Mesopotamian ruins dating back 7,000 years contain accounting records dating back at least that long, with accounting records dating over three millennia before wheels existed as evidence for human commerce and culture. An Italian mathematician named Luca Pacioli popularized double-entry bookkeeping during the 15th century; it allows businesses to monitor both current (debits) and future liabilities (credits), providing an efficient financial management system.
Financial Management System
Financial management system are software packages and processes used to track income, expenses, and assets across an organization. They aim to support daily operations while simultaneously helping ensure enterprise sustainability - helping finance teams make key financial decisions faster and reducing risks more easily. FMSs offer many advantages: they aid finance teams by:
- Bill collection and invoicing can be done more efficiently.
- Cash flow optimization for daily, monthly, and annual cash flows
- Keep audit trails and adhere to accounting regulations
- Reduce accounting errors by automating finance processes
- Improve budgeting and forecasting
- Accelerate financial close and financial reporting
- There's much more
Financial management software can often be found as part of an enterprise resource planning (ERP), which consolidates both financial and operational data to give teams a holistic overview of their businesses. Financial management systems may also be created from standalone applications; cloud-based ERP and financial management applications have grown increasingly popular among CFOs since these can easily scale with growth while offering functionality across geographies, currencies, languages, and regulations.
Components Of A Financial Management System
An effective financial management system offers companies accounting software and one single point of truth while providing many tools that can be divided into four different categories.
- Accounting and financial close: Accounting and Close Financial Tools help teams easily create reports, financial statements, income/expense statements, and balance sheets quickly and effortlessly, plus close books more rapidly with tax management features to ensure accuracy and compliance. These tools make teamwork much simpler while creating reports faster with tax compliance features integrated.
- Cash, treasury, and revenue management: Financial teams utilizing revenue accounting tools are equipped to automate billing, monitor payments in real time, and ensure compliance with statutory revenue recognition regulations such as IFRS 15. Cash and Treasury management tools allow teams to predict cash flow and mitigate risks while improving cash management; banking system integration enables users to see bank balances instantly while simplifying account reconciliation.
- Financial Planning and Analysis: Planning, Forecasting, and budgeting tools help Chief Financial Officers (CFOs) of companies support the overall financial health of their company. FP&A software plays an invaluable role in analyzing cost profitability, improving performance, and forecasting future conditions - essential functions that provide fast and accurate support to C-suite decision-making as well as multi-scenario collaboration and planning between finance departments and other departments.
- Governance Risk and Compliance: GRC tools offer teams a powerful resource to align organizational activities with business goals, identify risks, and ensure compliance - from international trade agreements and GDPR/SOX regulations all the way down to local industry standard regulations such as SOX/FEDA or SOx/CASP requirements. Companies can increase efficiency while simultaneously decreasing uncertainty by aligning corporate governance activities with compliance, risk, and risk management tasks.
New Technologies And Digital Finance
Companies across industries are only just getting underway when it comes to using digital technologies like cloud applications, augmented analytics, robotic process automation (RPA), artificial intelligence (AI), or blockchain in their finance processes. Yet, companies face imminent major change as pressure builds among CFOs who must quickly make important decisions for the business, and COVID-19 forces leaders to accelerate transformation quickly.
Why digital finance transformation benefits should matter is easy to grasp: instant intelligence, highly accurate predictive models, agile process automation, and instant intelligence provide businesses with what they need to adapt and navigate change while adapting to a new normal. AI revolutionizes finance analytics and automation.
AI will have an unprecedented effect on nearly all financial activities over the coming decade, both optimizing them and creating entirely new possibilities.
- Cloud Financial Management: Cloud-based ERP offers more than just scalability and cost efficiency; it enables the integration of more Big Data single source systems, offering secure access from anywhere - essential given so many employees work remotely. Furthermore, cloud computing serves as an entryway into new intelligent technologies like AI, machine learning, and blockchain that help companies stay ahead.
- Advanced Finance Analytics: AI and Machine Learning-powered finance analytics enable finance professionals to analyze massive data sets - both inside and outside their organization - more accurately in near real-time, providing more accurate forecasts, creating future scenarios with realistic projections, calculating financial ramifications of potential decisions, producing reports on demand and anticipating risks and opportunities in near real-time. Advanced finance analytics provide businesses with a powerful asset in steering them down their desired paths with long-term viability in mind.
