report for the Month Ending 31 December 20XX

Actual Target Variance >$100K Revenue Revenue 1 5,550 5,650 (100) Revenue 2 3,550 3,450 100 Revenue 3 2,450 2,200 250 Other revenue 2,250 2,350 (100) Total Revenue 13,800 13,650 150

Less: Cost of sales (11,500) (11,280) (220)

Gross Profit 2,300 2,370 (70) Expenses Expense 1 1,280 1,260 (20) Expense 2 340 320 (20) Expense 3 220 200 (20) Expense 4 180 160 (20) Other expenses 170 110 (60) Total Expenses 2,190 2,050 (140) Surplus/(Deficit) 110 320 (210) This month $000s Areas to Note 1. xxxxxxxxx xxxxxxx xxx Xxxxxxxxx xxxxx xxxxx xxxxxxxxx xxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxx xxxxxxxxx xxxxxxx xxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx 2. Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxx xxxxxxxxx xxxxxxx xxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx 3. Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxx xxxxxxxxx xxxxxxx xxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx 4. Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxx xxxxxxxxx xxxxxxx xxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

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Ban all late changes to the reports

Once the reporting pack is prepared, no adjustments are allowed unless they are very material. There is nothing worse for the finance team than to submit a finance report to the CEO that is inconsistent. This is frequently caused by a late change not being processed properly through the report. As night follows day, the CEO will be sure to find it. I am sure many readers have been guilty of this

mistake.

It is far better to hold back on processing minor adjustments as the net result reported in the P/L is still “true and fair”. In most cases the CEO will not notice anything. If the CEO says to you, “I thought the sales were higher” you can say, “Pat, it is a pleasure working for such an astute CEO. You are right, the sales are understated by £13,000; however, there are adjustments totalling £7,000 going the opposite way, so I have not booked the adjustments as the net difference is immaterial. I am booking these through next month. However, if you like, I will process this adjustment in this month’s report.” Most CEOs will agree with your judgement call, feel pleased with themselves for spotting the shortfall, and then move on to another issue.

Check numbers for internal consistency

Mark all pages with a number, e.g., for a five page report mark 1 of 5, 2 of 5, see Exhibit 4. For every number that appears elsewhere, either in a box, table or graph write the page reference where it appears again, by the number, and initial to indicate that you have checked this number in the subsequent page and it is right. This quality assurance document should be left around so the CEO sees it one day. When asked what are all these references and red ink you say, “This is the quality assurance we do every time we issue a report to you”. I assure you they will be impressed and want you on their important projects.

Exhibit 4: Checking for consistency

The two person read through

The only sure-fire way of picking up all errors is to have a call through. What I do is have a staff member sit at my desk and read aloud the report while I follow the words on my copy. By hearing the words I can check the ‘dance of the words’, their rhythm, and thus amend to correct spelling, grammatical errors and make it an easier read. Where the reader has had difficulties with your report I can assure you the CEO will likewise.

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Text to voice facility to be used by all finance staff

Dyslexia is a challenge when reading text and many of us suffer from it. It means that we can easily transpose words or completely miss words out.

Reviewing one’s own work with this disability is totally worthless. A must for any person suffering from dyslexia is to acquire a voice recognition package which will also include the more valuable tool the read back. You can acquire this package from the freeware such a package is called ‘via voice’. The computer aided read back should not replace the two person read through on those important reports as you will miss out on some collective editing that occurs when two minds are working on the one document.

The two gremlin rule

The two gremlin rule states that in every piece of work there are always at least two gremlins that sneak through. If I find them and they are minor I leave them and release the report. If you do not find them look again or someone else will spot them.

Remember that you need a sense of perspective here, if minor, do not alter as the cost both in time delays and reprinting may not merit the change. If spotted you simply congratulate the person saying well spotted. Never, never mention these errors. Let your manager find them if they can.

I would always change typos in the first couple of pages or in the recommendations, as these can undermine the report.

If time is really pressured, spend five minutes searching for the two gremlins, especially on the first couple of pages.

Introducing SCRUM and Kanban into your team

These two methods stem from the Agile movement and should be adopted by the Finance team for the month-end closing period.

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Appendix 4: Run a workshop to “post-it” re-engineering

month-end reporting

This can be a complex and expensive task or a relatively easy one. The choice is yours. Many organisations start off by bringing in consultants to process map the existing procedures. This is a futile exercise as why spend a lot of money

documenting a process you are about to radically alter and when it is done only the consultants will understand the resulting data-flow diagrams!

The answer is to “Post-it” re-engineer your month-end procedures in a workshop; see Exhibit 1 below for an outline of the workshop.

