Process Assessment

Intended Audience: CFOs, CAOs, CEOs, finance and accounting leadership

Industry: Oil & Gas

Location: Houston, TX

Client: Kelsey ICO was engaged by a new CFO of an existing oilfield services company recently acquired by a venture capital group. The organization's initial concern was primarily with the close process. Month End Close was delaying reporting to the new owners and often was inconsistent in duration (between 2 and 3 weeks). Accuracy, timing, delayed board reporting, and the risk of the year end audit not being filed, were all remedied by Kelsey ICO in this Month End Close transformation case study.

Series Overview: This is part 1 of a 6 part series that documents strategies implemented by Kelsey ICO to transform the close process for a service company in the Oil & Gas industry. Our goal in this series is to share details of the challenges and solutions implemented during this engagement and to provide helpful best practices that can be implemented in any size organization. Each part in this series can be read independently or in succession.

Series Links(links will highlight as each are published):

Process Assessment | Pre-close Meeting | Close Calendar Schedule | Journal Entries Gantt Chart | Reconciliations | Post Close meeting

Process Assessment

3 Common Challenges Our Client Faced

Month End Close transformation can be one of the most cost effective yet challenging implementations an organization can invest in. CFOs and CEOs often communicate to Kelsey ICO the same three issues that they face with their close each month. As a leader of your organization, you may face variations of these problems and benefit from solutions documented here in this case study.

Challenge 1: Length of Time

Nobody likes surprises in the financial results. Reducing the length of time a division or section of operations is performing poorly is of paramount importance to leadership of any size organization. The C-suite needs to know as soon as possible to adjust pricing, react to increase in costs, or possibly even change personnel. The length of time was hindering our clients ability to analyze and react. They were often asking questions that could not be answered succinctly and sufficiently.

Is it a cost issue, a people issue (management or staff), or a pricing issue? We need the ability to be proactive instead of reactive. The sooner we understand the problem, the sooner we can act to improve our performance.

Challenge 2: Accuracy

Kelsey ICO understands that confidence in the numbers reported is key for the C-suite to react. In this case study, our client had an increased volatility of cost in key cost of good sold components. They did not believe the number was accurate for several months and could not react. After a 3 month trend and much manual analysis, the client finally believed the numbers reported were correct. This resulted in a reactive decision to increase customer pricing. The lack of confidence in the 3 month period resulted in a significant loss and leadership frustration.

Our accuracy is the difference in us making proactive decisions or losing profit margin. We need better control of our Cost of Goods Sold and Labor. We are in a volatile business and need accurate and timely data to make these decisions strategically.

Challenge 3: One Version Of The Truth

Discipline and structure throughout the close process is necessary to combat misinformation. Kelsey ICO often finds that out of period expenses and differing numbers reported leave clients feeling as if they receive a different version of the truth depending on the origin of their reports. Accountability can be a challenge for most organizations. The client in this case study struggled to identify and define within the organization who was responsible for reporting information and what accountability measures were currently in place for accuracy.

We are having issues with the amount of manual analysis needed each month because of the differing reports from Purchasing, Accounting, and Supply Chain.

Engagement & Expectations

After meeting with leadership to listen to and understand fully their organizational needs, Kelsey ICO was engaged to do an initial process assessment to identify how to reduce the close time and improve the accuracy of the close results. The engagement agreement consisted of Kelsey ICO sending one consultant for a duration of 6 weeks to observe and assess the existing close process. The expected deliverable to the client was an exhaustive assessment and analysis of the health of their close process. In addition to this report, Kelsey ICO was to deliver a detailed plan to implement changes to the current process to reduce the 2 weeks to a 3 to 5 day close.

While the organization in this case study has a unique business model and organizational structure, Kelsey ICO has developed a list of best practice queries to measure the performance and isolate issues that will hinder the close process. The following was used during the observation and interview process and may also be a tool for conversation among your own organizations leadership. The answers derived from observation and interviews in the context of the following queries are integral in developing and customizing a plan to improve the close process.

