Use Real-Time, Self-Service Financial Reporting to Address 2021 Compliance Issues

This article is part of our multi-part series about the challenges that CFOs face going into 2021. Please be sure to check back for other posts in the series coming soon. 

Compliance issues continue to challenge businesses’ capacity to report on information from a multitude of different data sources. Increasing government regulations, tightening credit requirements, safety compliance, and tax planning all require business leaders to proactively address the collection, storage, and management of information from across the enterprise. 

Companies that develop a comprehensive approach to reporting position themselves to successfully meet these challenges. In doing so, they avoid fines, penalties, and bad publicity, also ensuring that they remain in good standing with lenders and investors. As an added benefit, they move quickly on opportunities related to tax planning and government programs. 

Let’s look at some examples of how compliance issues will impact profitability in the coming year. 

Debtor Compliance: Maintaining Good Standing with Lenders

When the business environment experienced sudden, unexpected disruption resulting from the COVID-19 shutdowns, cash flow quickly became a top concern for most CFOs around the world. Amid a continuing climate of uncertainty, many lenders have become more cautious about extending credit to their commercial clients. In 2021, cash flow will continue to be a key concern for most business leaders. 

Businesses that can produce clear, accurate, and timely financial reports will be well-positioned to maintain lines of credit adequate to sustain them through a temporary drop in revenue. Those that are unable to present clear and accurate information when requested could find themselves short of cash when it matters most, leaving them with fewer (and potentially much more expensive) alternatives. 

Consider a company that’s running a low-end accounting software package while keeping a separate record of raw materials and finished goods inventory using Excel spreadsheets. With inventory representing a significant proportion of their hard assets, lenders will want to know what makes up that inventory balance. That includes a breakdown of raw materials vs. finished goods, for example. If that company were to then go into liquidation the latter category of inventory may have much greater value to the bank than raw materials or work in progress. With company leaders being unable to present a clear breakdown of inventory valuation (including finished goods), the bank is likely to reduce or even freeze the company’s line of credit. 

That’s not a hypothetical scenario. It’s a real-world situation where company leaders found themselves continuously struggling to get the financial and operational information they needed. Fortunately, there was a good ending in that particular case. The company implemented an ERP system along with a suite of robust, self-service reporting tools that enabled it to deliver highly detailed, accurate, and timely reports to its lending bank. 

Proving Processes and Safety Compliance

“Proof of process” is another key area of compliance where flexible, reliable, and accurate reporting capabilities can make a big difference.

There are many reasons companies might need to provide evidence that they are following clear, well-documented processes. In the case of FDA-regulated industries, for example, companies must be capable of tracing lots or batches of products (and sometimes even individual serialized items) from the time they are acquired or manufactured through their sale and shipment to a distributor or end customer.

If a product safety issue is discovered, it is critical that such companies can make the right information available to notify customers quickly and recall a product if necessary.

It’s not just FDA-regulated companies that need to meet those kinds of requirements, though. For many companies, it’s important to have the ability to trace the provenance of faulty parts, as well as to reach out to the customers who may experience problems resulting from a manufacturing defect. 

Proof of process is becoming more important across a range of industries. In supply chains, it is becoming more and more common for large customers to expect that their suppliers can provide information showing the origin of their products. The ability to provide clear evidence of safety procedures or manufacturing processes, likewise, has become important in many sectors of the economy. 

Very often, the organizations that clearly define processes and follow them consistently will outperform those that do not. Even as a matter of internal managerial control it’s sensible to establish clear visibility to process compliance within a business. When workflows are defined and recorded within the organization’s software systems, effective reporting tools provide transparency to ensure internal compliance with established processes. 

Program Qualification and Compliance

In March of 2020, the U.S. Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Among other things, the new law provided for cash flow relief to businesses and non-profit organizations through the Paycheck Protection Program (PPP). 

Unfortunately, many business owners were left empty-handed when the initial round of PPP loans was disbursed. As thousands of organizations rushed to submit applications and lenders struggled to understand guidelines for the new program, those that moved quickly to compile the required information were able to submit their applications in time to get a first-round loan.

Fortunately, with the release of a second round of funding, organizations that missed out the first time around were able to eventually get access to much-needed cash, but because of their lack of quick access to information, those businesses were required to wait weeks to get their PPP money. 

Several months later, most of those loan recipients were submitting their PPP loan forgiveness applications. Those loan forgiveness applications required finance and accounting staff to compile information and analysis that most businesses had never produced before. Moreover, accuracy was paramount, and failure to get the numbers right could bring about significant negative consequences. Once again, the companies that were able to produce that information quickly and accurately were able to fast-track their participation in the program. 

The CARES Act contained other provisions that are not as well known, but which have potentially even greater benefits for many businesses. Section 2303 of the law expands the availability of net operating loss (NOL) carrybacks, for example. Briefly stated, this provision enables certain taxpayers to retroactively reduce their tax liability from prior years by “carrying back” losses incurred in more recent years, including 2020. By reducing taxable income in those prior years, businesses may be eligible for an immediate tax refund.

By accelerating certain capital investments, tax-savvy businesses could generate losses in 2020 to be retroactively applied to prior years. That’s a great deal if you qualify, but it also requires some careful analysis and quick access to information. 

Improved Audit Processes

Traditionally, financial and compliance-related audits are expensive processes that consume significant amounts of manpower. In a typical audit cycle, staff must expend large swaths of their time in preparation and must be ready to respond to requests for detailed information from the auditors. 

In most businesses, that can be a struggle because it typically requires that members of the finance and accounting team gather detailed data from many different sources, assemble that information manually in spreadsheets, and then validate and organize it for the auditors. Doing that manually is a tedious and expensive process. If your organization is relying on customized versions of system-generated reports to produce that information, it can take even longer when these customizations are dependent on the availability of IT staff. 

Manual processes or customized reports often become bottlenecks that result in delays throughout the audit process, as staff wait for information from their colleagues. Audits tend to be expensive and time-consuming even in the most ideal environments. When you add reporting bottlenecks to the process, those problems get even worse. 

Reduce Your Dependency on Manual Reporting Processes

For most organizations, reporting is an unnecessarily painful undertaking. Most finance and accounting professionals have come to accept the inevitability of tedious manual processes that require copying and pasting information from exported CSV files or system reports or entering information by hand into Excel spreadsheets. 

The tedious process of reconstructing and reorganizing information from multiple sources in Excel also tends to introduce errors. If information is pasted into the wrong cell, or if the source format has changed, it can result in incorrect information. When management decisions are based on erroneous reports, it can cost the organization dearly. 

Many executive managers express frustration at the difficulty of getting clear information exactly when they need it. When the VP of sales sees revenue trending upward, and the CFO sees a downward trend, valuable time will be wasted arguing about which number is correct. When an organization has clear, accurate, timely information based on real-time data, everyone in the business can operate according to a single version of the truth. The management team can spend less time arguing about who is right, and more time solving problems and improving business results. 

insightsoftware provides financial intelligence tools for over 140 different ERP systems. For nearly three decades, we have been helping business leaders get the information they need quickly, accurately, and efficiently. If your organization is struggling with reporting, including compliance, contact us today to schedule a free demo.