Exhibit 1: Outline of workshop on implementing quick monthly reporting within existing system constraints

Re-engineering month-end Agenda for workshop

Date and Time: ________

Location:

Suggested attendees: All those involved in month-end including accounts payable, financial and management accountants, representatives from teams interface with month-end routines, e.g. someone from IT, payroll etc

Learning Outcomes: Attendees after this workshop will be able to: discuss and explain why _________ should have quicker M/E reporting implement the steps required to move month-end reporting back to day3 or less

describe better practice month-end routines

• recall all agreements made at the workshop (these will be documented)

9.00 am Welcome by Financial Controller

9.10 Setting the scene - a review of better practices among accounting teams, that are delivering swift reporting, topics covered include:

what is quick reporting

benefits of quick reporting to management and the finance team better practice month-end procedures - stories

the current performance gap between __________ and better practice

precision Vs timeliness

latest developments - day one reporting and virtual closing

Senior management, and a selection of budget holders ( who are based locally) will be invited to attend this session “setting the scene”

9.50 Agreement on the current key bottlenecks of month-end

reporting presented by the Financial Controller (the current cost estimate of month-end reporting, the human costs, what we are doing well, we need to work within existing systems, goal is “twelve non events” each year etc)

10.05 Workshop 1 When activities should start and finish Where

separate teams look at the different issues (we will cover

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Appendix 7: Accounts payable in the 21

st

century

There are some of the changes you can make that will make a significant contribution to the Lean journey.

Move to a paperless accounts payable operation

Many accounts payable processing procedures are more akin to the Charles Dickens era than the 21st_{century. Why do we go from an electronic transaction in the}

suppliers accounting system to a Charles Dickens paper based invoice. Surely we should be able to change this easily with our major suppliers.

Many American multinationals have achieved this already. It requires an

investment, skilled A/P staff and retraining of the budget holders. The rewards are immense. To appreciate the benefits I suggest the A/P team regularly visit

www.TheAPNetwork.com website of The Accounts Payable Network.

There have been major advancements in technology for accounts payable teams. The return on investment in AP technology is I believe greater than any other equivalent investment in other service departments within a business. Why then are some AP teams so under invested? I believe it is due to:

• lack of understanding by the CFO of the technologies and their benefits • the AP team not researching the technologies

• poor selling of the technologies to the executive team

It is safe to say that there is a technology suitable for SMEs and large enterprises that will make them paperless. In a recent study the winds of change were shown in Exhibit 1. As can be see if you are not using electronic payments and purchasing cards you are already behind the eight ball.

Exhibit 1: Technology in use or planned to be in use in next six months

Source: 2012 Automating payables for the SME market

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The major components of payables automation are well set out in Exhibit 2. Exhibit 2: Automation options abound

Source:2012 Automating payables for the SME market

In their paper Paystream Advisors point out:

Once an invoice or other payables data is captured electronically, the question to ask is: Does this invoice need to be approved? The ability to derive an automated answer by using business rules, which in turn trigger appropriate workflows, is the centrepiece of an automated AP environment. If the answer to the question is no, the system will move the invoice into the payment process. If the answer is yes, the system will route it to the approving party along with any necessary decision support documents and information.

Business rules, flexible workflow and transactional transparency are essential.xii

A good document to read is the 2013 AP Automation Study that can be accessed via any search engine (or visit www.readsoft.com).

Here are some of the ways to work towards a paperless accounts payable function.

Electronic ordering system

Purchase an electronic ordering system (procurement system) which automatically links with the accounts

payable system so that orders are completed electronically and invoices are matched electronically.

Scanning Introduce scanning so that invoices can be sent

electronically by email for approval. You need this even if you have invested in a procurement system as invoices without orders, or invoices which are different to their

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corresponding order, will need originator approval.

Electronic supplier feeds

Invest in liaison time with all major suppliers to organise electronic feeds of the invoices which will include the general ledger account codes – this requires liaison between the two IT teams, yours and the suppliers!

Load remittances onto your website

Load remittances electronically onto your website in a secure area so that suppliers with their password can

download them. This removes the need to post remittances to suppliers. One participant said this was set up very easily by the IT team.

Web based expense claim

Acquire an integrated web based expense claim system so staff can complete their expenses where ever they are in the world.

Purchase card Introduce the purchase card to all staff with delegated authority so all small value items can be purchased through the purchase card thereby saving thousands of hours of processing time by both budget holders and the accounts payable teams, see separate purchase card section below.

Eliminate all cheques

Eliminate all cheque payments, framing the last cheque on the CEOs wall, see separate payments section below.

Key suppliers online access

Allow your key suppliers online read only access, through password access, to their account in the AP so they can reconcile their ledger.

Invest in a electronic ordering system (procurement system)

Most accounting systems come with an integrated purchase order system. Some systems even enable the order to be priced using the suppliers on-line price list and then emailed automatically to the preferred supplier providing the order is within the budget Holder’s delegated authority.

These systems should be purchased and implemented before the accounting team ever consider upgrading the G/L. Increasingly today the G/L is only the holder of actuals with the targets, reporting, and drill down being provided in auxiliary systems.

This is a major exercise and one which should be researched immediately. There will be an organisation that has your accounting system where the purchase order system is working well. Visit them and learn how to implement it.