The Hidden Costs of Scattered Data in Financial Reporting
Regardless of the products and services offered, every business aims to profit. Financial reporting and analysis are key to understanding the financial health of a company, which then informs strategies to ensure year-round profitability.
In this article, we explore the role of multiple sources of truth as a major barrier to preparing accurate financial reports, the real-world implications this disparity of data sources may have on a business, and practical solutions for improving financial data management.
The value of accurate financial reporting
Financial reporting is the systematic documentation and communication of a company’s financial performance to internal and external stakeholders. It involves the analysis and presentation of income statements, balance sheets, cash flow statements, and other pertinent financial data to concerned parties.
A good financial report is relevant and true to the facts. It should be unbiased, error-free, and useful to its readers. Other hallmarks of top-notch financial reporting include being easy to compare and understand, verifiable, and timely.
From the Chief Financial Officer (CFO) down to the accountants, every finance team member must strive to build reports on the foundation of these qualities.
Accurate financial reporting is vital to external and internal stakeholders of a company for several reasons. Some of them include:
A financial analysis report that is properly prepared answers questions on a company's financial health, profitability, debt level, and return on investments.
Hence, accurate reports arm CEOs and other upper-level staff with information to make strategic decisions on areas such as pricing of products, employees’ compensation, and debt management.
Securing Investors and Creditors
External stakeholders like investors and creditors rely on financial reports to make decisions. Investors will look out for indicators of profitability and potential for future growth.
Similarly, creditors will assess debt-to-equity, solvency, and cash flow to determine creditworthiness and fiscal stability. Therefore, accurate financial reporting can help a company attract investors and creditors to finance daily operations.
The European Union adopted the International Financial Reporting Standards (IFRS) for financial statements prepared by companies within the region in 2002. Failure to adhere to the outlined standards comes with legal issues, penalties, and fines by European regulatory bodies.
Facing sanctions for failing to meet reporting standards could also damage the reputation of affected companies. However, these consequences are easily avoidable by ensuring financial data is prepared according to set standards.
Multiple sources of truth for financial data - hidden costs
While every finance team strives to perfect their reporting and analysis, certain barriers might prevent that from happening. The presence of multiple sources of truth for financial information is one of such barriers and potentially the most significant one. On the surface, having various data sources may seem harmless, but there are hidden costs to conducting financial operations with such a system.
The organizational structure of most businesses plays a significant role in forming multiple sources of truth. When a company's operations are decentralized, the different departments or business units may employ different software, spreadsheets, and databases for financial data.
Similarly, companies involved in mergers and acquisitions will often bring their preferred reporting and analytics tools. This will inevitably increase the number of data sources and lead to difficulties consolidating information.
The persistent use of legacy systems is another reason why multiple sources of truth still exist. A report by the Financial Conduct Authority shows that 92% of the UK's financial firms still use legacy tech. Unfortunately, legacy systems come with many problems, the most relevant of which is their notorious incompatibility with newer systems.
Hence, it is often difficult to integrate data from other sources, inevitably creating multiple truth sources. This is a well-recognized problem, with 90% of IT leaders admitting to being held back by legacy systems.
When a business cannot unify multiple data sources, the downstream effect is often inconsistent, incomplete, and duplicate data. Siloed financial data increases the difficulty in adhering to set standards within the company. Therefore, inconsistencies in accounting methods and reporting periods may arise. The accuracy of financial reports generated with such data is also questionable.
The insights derived from such financial analysis are often flawed, leading to poor decision-making that may negatively impact daily operations. Also, companies spend additional time and resources to reconcile data from disconnected transaction systems.
Furthermore, failure to adhere to international standards may attract fines and penalties that may set companies back financially while creating negative impressions that scare external stakeholders away. Cash flow problems and bankruptcy are other possible scenarios if such a situation is not carefully managed.
Practical tips for streamlining financial reporting processes
Here are some tips for improving data management for more accurate financial reporting and analysis:
Centralize Data Sources
The obvious first step is to unify data from disconnected systems into one single source of truth. Achieving this ensures the integrity of financial reporting and the reliability of decisions made from the data analytics process.
A structured approach must be used when creating a centralized data repository, best done with a trusted system integration partner. All financial data sources must be identified. Next, a robust system, such as an Enterprise Resource Planning (ERP) or dedicated financial management software, must be selected to host all the data.
This centralized system may then be integrated with the legacy systems and other databases for seamless migration. Creating this single source of truth is an important step to making useless data have high value to users.
Standardize Financial Reporting Processes
Creating a standard framework for data collection, analysis, and reporting is compulsory for financial data management. The IFRS is the recognized standard for accounting and reporting in Europe, so all companies in this region must ensure compliance.
To achieve compliance, data collection and entry procedures and reporting formats must be defined by upper-level management, documented, and communicated regularly to the employees. Data validation checks must also be put in place. Standardization guarantees consistency in all accounting processes, ensuring that financial reports generated accurately reflect the current state of the company.
Alternatively, companies can adopt internal control frameworks such as the COSO (Committee of Sponsoring Organizations) framework for standardizing processes.
Introduce automation into data management to improve the accuracy and consistency of financial reporting and analysis. This helps to reduce manual errors and save time while facilitating real-time reporting for smarter decision-making. Automated reporting can also help companies track changes in financial data as soon as they are made, enhancing data security and ensuring accountability.
Joining forces with ACTUM Digital
Management of financial data is a delicate process that must be approached with precision. Considering the precarious economic situation in Europe, companies must be sure to stay on top of their finances to avoid losing fortunes and falling behind the competition. Working with multiple sources of truth for financial data poses hidden threats to a business, and addressing this issue is key to improving overall financial management.
ACTUM Digital can provide your business with innovative solutions to optimize financial reporting and analysis. Our team of certified experts can streamline your financial processes by connecting your company with the most suitable business intelligence (BI) tools, automating your data reporting, and developing dashboards for optimal data visualization. Get in touch to cut costs and mitigate risks associated with poor financial reporting.