- Finance Automation: 90% of corporate controllers employ robotic process automation (RPA) and AI together in order to automate financial reports, closes, and tax preparations. RPA bots automate repetitive tasks so workers can focus their energies elsewhere while at the same time saving costs errors, and improving workflows.
- Blockchain: Blockchain technology brings unprecedented levels of security, transparency, and efficiency to finance. Finance teams, for example, can utilize it to create an immutable, single ledger that's always up-to-date without ever needing reconciliation. Furthermore, smart contracts - contracts that execute automatically when certain conditions have been fulfilled - allow teams to automate activities such as payment processing and regulatory conformance compliance.
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Financial Planning Challenges To Overcome In 2023
Moving a company from A to B can be more complex than you expect; many factors, departments, and individuals can have an enormous effect on revenue and business throughout the year. What appears on paper rarely translates to actual reality; there are solutions for the most pressing financial planning concerns available that will allow you to anticipate change more accurately and predict changes efficiently and effectively.
Explore 13 of the key financial planning challenges of 2023 so you can achieve greater business expansion while using resources more efficiently.
Top FP&A Challenges
1. Disconnected Departments
Data silos often result from disconnected teams, which can disrupt your financial planning by not giving access to all available information. Larger companies with many moving parts are particularly susceptible to data silos due to ineffective communication and integrated systems preventing each department from having its budget and goals, leading them down different strategies which often conflict.
Disconnected departments may lead to:
- Data Incomplete: You cannot see the complete financial picture for each department.
- Data that is inconsistent: You might not receive accurate information.
- Duplicated data: Can lead to wasted effort and budget overspending.
- Limited collaboration: Departments can't work together to achieve the same financial goals
The Solution
Problematic systems create confusion. Not all departments understand each others' data management programs fully.
Implement a centralized financial planning and analytics system to unify all your departments without needing separate employees management software purchases for each. Everyone involved can import data directly into this database for storage purposes - creating one central point.
Track these signs to identify data silos and resolve them swiftly so your department continues to operate seamlessly as an integrated whole. Here are a few common indications of disconnections within the department:
- Inconsistent data
- Missing Information
- Multiple costs that are not budgeted
Implement a data system that everyone can use and access to address these issues.
2. Lack of communication
Eight out of ten employees believe poor communication to be the root cause of workplace errors; businesses with strong communications can expect a 25% boost in productivity as a result.
Communication breakdowns can thwart financial planning efforts and hamper budget management efforts. Without effective dialogue among departments and teams, financial goals cannot be aligned effectively across them all, and challenges are quickly addressed to ensure staying within your budget constraints.
Long response times can be seen as an indicator of poor workplace communication. They may cause delays to your departmental schedule while waiting for approval or feedback on spending decisions. Departments could make their own financial decisions in an attempt to avoid waiting, potentially creating discrepancies between financial plans and actual spending habits.
The Solution
Integrate software solutions between teams. This will automatically upload all information into one centralized database that everyone can view and utilize.
Utilizing collaboration platforms like Slack or Microsoft will improve cross-departmental communications and ensure your financial plans align with each department's goals so everyone works towards reaching one common objective.
3. Limited Data
Looking backward is a powerful way of gathering data and planning for the future. What have been successful strategies that worked in the past that can be utilized now to prepare for changes that lie ahead?
Data can provide invaluable support when it comes to making big financial decisions - like when introducing a product or service, testing out a business plan, or making significant adjustments that affect financial well-being.
Your financial planning might involve guesswork or researching other companies with similar business models or changes; no two businesses are alike, so each decision you make needs to consider different financial scenarios and make sense in light of multiple variables.
The Solution
Scenario modeling can help you predict the future, taking away some of the mystery in financial planning.
Vena's Scenario Planning and Analysis Software gives you the power to explore what-if scenarios quickly while visualizing how potential changes could influence both revenue and expenditures.
4. Poor Data Quality
Financiers all too frequently experience the frustration of performing reconciliation only to discover discrepancies; minor ones can usually be resolved quickly, while major ones could potentially disrupt a plan's implementation.
