Why CFOs need to look beyond the General Ledger

17th April 2016

For most finance professionals the general ledger is historically the undisputed centre of their ‘universe’.  But the inviolability of the general ledger as the most trusted source of financial information is under threat as finance functions grapple with increasingly diverse data sources visited on them by regulation, compliance and the machinations of the digital economy.  It’s a position made worse by the emerging era of “Post Modern ERP” in which critical business data is scattered across multiple locations in the cloud and on-premises. 

By 2020, finance staff in leading organisations are expected to spend up to 75% of their time (up from 25% in 2015) on decision support, predictive analytics and performance management1, yet this ambition could be seriously derailed without complete mastery of financial and other data. 

Given the challenges facing the modern finance function and the push for a more data-driven approach to financial management, CFOs need to look beyond the General Ledger.

 

Regulation and compliance

The burden of regulation and compliance shows no signs of abating.  Financial services businesses have borne the brunt of the changes since the financial crisis of 2008 with new compliance regimes around the Dodd-Frank Act, Foreign Account Tax Compliance Act (FATCA), Know Your Client (KYC), Basel 3 and Solvency II.  But even less regulated industries have had to accommodate the Bribery Act, The Foreign Corrupt Businesses Act and changes to international accounting standards, most recently IFRS 9 and IFRS 15.

At each twist and turn businesses are required to gather and assemble new data, integrate it with existing data sources, store it for longer and accommodate more onerous disclosure and filing requirements.

 

The impact of the Digital Economy

Contemporary research shows that digitally-infused businesses outperform their peers on almost all measures (revenue growth, EBITDA)2.  And it’s not just new businesses with novel business models driven by digital technology such as Uber, Pinterest and Airbnb.  Traditional businesses in mature sectors that have embraced digital technology in the ‘right’ way have also seen positive effects on the bottom line. For example, insurers are leveraging digital technologies such as “telematics” (the facility to remotely monitor car usage, speed, time of day) to create imaginative car insurance products in which the insurer is able to adjust premiums according to driving habits and risk3.

As organizations continue to entice new customers with novel business models, increasingly personalized products, services and sales channels, back-office systems often struggle to keep up.  ERP systems are being left behind, unable to cope with very high data volumes or complex calculations, such as the need to handle the complex billing derived from telematic adjusted premiums. 

However, the inability to handle a new breed of transactions is just one facet of the problem. Just as important is the wealth of data that can be derived from new digital businesses and channels.  Finance functions need to leverage that data to understand fully the potential for new businesses to exploit under-utilized intellectual property, re-assess the value of customer information and anticipate how all of this new information could create new service opportunities.  But relatively little of this data resides in traditional data stores such as the general ledger or ERP system.

Keeping a ‘finger on the pulse’

The shortcomings of the general ledger as a platform for reporting and decision-making is further laid bare as CFOs seek to transform the finance function from ‘scorekeeper’ and trusted custodian of assets to a valued business partner that is able to support senior stakeholders in the business with advanced analytics and a more data-driven approach. 

Put simply, the general ledger does not have the agility or store of transactions to provide real-time insights or reduce time-to-decision and neither do traditional business intelligence tools which sit astride the general ledger.  Performance management is in a state of flux as CFOs grapple with the challenges of measuring the ROI (Return on Investment) of, for example, digital initiatives and social media campaigns and all of this points to the pressing need to gather new data and new metrics previously unavailable. CFOs must look beyond their general ledgers for the answers.

While the impact of regulation, the digital economy and a more data-driven approach to performance management continues to highlight the inadequacies of general ledgers, CFOs must also contend with the increasing trend to more fractured systems architectures (Post-modern ERP) which add to the burden of enterprise-wide reporting.

 

Impact of “Post-modern ERP”

The growing popularity of the post-modern ERP model is a profound market change that could further undermine the pre-eminence of the general ledger as the primary source of financial information. Under this model, businesses are abandoning the monolithic ERP solutions of the past and moving to a sleeker ERP solution supplemented by a range of ‘Best Of Breed’ applications supported in the cloud or on-premises.  For example, organisations can add to a slimmed down core of financial applications with specialist applications that serve specific purposes like revenue recognition, budgeting, balance sheet reconciliation and intercompany processing. 

This Hybrid approach (some applications on-premises and some in the cloud) is attractive because it allows businesses to side-step the limitations of the on-premises world and build a bridgehead in the cloud while phasing out their dependency on legacy ERP systems.

