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Bad financial reporting estimated to cost companies billions

Dysfunctional and manual financial reporting processes are expected to cost U.S. businesses $7.8 billion this year, according to a new report, as a result of financial planning and analysis teams spending at least two hours on manual work each week, with annual company budgets taking up to six months to prepare.

The report, released Thursday by the financial planning and reporting software company DataRails, in conjunction with economists at the University of Baltimore, examined the economic impact of financial reporting processes in the U.S. The researchers did an economic analysis based on composite revenues of more than 839,000 U.S. companies of different sizes.

The report comes at a time when companies are dealing with the increasing costs of goods and materials thanks to supply chain constraints and high rates of inflation, and are also facing serious shortages of finance and accounting staff.

The report found that $6.1 billion of economic value is lost each year due to inefficiencies in the traditional role of FP&A, preparing reports such as P&L statements, balance statements and cash flows using manual means, including siloed ways of doing work and lack of data integration. Another $1.7 billion is estimated to be wasted by failing to capitalize on growth opportunities in FP&A.

“Beyond the sizable $6.1 billion figure, the challenge of manual work also produces side economic downsides for businesses,” said the report, co-authored by University of Baltimore professors Roberto Cavazos and Mikhail Pevzner. “These represent indirect economic costs that hurt the CFO office’s opportunity to function as a strategic advisor and create a larger impact on the business.”

The authors believe at least another $1.7 billion of opportunity is failing to materialize due to a failure to push the proper levers and skills within the FP&A function.

The study analyzed the economic impact of manual work relating to financial reporting and the economic damage causing a drain in FP&A and overall finance productivity. It also examined longer-term economic value and new sources of revenue that can be opened through the FP&A function.

The researchers believe that 0.1% growth in revenues is a conservative return on investment for inventive FP&A teams. For example, they pointed to how Amazon’s high-performing FP&A units were responsible for the birth of Amazon Prime, which today has 200 million members. Other revenue-driven FP&A initiatives include the 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 found that the 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.

“Since COVID-19, the role of financial planning and analysis (FP&A) has gained even greater momentum as businesses seek better understanding of their numbers,” Pevzner said in a statement. “However, despite more than a decade of efforts, the daily life of an FP&A professional still involves strategy-sapping manual processes, including identifying and correcting errors, updating reports, and collecting data. This is essentially depriving both companies and the wider US economy of billions of dollars of economic opportunity.”

“We hear on a daily basis from FP&A professionals wanting to contribute strategic direction to their business,” said DataRails CEO Didi Gurfinkel in a statement. “Despite being uniquely placed to deliver economic growth through measures such as scenario planning and responding to real-time data, FP&A professionals spend the vast majority of their time manually producing staple reports. This cycle leaves huge sums of money on the table by failing to capitalize on FP&A’s insights, skills and ability to deliver top line economic growth.”

The report pointed to opportunities of using more automated FP&A systems, especially in the face of the uncertainties caused by the COVID-19 pandemic. With scenario analysis tools, finance decision-makers will be able to identify ranges of potential outcomes and estimated impacts, evaluate the possible responses, and manage how the company will act given both positive and negative possibilities.

“In the past decade, FP&A has moved away from strict focus on budgeting and P&Ls, balance sheets, and month-end reporting, toward becoming stewards of ‘value creation,” said the report. “This entails moving beyond a traditional reporting mindset to supporting top-line growth through timely and relevant insight and foresight. This shift peaked during COVID-19 when improving finance analytics, scenario planning, and modeling capabilities, made the difference between growth and failure for businesses.”