Poor data quality can often be to blame for discrepancies. Teams may have entered their expenses into accounting software but have failed to send them on to the finance department for accounting purposes.
Multiple errors are another indicator of poor data quality. When entering identical information across various databases, errors become more likely, and inconsistencies appear in your numbers.
The Solution
By connecting all your databases into one centralized repository, you can ensure the information remains timely and accurate. When each department enters their expenditure data, this real-time update automatically populates into your master database ensuring your accounts stay in line while also decreasing discrepancies when reconciling.
By integrating applications like Paylocity, Peoplesoft, or PeopleSoft into your master database, it's possible to integrate HRIS and payroll data easily and reduce errors caused by the duplicate entry of information by HR into separate systems and then uploading this into one centralized location - with financial teams benefitting from less manual reentry of data by not needing to retype anything themselves.
5. There are too many manual tasks.
Repetition occurs when performing the same manual task over and over, for instance, entering data into a spreadsheet repeatedly - such actions could even be automated with programming software to do them for you!
Manual tasks not only divert your team's focus away from more pressing matters, but they can also increase error rates. Errors could arise during data entry processes or manual transfer from one system to the other by manually inputting numbers and information.
Manual data entry typically results in an average error rate of about one percent; this number varies greatly based on how it's done. Entering written forms increases risk since you have to account for difficult-to-read handwriting when transcribing information.
The Solution
Computer systems can now perform many of the time-consuming and error-prone tasks more quickly and accurately than before. Automating repetitive and cumbersome manual tasks can save time. Your employees could then utilize this time more productively towards expanding your business.
Automating tasks may involve:
- Collecting data
- Approving requests
- Update systems and information
- Looking for errors
- Entering data
6. Multiple security risks and breaches
Security risks are on the rise; data breaches jumped from 419 in 2011 to 1,862 by 2021 due to technological advancement, with hackers having access to websites and databases of financial institutions without adequate protections in place.
Every 39 seconds, there is a cyberattack, and 23% of data breaches result from human errors. By conducting all your financial transactions online, you are opening yourself up to data breaches.
Payroll data, for instance, can be particularly susceptible to breaches in security - the more people who can view and edit it simultaneously, increases the risk that data could be stolen, altered, or misused.
Businesses of all kinds can experience serious data breaches. You will initially face financial repercussions from losing customers' and employees' trust; furthermore, legal actions from those directly affected could follow as a result of the breach.
The Solution
Businesses possess sophisticated data security model technologies that outwit hackers. By taking appropriate measures, such as protecting passwords and restricting access or restricting financial data flow, many data breaches can be avoided. Vena, for instance, restricts employee access to its central database so they only gain access to what they require - for instance, payroll data - without risking accessing other financial data.
Regular security training is another effective way of mitigating risk. Your employees will become aware of any potential threats so they can take appropriate precautions to keep sensitive data protected in an insecure system. Training also shows your staff how to enter and store information safely into it.
7. Plan in stages
An annual financial plan covering an entire year is an indication of good planning by any business unit, providing detailed budgets and reports about expected profits and losses each month of the year.
Time can be an obstacle when creating a comprehensive report, which may necessitate starting early to meet deadlines before the fiscal year's end; however, doing so might result in outdated information being shared prematurely. Waiting till the last minute may force rushed planning with increased errors made along the way.
The Solution
Business management software dramatically cuts your planning time in half. No need to start early with outdated information; instead, use current details to produce comprehensive reports regarding projected profits and spending habits.
Vena's software simplifies payroll planning and benefits administration by using pre-built calculations that account for salary increases, benefit adjustments, and bonuses, cutting your time on these calculations down considerably.
8. Lack of Scalability
Your financial planning tools must adapt as your business evolves. While a spreadsheet might have served your small operation well when there were less than 100 workers on staff, eventually, this won't be sufficient anymore. New tools must be found that allow for efficient task completion.
Financial planners often struggle to maintain detailed plans while using outdated budgeting tools and software that hasn't kept pace with their businesses' expansions. Not being ready to upgrade due to familiarity and comfort levels with spreadsheets leads to errors, delays, and inefficiency that compromise financial planning processes.