This approach is proving extremely popular. IDC reported that by the end of 2015 more than 65% of enterprise IT organizations had committed to hybrid IT5 and analyst, Gartner predicts nearly half of large enterprises will have hybrid cloud deployments by the end of 20174.

While this model offers many benefits, a loosely coupled hybrid architecture could become a victim of its own success as organizations lurch from inflexible, on-premises ERP systems to a patchwork quilt of multiple clouds, each hosted in a different technical environment that makes it difficult to provide an enterprise view of the business.

A particular concern of the uncontrolled selection of Best of Breed applications is that it leads to multiple clouds with different vendors’ applications (different look and feel) being hosted on different infrastructure, to different development and design standards, leading inevitably to duplicated and inconsistent data and metadata (for example, organisational hierarchy, chart of accounts, currencies) and significant integration challenges. 

Indeed, according to one recent study, 54% of respondents say their department has experienced staff downtime in the last six months due to cloud integration problems, and 75% have had their ability to innovate impaired by poor integration of their cloud applications, which has left applications isolated from the rest of their business functions6.

 

So what’s wrong with the general ledger?

Old general ledger products, whether part of a financial management system or a more comprehensive ERP system, tend to be inflexible, with limitations on coding structures, transaction analysis, dimensions and hierarchies. They are not designed with high volumes of data, regulatory information and e-commerce transactions in mind. The general ledger was designed for summary (balance level) information and not detailed transactions – that’s the role of sub-ledgers.

So where do finance leaders turn when the information they need to capture is highly granular and needs to be transformed into dependable financial information?

 

Is there a better way?

Despite its limitations, the general ledger remains pivotal to reporting because of the high level of control and validation that can be exerted over in-bound data.  Ultimately, the general ledger remains the focus of financial reporting but any sub-ledgers have to guarantee an equivalent level of control.

As a result, many CFOs are turning to a new generation of specialist financial software.  Solutions such as Aptitude Software’s Accounting Hub, tip the balance in their favour and help them regain control over diverse and scattered data. The Accounting Hub uniquely complements general ledgers by capturing accounting and non-financial data sources at a very granular level and, by applying unique business rules, transforms and enriches the data to create a single version of financial truth which can be used to drive decision-making and reporting.  


 

Summary

 

The inexorable growth of regulatory, compliance, reporting and accounting requirements across all industry sectors together with the growth of the digital economy is placing unprecedented pressure on financial systems.  Although the increasingly popular hybrid model of computing confers significant agility, it leaves in its wake lots of individual applications in their own clouds. These twin challenges leave the modern finance function exposed as it seeks to coalesce diverse data from a variety of disparate data sources.

Old fashioned general ledgers cannot cope with these trends.  Fortunately, a new breed of financial solutions, such as, Aptitude Software’s Accounting Hub is filling the growing void, allowing CFOs to take new reporting challenges in their stride, safe in the knowledge that transactions held in sub-ledgers are dependable from an accounting point of view.

With 83% of financial services firms saying that data is their most valuable strategic asset7 smart CFOs know that urgent steps need to be taken to maintain control and competitiveness.


 

About the Author

Gary Simon, is rated by Linkedin as one of the UK’s top 10 business leaders in 2015 and is leader of the FSN Modern Finance Forum on Linkedin with more than 44,500 members.  He is a graduate of London University, a Fellow of the Institute of Chartered Accountants in England and Wales and a Fellow of the British Computer Society with more than 30 years’ experience of implementing management and financial reporting systems. He is the author of four books, many product reviews and whitepapers and as a leading authority on the financial systems market is a popular and independent speaker on market developments.  Formerly a partner in Deloitte for more than 16 years, he has led some of the most complex information management assignments for global enterprises in the private and public sector.

 


Bibliography 

Note1 Accenture, Finance 2020: Death by Digital; The Best thing that ever happened to your finance function, by David A. J. Axson

Note2 MIT Sloane Management and Capgemini Consulting “The Digital Advantage” 2014

Note3 Car insurance: satellite boxes make young drivers safer”, Jill Insley, The Guardian,  5th April 2012 

Note4 Gartner Press Release: Gartner Says Nearly Half of Large Enterprises Will Have Hybrid Cloud Deployments by the End of 2017, October 2013

Note5 IDC Press Release: Forecasts Public IT Cloud Services Spending Will Reach $127 billion in 2018 as the Market Enters a Critical Innovation Stage, November 2014

Note6 Research Study: Cloud for Business Managers: the Good, the Bad and the Ugly, Dynamic Markets, May 2013. 

Note7 EY, The science of winning in financial services 2015 

 

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