Author: Shak Akhtar
Finance needs to perform many controls and checks as part of its accounting and reporting responsibilities, ensuring the numbers accurately reflect the reality of the business. Crucially, finance needs confidence that the figures recorded in SAP (or any other ERP system) represent what is actually happening in the business?
Some examples of accounting controls performed by finance include:
- End-of-day checks: Have all production orders been closed? Has a manufactured item been moved into stock, or is it still a work in progress? For example, if a production order hasn’t been closed but the product has been completed and moved to the warehouse, it would not be reflected in the inventory figures.
- Purchase price variances: If labor, machine time and materials are charged to a production process, are they the right costs? Finance needs to check for any abnormal purchase price variances that might indicate the business is not accurately costing the items produced.
- Profit margin checks: Is the percentage gross profit margin generated over a given time period – whether that’s a day, week or month – correct and in line with what was forecast?
- Costs: Are costs on track to be within budget? If not, why not?
- Trend analysis: What can we learn from trends in bank balances, cash flow and other key general ledger accounts?
Ultimately, these activities drive good stewardship of the business. Controls help identify where issues and challenges that are likely to affect sustainability lie. For example, is there enough cash to meet commitments? Is the business being paid on time? Is stock accuracy affecting sales? Are suppliers being paid within agreed terms?
Developing rules, such as setting tolerances, for these types of accounting controls is the best way of validating the numbers. For example, an rule can check if profit margin for a given time period is within +/- 5% of what is expected. When done manually, this involves a time-consuming process of downloading sales and cost figures for that period and using Excel formulas to examine sales data and check the profit margin.
The benefits of automating rule-based controls
Automated rule-based controls can deliver four key benefits:
- Reduce time-consuming manual work for employees
When utilizing a finance automation software solution, initial control checks are done automatically. Automation can also do the truly heavy lifting of investigating what has gone wrong if a problem is identified.
As an example, an automated rule-based control can be set up to check profit margin, within a given tolerance, for each of the divisions of a business every day. If the automated check identifies that margin for one of the divisions is not as expected, the automation can then trigger the collation of relevant data and drill down into where the problem is.
There may be thousands of invoice lines to check, but automation will be able to identify the subset of sales that do not meet margin expectations and therefore need further investigation. If margins are checked manually, the volume of individual invoice-line work level is too high to be done regularly.
- Perform control checks more frequently
When done by finance and accounting staff, bandwidth restricts how frequently control checks can be carried out due to other pressures on the finance’s already-stretched resources.
In our profit margin tolerance example, staff were performing the time-consuming process of manually downloading the sales figures and using Excel to confirm the profit margin. The result? Some checks may only be carried out once a year instead of monthly or daily. The downstream impact is that, if errors are discovered, the team may have to go back through the whole year’s numbers to identify and correct them, resulting in potentially substantial (and preventable) margin leakage.
Global dairy company Arla Foods is using automated rule-based controls, among other things, for its energy tax reconciliation process, comparing meter readings from its dairies against the invoices from utility companies. This eliminates administrative work and human error and allows it to complete the process – with greater accuracy – monthly instead of annually.
- Improve accuracy
More frequent control checks and more timely correction of errors through automation reduces risk of financial misstatements or compliance failures, giving the board, investors and other stakeholders greater confidence in the numbers.
Arla Foods is extending its use of automated rule-based controls beyond pure finance processes and into other parts of the business such as supply chain. This includes automated controls to check for work and production orders that haven’t been closed, verifying whether an item has actually been completed and has gone into inventory or if it is still a work in progress.
This ensures inventory and stock numbers are accurate ahead the month-end close and has saved the finance team eight person-hours during the close process. Plus, perishable stock is now more visible and available to be sold to customers faster. Arla Foods has also fully automated rule-based controls for “catch weight” corrections for the weight of cheese, which changes according to where it is in its maturity and how much water it contains.
Christel Møller Broch Jensen, senior accounting specialist at Arla Foods, said: “It’s that confidence that you have taken everything into account, that you have checked it and if it changed you changed it in a timely manner.”
- Deliver greater consistency
When rule-based controls are automated, finance can not only increase efficiency but also standardize and consolidate the processes, ensuring greater consistency in how checks are carried out.
For example, automation allows an organization to consolidate a rule-based control and move it from the divisional or regional finance teams to a central shared service center (SSC). Aside from economies of scale and greater capacity to do more checks, this means the control process can be executed consistently across the various business units or geographical regions that the SSC serves, instead of each division carrying out checks in their own, slightly different, ways. Greater consistency also ensures better governance and compliance.
Arla’s Jensen added: “This standardization means the controls are always delivered at the same time everywhere and everyone knows what they are talking about.”
All of this comes down to trust in the numbers. Automated rule-based controls bring a level of assurance that manual checks cannot hope to achieve.
Find out how Redwood’s finance automation can help you achieve these rule-based control benefits.
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