Finance Transformation

Finance Transformation
For the 21st Century

July 2006 Sydney, Australia
DRAFT DRAFT
Finance Reform
Finance Departments are successfully helping to steer their organisation through a turbulent business environment Often there is little time for departments to focus on their own performance and development Ernst & Young can assist Finance Departments improve their effectiveness and efficiency by sharing our Leadership Methodologies Experience
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DRAFT DRAFT
Finance Reform
Improving effectiveness and efficiency
Effectiveness & Efficiency Impact of Financial Reform
Reduce total cost Reduce transaction processing to reporting cost Invest in Business Partnering & Enterprise Decision Support
100
75
Total Cost of Finance 25

0
50
Past
Fu re tu
Enterprise Decision Support Manage Risk & Financial Capital; Improve Control Transaction Processing, Accounting & Reporting
DRAFT DRAFT
Finance Functions
Strategy and Planning Reporting and Analysis Stewardship and Compliance Transaction Processing Strategy, mergers and acquisitions, business and financial structure, operations planning, budgeting, VBM Board, Statutory and management reporting, forecasting, PI, business case and performance analysis, ABC/ABM Tax, IFRS, ASX, external and internal audit, approvals procedures, internal controls, risk management General accounting, asset register, payroll, accounts payable and receivable
DRAFT DRAFT
Path to Functional Excellence
People
Current State
Processes
Best Practice
Information Systems
DRAFT DRAFT
Getting the Strategy Answer the Questions?

Governance Transactional Centralised Shared Services Simple Standard Vanilla ERP Generalists Lower Capability Decision Making Value-Add Decentralise COE Innovative Flexible
STRATEGY
STRUCTURE
PROCESS
SYSTEMS PEOPLE
Additional Tools Specialists Higher Capability
DRAFT DRAFT
Traditional Finance Function

In your organisation Is the operations plan aligned with strategy? Is budgeting an onerous process? Do Board, Statutory and management reports and the ITR logically flow into each other? Does your business know; customer profitability; whole of life asset costs; process costs? Does Finance analyse all significant business decisions; approve all operating and capital projects? Do reports contain leading and lagging, financial and non-financial metrics? Do your systems do most of the work for monthly reporting? Are transaction approval processes duplicated; are they effective? Does your department cost more than it should?
DRAFT DRAFT
People
Leadership
Understands & committed to organisations strategic context Apolitical & diplomatic Initiates change & continuous improvement Committed to helping staff realise their full potential
Processes
Information Systems
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People
Culture & Attitude

Purpose is to serve the organisation Understand and interested in the business Maintain close relationships across the organisation Equal partner in developing solutions to business issues
Processes
Information Systems
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People
Capability
Appropriate technical skills Capacity and willingness to learn Comfortable working outside traditional accounting boundaries Continuous learning / skills maintenance
Processes
Information Systems
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Building Blocks of Functional Excellence
People
Processes
Support the business; not a bureaucracy In control Simplified, e.g. no duplication of effort
Processes
Information Systems
Finance has authority to enforce Selective use of Shared Services & Outsourcing
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Leverage interdependencies between processes
DRAFT DRAFT
People
Information System
Data analysis tools usable by non-finance staff
Processes
Data warehouse for financial and non-financial data Maximum automation of routine processes Reliable interfaces
Information Systems
Our Approach to Finance Reform
DRAFT DRAFT
Our Approach to Finance Reform

Finance Reform is the term we use for engagements aimed at improving the performance of an organisations Finance Department.
Reform consists of many variations, including:
Formulating the departments strategy Reviewing IT architecture Formalising governance structure Full process re-design & organisation restructure Shared Services Centre or Outsourcing implementation
We offer our:
We are not associated with any business solution or software vendors.
Leadership Methodologies Experience
DRAFT DRAFT
Our Approach to Financial Reform