How easily could you, for instance, add in new payrolls if, over one year, your company hired twelve additional employees? Doing this using outdated spreadsheets or older systems may prove challenging as manually making calculations may increase the financial risk of error and require manual adjustment of numbers - potentially increasing operational complexity significantly.
The Solution
Finding financial planning software with flexible scaling features is crucial to your financial planning success. Vena allows users to scale spreadsheets as their business performance expands without changing systems as you go along, saving hours in manual real-time data entry tasks.
Your financial plan can be updated immediately as new data enters HR software, thanks to integration between each department and financial strategic planning software. Your single platform will even perform any necessary reconciliation to adjust for changes without your intervention!
Vena has helped more than 1,300 companies expand, using intelligent planning techniques for healthier company development. Vena Customer Case Studies demonstrate this.
9. Unexpected Events: How to Prepare for Them
Unpredictability in business can often alter plans, leading to inaccurate financial projections that rarely match actual figures received each month. COVID-19 served to remind companies about the challenges a sudden and unwelcome change can present them; even those who had contingency plans in place found it impossible to adjust.
Your ability to adapt quickly will be even further compromised if you plan two to five years ahead and find it challenging to estimate for next year. Will gas prices increase significantly this year, or is something in short supply that you need? Will your business experience an unexpected surge or dip in sales due to competition or something else entirely?
The Solution
As much as it's impossible to know exactly what will come your way, creating a flexible plan to allow for changing circumstances can give you the tools necessary for facing whatever may come.
Agile project management has emerged since businesses adopted more dynamic financial models of project administration. Gone are the days when plans would last several years before being updated with any significant information and technology advancement. Instead, today's market is driven by consumers with greater purchasing power who expect constant updates as markets continually change - forcing businesses to adapt with each passing moment or risk losing out entirely in today's constantly shifting marketplace.
Agile planning is flexible in that it does not depend on an established plan; rather it utilizes probabilistic planning. Once implemented, agile allows employees and customer satisfaction to provide frequent feedback in real-time to adjust the plan in real-time.
Agile financial planning provides an ideal example. Each team budgets over the long-term rather than accounting for short projects, allowing teams the freedom to tailor budgets based on customer experiences and employee needs instead of adhering to an inflexible plan. Around 71% of U.S. companies employ Agile project management, leading to an estimated 60% increase in revenues among companies who utilize it.
Preparing in advance for unexpected events and changes is the ideal strategy to adapt quickly to any major business changes that might arise. By planning for changes ahead of time, your business can make quick adjustments swiftly to stay competitive.
Discover why agile forecasting is vital to finance teams to plan in uncertain times through this blog post. Don't miss reading it.
10. Factoring in unknown consumer behavior
Financial planning would become much simpler if we could accurately forecast consumer behaviors over the course of one year. When planning the launch of new products or services, sales growth needs to be factored into your financial plan for optimal success; otherwise, they risk not meeting consumer demand and creating financial problems in their wake.
Predicting the impact of price hikes on consumer spending is another challenge facing businesses today, due to rising raw material and gasoline costs associated with supply chains. You cannot know for certain what effect any increase might have on customer relationships - whether or not they continue purchasing your products and whether competitors may take up your offer instead.
Economic uncertainty can trigger many new behaviors among consumers. It could push them towards increasing credit card use - leading them to spend more without experiencing its financial repercussions - or cause them to cut spending due to economic anxiety. These are only some examples of consumer reactions in similar situations from years past that will influence your financial plan this year.
The Solution
Although you are unable to read consumers directly, you can still gain an excellent idea of their future behaviour by tracking its effects in real-time.
Company management software integrated with other systems enables you to manage and track changes to consumer spending behavior more closely, eliminating the need to wait until quarter-end to detect whether spending has decreased due to economic factors.
Your central database allows you to track changes more closely as data from various applications are aggregated into it, giving you more time and agility in responding quickly and adjusting expenses so as to still return profits in the end. Financial forecasting allows you to prepare plans for multiple scenarios. For instance, you could assess how credit card purchases would change or whether consumers reduce spending with this technique, allowing you to prepare plans accordingly.
Conclusion
Financial management is essential to any successful business's development. Running it efficiently and profitably means understanding cash flow management as well as other important metrics, as well as budgeting, investing, borrowing and debt repayment strategies to improve overall performance and achieve long-term business goals.
