Takeaways from $7.8 Billion Lost in Dysfunctional FP&A Reporting Processes
Updated: Apr 11
In a recent study conducted by the University of Baltimore Business School and FP&A software enterprise DataRails, it was discovered that in the past year, mistakes in financial reporting snowballed to a cost of a whopping $7.8 billion in the US in the past year alone. Such a catastrophic number is the result of FP&A teams wasting 2 hours a week on manual processes, as well as taking an excessive 6 months to prepare annual company budgets (which is enough time for the financial circumstances of an enterprise to change 180 degrees, making such a budget obsolete).
Findings of the Report
The report found that financial planning and analysis (FP&A) teams spend at least two hours on manual work each week, such as budgets, month-end closes, and forecasts, with annual company budgets taking up to six months to prepare. The economic analysis, based on composites of 839,8000 small to large companies in the US, finds that these burdensome manual processes are costing US companies $6.1 billion annually.
The findings also state that a further $1.7 billion of economic uplift could be released if FP&A reporting departments hit a conservative 0.1% revenue uplift for their businesses through projects directly linked to top line growth. From the study, it is clear that finance teams fail to capitalize on automation and will insufficiently drive revenues that will cost US businesses $7.8 billion in 2022.
The study notes that 0.1% growth in revenues is a conservative return on investment for inventive FP&A teams. For instance, Amazon's high performing FP&A units were responsible for the birth of Amazon Prime, which today counts 200 million members. Other revenue-driven FP&A initiatives include manufacturing company Chemours whose FP&A team improved margins for industrial plants at the $6 billion company, while other companies including Lego and HP used real time data to drive revenue during COVID-19.
The report notes that detrimental costs of poor manual financial processes could go beyond direct costs. Indirect economic costs include negative impact on retention and recruitment, inability to act on real-time economic data, and incorrect numbers hurting share prices and investor relations.
Common Mistakes in Financial Reporting
While every company faces its own unique challenges, many companies experience one or more of these common errors as they look to improve their financial reporting process. Such shortcomings can be addressed through a combination of improved techniques in areas like data visualization, proper forecasting methods, and the integration of an effective software to eliminate the gaps created by human error.
1. Irrelevant financial statements:
Financial reports should contain comprehensive comparative data for prior years, quarters, and months. The data sets pertaining to such reports should be complete, and the relationship between key values must be explained in detail. Furthermore, the visualization of the data must be clear, concise, and versatile. If this is not the case, you need to reassess your data management system and strategy.
2. Data Gaps & Inconsistencies:
Manual record keeping, procurement, and accounts payable processes can make it easy to swipe things under the rug, particularly in small businesses where staff hasn’t been adequately trained in the more rigorous aspects of bookkeeping. In the absence of auditing awareness and training, accounting staff can readily cook up all manner of jury-rigged shortcuts to keep the books balanced even while their relationship to actual cash flow grows ever more skewed.
Automation defeats the issue of human error entirely. With all transaction data automatically collected, connected, and fully visible, there’s no room for massaging numbers, fraud, rogue spend, or data entry errors. A complete audit trail puts finance leaders at ease, thanks to clear, up to date graphs and charts for C-suite reviewers and on-demand, complete and concise financial reports for industry and government auditors.
3. Insufficient cash flow forecasting:
Cash flow is the lifeblood of any company’s operational health (and overall existence). A thorough and complete understanding of historical, current, and projected cash flow is indispensable to the effective management of capital investment, fund expansions, updates, or other large-scale spending, or negotiate favorable terms on working capital financing when forecasts reveal potential shortfalls. Without monthly cash flow reports, periodic and yearly income statements, and projected cash flow forecasting, your organization puts itself at needless risk of writing checks its capital can’t cash.
4. Procedural Inefficiencies:
This is another aspect of financial reporting where automation provides a key solution. In addition to removing the most obvious errors, omissions, and inconsistencies in your workflows, having full visibility of key performance indicators (KPIs) makes it easy to refine workflows further. You can also create contingencies, assign roles, and organize reminders to ensure all data is accurately collected, transparent and complete, and readily accessed for analytics and reporting.