Our approach of combining strategy with shop-floor process improvement has proven to be the most successful approach to delivering sustainable improvement. It harnesses the wealth of knowledge that exists on the shop-floor and ensures the right changes are made.
Top down direction setting Crossfunctional process redesign People
Bottom-up problem solving
DRAFT DRAFT
Our Approach to Financial Reform
Finance Strategy formulation Executive mentoring Culture assessment Organisational restructure Change management Staff capability reviews Job design Technical training
People
Benchmarking Functional review Process re-design Governance framework IT Advisory
Processes
Information Systems
DRAFT DRAFT
Project Implementation
Our approach to each assignment is tailored to meet client needs. Key features of our project implementation approach are:

Reliance on client teams Small, highly skilled and experienced Ernst & Young team Provision of project management, progress reports, steering committee attendance & project documentation Discrete phases Full and abridged implementation options
DRAFT DRAFT
Our Leadership
We provide two-directional leadership; top-down & bottom-up Top-Down
Work with senior management to determine Strategy Culture Structure Appreciation of organisational constraints Management acceptance of change Prevent formalisation of bad practice Identify & address obstacles Raise the bar and set the pace Assist client-team champion the cause and address obstacles At times, an extra pair of hands Inculcate sustainable change
Bottom-Up
Harness shop-floor knowledge Guide client team through change process Introduce best practice concepts Train client team in process improvement techniques
DRAFT DRAFT
Our Methodologies Finance Strategy

Confirm commitment to reform initiative
Ensure Finance Departments strategy is aligned with the organisations Executive interviews & short workshops
Determine where processes and functions belong in the organisation
Secure cross-functional support for process and structural improvements
Assign accountability for benefits realisation
DRAFT DRAFT
Our Methodologies Governance Framework
Purpose
i li t yt o fut imp ure ac t
Planning & Control
Mitigate risk of malfeasance

of om ed n Fre esig d
Avoid unplanned contingent liabilities Ensure regulatory compliance Financial stewardship to ensure resources are utilised in an acceptable manner Assist management maximise return on assets
Ab
Reporting
Approvals & Compliance
DRAFT DRAFT
Methodologies Process Re-design

Review
HighLevel Mapping Org. Chart Review
Staff Interviews
Cost Analysis
Benchmarking
Systems Review
Re-design
Detailed Process Mapping Work Distributio n Analysis Detailed Process Re-design Org. Structure Re-design Change Managemen t Plan
Benefits Analysis
Project Briefs
New Process & Structure Implementation
DRAFT DRAFT
Our Methodologies People
Executive Mentoring
Staff Capability Review
One of our Partners or Senior Managers develop an enduring one-on-one relationship with a client Executive We are there to listen, test ideas and offer impartial advice Useful for discussing general issues, contemplating a major initiative and personal development
Assess your needs and determine skills and personal attributes specific roles require Use structured interviews, observations and peer reviews Form objective conclusions about an individuals capabilities and offer suggestions where they may best fit in the organisation
DRAFT DRAFT
Our Methodologies - Organisation
Cultural Assessment
Change Management
Make an assessment using recognised assessment tools Identify gap between existing and desired cultures Develop program to shift values, beliefs and behaviours in desired direction
Three layers of change:
Strategic communicate departments vision across the organisation Operational imbedding new processes, systems and organisation structures, transitioning people Individual align individual and team behaviours and performance
DRAFT DRAFT
Our Methodologies - Organisation

00s
Organisation Structure Review structure, including finance work performed in other parts of the organisation Develop new structure, based on
90s
80s
CFO
- Finances strategy & cultural objectives - Leading practice - Process improvements
Transactional work Specialist finance services
Value add work
DRAFT DRAFT
Our Methodologies IT Advisory

1. Select systems for review
Financial s Structured Questionnaires Structured Interviews Structured Workshops Human Resource s Marketin g Mgmt Inventor y Mgmt Purchasin g Mgmt Quality Mgmt Sales Mgmt Product Technolo gy
3. Deliver recommendations
2. Assess against best practice
DRAFT DRAFT
Our Methodologies - Benchmarking

Ernst & Young has a specialised Benchmarking service line and leads the Western Australian and South Australian Benchmarking Consortiums
Two stage benchmarking exercise in Finance Reforms: 1. 2. Quantitative analysis using standard data template to compare client performance with relevant peer group Qualitative analysis using structured interviews to assess client practice with best practice
We use our global network to regularly update our quantitative and qualitative templates
DRAFT DRAFT
Our Experience
In recent years no or only margin savings have been realised from improvement initiatives, common errors include:
Failure to address what actually drives the work Failure to identify value destroying activities Formalised or centralised poorly performing processes Alienated the business Sole reliance on automation Ignored culture Relied on Shared Services or Outsourcing as an end result
DRAFT DRAFT
Our Experience
Referees
Denise Dawson
Chief Financial Officer Sydney Water Corporation
Chris Hern
General Manager Finance & Budgeting Telstra Corporation
General Manager Rio Tinto Shared Business Services
Megan Enders
Appendix: Leading Practice - Processes
Budgeting and Forecasting Leading Practice Features
DRAFT DRAFT
Set budget guidelines & targets
Prepare budgets
Review and consolidate budgets

Process Features
Prepare forecasts
Monitor and analyse performance
Strategic plan drives operational budgets, targets, milestones and timings Provides broad economic and market trends Includes business linked key performance indicators Action orientated with achievable targets
Detailed budget completed in less than 6 weeks Budgets focused on business needs eg PBB, zero based Budgeting is extension of the business planning and long term forecasting processes Target performance related to pay award
Budget review is focused on the strategic objectives and KPI's Budgets are consolidated at level appropriate to business needs eg process, function, BU People skill set enables global budget changes to be administered efficiently Final budget communicated to budget holders quickly, before start of year
Operational and process functions are responsible for forecasts Rolling forecasts linked to the planning and budgeting cycle Forecasting process facilities action based planning
On-line budget guidelines and indicators set centrally
Integrated systems used to aid budget process Software provides ability to test different budget scenarios Flexible budget phasing facilities Facility to hold alternative budget scenarios
System Features
Coherent budgeting systems eliminate rekeying of data System allows automatic calculation of KPI's and holds non financial data Data can be downloaded to final budget documents preparation or to EIS Systems provides sensitivity analysis of data
Software supports on-line forecasting by operational management Flexibility to allow rolling updates of forecast data Forecasts linked to KPI's budgets and planning
System provides comprehensive on line variance reporting Reporting includes on-line graphics and non financial data where appropriate
Accounts Receivable Leading Practice Features

Establish credit levels
DRAFT DRAFT
Issue sales order
Issue invoice
Monitor credit/ collect cash
Process Features
Formal credit checks applied to all new customers within 24 hours using credit bureau Monitor credit status/terms on regular basis Customer account managers provided with up to date credit status Treasury policy set on late and prompt payments Authority levels clearly defined Credit policies defined and agreed Terms and conditions agreed with customers
Sales orders prepared using pricing database with pricing profiles for products and customers No order processed without valid customer PO reference Delivery note acts as invoice for low-frequency shippings
System

Consolidated credit position for group of customers System provides on-line customer payment history and terms Use of workflow software to monitor process and help resolve queries Standard credit control reports
SOP linked to debtors ledger to ensure customer credit limits not exceeded Sales documents sent via EDI for all major customers Integrated order & billing systems available on line & hard copy
Consolidated periodic invoicing for Credit insurance arrangements high frequency shipments evaluated periodically Bank remittance notices issued Customer account managers with sales invoices to facilitate responsible for sales and cash reconciliation collection Self billing invoices by high Constant monitoring of debtor volume customers days, daily collection, ageing of Consider outsourcing regular debt invoice/payment eg utilities Customer contact records Regular review of invoice queries maintained and credit notes Outsource cash collection where Reconciliation of AR balances to appropriate GL control accounts on a regular Determine and report on credit basis targets Bundle packages and portfolio. Monitor overdue debts and take Consolidated invoices/statements action within agreed policy Features collection easier for Payments received electronically Common SOP and AR customer where possible Automatic matching of payments to database invoices Invoices automatically On-line diary facility to monitor calls generated from SOP and Automatic flagging and reporting of shipment data high risk accounts Self billing invoices Automatic dunning letters issued automatically matched to within agreed trading terms customer orders Auto routed hold/cessation of Multi currency invoices service Automatic commitment and Integrated systems to facilitate accruals customer query handling Automatic reconciliation facilities between integrated Forecast cash receipts available for treasury purposes SOP AR and GL systems
Accounts Payable Leading Practice Features

Period end processing and reporting
DRAFT DRAFT
Maintain supplier details
Process vouchers
Process payments
Process Features
Authorise and set up new suppliers payment details Maintain supplier payment details Segregation of duties between supplier set up, voucher processing and payment processing
Accounts payable process vouchers: invoices, expense claims, credit notes, debit memos and prepayment requests Suppliers required to use PO number on all documents and three way match wherever possible Consolidated periodic invoicing for high frequency suppliers
Optimisation of early payment discounts Payment runs properly authorised
All transactions completed before period closed Reconciliation of Accounts Payable activity and reconciliation with General Ledger control account Management reports run once period is finally closed
System Features
Single supplier database Single employee database Audit trail of changes to supplier payment details Purchase invoices transacted via EDI with major suppliers wherever possible Electronic validation and approval of invoices Automatic matching of invoice to order and goods received note (GRN) Interface with General Ledger, Purchasing, Fixed Assets and Project Accounting Use of workflow software to resolve queries and monitor process Electronic payments Default payment terms held on supplier file with manual override at P.O. and invoice Production of forward payment entry schedules to aid cash flow management Interface with General Ledger, Fixed Assets, Project Accounting and Cash Management Facility to suspend payments Integration with General Ledger minimises reconciliation adjustments Transaction processing prevented for closed periods Evaluated Receipt Settlement
Fixed Assets Leading Practice Features
DRAFT DRAFT
Maintain fixed asset register

Determine asset categories for internal and statutory purposes Monitor asset maintenance charges Apply insurance valuation to key assets Ensure asset responsibility at BU level Identify asset usage
Control acquisitions and disposals
Manage periodic asset depreciation
Verify and value asset base

Revalue key assets on a regular basis based on book value and high risk Comprehensive asset verification on regular periodic or rolling basis where asset cannot be verified via technical assumptions (most telcos do not verify network assets: the fact that the network works is verification enough) Verify non capitalised assets Variable asset valuation mechanisms eg historic, current replacement Complete asset reports by physical location and cost centre Report on identified or missing assets Hold non capitalised physical assists for verification Bar coding of assets for verification
Process Features at point of asset use Depreciate

Set up appropriate control of asset acquisition and disposals across company Report on acquisitions and disposals on a monthly basis Monitor tax issues related to acquisitions or CIP Ensure BU responsibility for assets in their use and for disposal losses Apply depreciation rules to asset classes Depreciation rates in management accounts in line with statutory rates Links asset depreciation to production and product costs/development
On line asset register holding key data and current cost allocation Cost code validation with GL Automatic links to AP and Project Accounting system to capture acquisitions Revaluation of features and mass transfers of assets to new cost centres Leased asset features compliant with accounting standards
Acquisition linked to purchase order and accounts payable ledger Disposals linked to sales ledger CIP linked to capital project accounting Effective tax management integrated with the fixed assets system
System Features
Depreciation charged automatically to cost centres in GL Forecast asset depreciation for budget purposes Variable depreciation rules for classes of assets Assets can be grouped for depreciation rules
General Accounting Leading Practice Features

Establish and maintain standing data

DRAFT DRAFT
Establish and apply accounting controls
Apply and allocation rules

Management accounting information is sourced from GL (no reconciliation to financial accounts required) Level of detail is driven by business requirements Allocation rules are based on agreed rates or service level agreements Consistent use of account codes across business allowing comparison of costs
Produce periodic financial reporting and information
Produce statutory accounts
All users of financial Common chart of accounts systems fully trained in Minimal number of accounts standards and controls to meet information needs Clearly defined Regulated control of new procedures cover account creation reconciliation of control Periodic check of inactive accounts accounts Standard journal and authorised input forms are used Clear month end cut off process Electronic approval of journals Clear authority levels Integrated system eliminates duplication of maintenance Local variation to common core chart of accounts Comprehensive security and access controls Efficient copy and editing facilities Extra segment (s) provided for future expansion of requirements (fundamental change to business) System allows control prior period posting Variable journal input types such as standard, reversal, recurring System controlled month end procedures and processes On line training and help facilities
Process Features Rigorous period end and year
System Features
System provides control over combination of accounts and cost centres Controls applied for use of balance sheet and profit and loss accounts Real time allocation to cost centres Automatic reconciliation of management and financial accounts
Regular liaison with auditors end routines to ensure to minimise ad hoc trail and accuracy of data reporting requirements for Detailed procedures applied to statutory reports Corporation disallowable reconciliations, accruals and prepayments and allowable tax data Period and financial reports controlled through use of produced within 5 working chart of accounts Period end timetable days of period end Flash results within 1 day communicated to all Cyclical reconciliation of relevant staff balance sheet accounts Balance sheet accounts allocated to GL staff Soft close for non quarter months System allows prior year postings and automatic balances carried forward System is sole source of consolidated statutory reporting requirements and holds non financial data Drill down facilities provides full audit trail on financial data Additional period used solely for year end accounts Multi-currency, multi-country consolidation
Automatic period end reports produced Comprehensive report writer facilities to provide user defined reports One line reporting of information and drill down On line graphical display or links to EIS system Screenbased exception reporting
Management Reporting Leading Practice Features
DRAFT DRAFT
Reports preparation
Variance Analysis
Process Features
Finance Analysis
Standardised and documented close process Soft close
Reports centred on key performance indicators Initial variance analysis and commentary
Financial information which the business has requested Detailed analysis by business specialists
System Features
Integrated systems that extend across all business units Common chart of accounts Common financial language Consolidation system Standard reports Flexible systems Web based reports Drill down functionality on reports
Statutory Reporting Leading Practice Features

Prepare Accounts Distribute Accounts
DRAFT DRAFT
Review Accounts
Sign Accounts
Process Features
Standardised and documented close process Soft close Reports centred on key performance indicators Initial variance analysis and commentary Financial information which the business has requested Detailed analysis by business specialists Financial information which the business has requested Detailed analysis by business specialists
System Features
Integrated systems that extend across all business units Common chart of accounts Common financial language Consolidation system Standard reports Flexible systems Web based reports Drill down functionality on reports Web based reports Drill down functionality on reports
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E RNST & Y OUNG

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Finance Transformation

For the 21st Century

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Total Cost of Finance 25

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Path to Functional Excellence

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Getting the Strategy Answer the Questions?

Additional Tools Specialists Higher Capability

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Traditional Finance Function

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Path to Functional Excellence

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Path to Functional Excellence

Culture & Attitude

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Path to Functional Excellence

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Building Blocks of Functional Excellence

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Leverage interdependencies between processes

Path to Functional Excellence

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Our Approach to Finance Reform

Our Approach to Finance Reform

We are not associated with any business solution or software vendors.

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Leadership Methodologies Experience

Our Approach to Financial Reform

Bottom-up problem solving

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Our Approach to Financial Reform

Benchmarking Functional review Process re-design Governance framework IT Advisory

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