Kelsey ICO's Process Assessment For Best Practices Implemented:

• Does the transactional close take more than 3 to 5 days (not including financial reporting)?
• Is there a pre-close and post close meeting?
• Are all processes documented with flowcharts and narratives?
• Are all staff trained and aware of documented processes?
• Are there documented standard operating procedures (SOPs) for accounting processes?
• Is there a clear delegation of approval authority and approval hierarchy?
• Does an environment of continuous process improvement with initiatives reported to the CFO quarterly exist?
• Is there a clear accountability matrix for all close processes identifying key personnel responsible?
• Are close goals defined and communicated monthly?
• Is there a specific close schedule communicated prior to close to all responsible parties?
• Is there a gantt chart of close processes and journal entries? Are they monitored and evaluated during close? How are escalations enforced (journal entry checklist)?
• Are there journal entry templates for recurring entries?
• How are Close KPI’s reported?
• Are all balance sheet accounts reconciled monthly for accurate reporting? Are they reconciled correctly or are they prepared as roll-forwards of ledger detail?
• Are correcting entries posted within 30 days or during close if material?

Observation Discoveries

Defining and isolating issues can be a difficult process for the best of organizations. In our experience clients that embrace critical assessment, are more productive and often leaders in their industry. This organization's leadership was adamant about transforming their close process. Here is an extracted list of some of the most pressing close issues from the detailed process assessment that was delivered to the client.

Process & Personnel Issues 

• Approval hierarchies were not set up appropriately in the ERP system. The access to ERP modules were not role based causing compliance issues.
• There was a lack of mitigating risk controls where needed. (For example, email signature approvals needed to be required for fixed asset purchases over 20 thousand.)
• It was observed that many recently added personnel were not trained in their roles due to turnover.
• Key management did not share information efficiently. There was a significant bottleneck in the close process due to failure to delegate tasks appropriately. Also, dependencies in the workflow were not clearly understood or coordinated by management.
• Several new processes were implemented without communication, change management and training in the organization.
• Deadlines were obscure and not communicated in a clear consistent manner.
• Pre-close and post close meetings were not facilitated to discuss specifics that were unique to that month. Discussions of timing, resources, and deadlines were also absent.
• There were not any KPI’s in place to monitor close.
• Bottlenecks were found due to a lack of understanding or scheduling of dependencies in the close process. This created an inefficient workflow of personnel, for example, waiting on others to complete processes before they had the ability to complete their own processes.
• There was not a post close review available for discussions pertaining to close issues. This resulted in difficulties to correct problems at the source. Each close would deal with redundant issues month after month.
• There was a lack of accountability outside of the corporate headquarters. If there was a missed deadline, it was observed that there was ineffective management support in operations to take corrective action. There was also confusion as to what personnel were responsible for each close process.
• There was not a process in place for reconciliations and correcting entries were not processed timely.
• It was observed that there was an overall lack of management support, coordinated effort, respect for deadlines, and sense of urgency throughout the organization. This environment consistently produced bottlenecks and undue stress each close period.
• It was observed that personnel were not cross trained. Parts of the close process would completely shut down if key personnel had an unforeseen absence.

Solutions Delivered

The process assessment uncovered a myriad of issues that needed to be addressed to not only improve the close process, but also the overall profitability and financial health of the organization. After reviewing the process assessment and solutions to implement a 5 day close with executive leadership, the organization requested Kelsey ICO to lead the implementation changes necessary to reduce the close process.

The decision to use a third party for this process was based on the assessment and clear road map presented by Kelsey ICO. Along with change management expertise and additional resources, Kelsey ICO could direct change for best practices in order to mitigate pushback and morale issues. The client also requested an independent evaluation of personnel and skill set based on market standards for each position.

Implementation

The remaining case study articles document in further detail the solutions implemented by Kelsey ICO over a 6 month engagement that reduced the close from 2 weeks to 5 days. Each implemented solution can be a conversation tool for your leadership to evaluate your own close process. The articles are broken down into building blocks that are industry best practices and necessary for any organization to have a successful close.

Building Blocks To A Successful Close

• Initial Close Process Assessment (current article)
• Pre-close Meeting (publish date: 6/12/18)
• Close Calendar Schedule (publish date: 6/19/18)
• Journal Entries Gantt Chart (publish date: 6/26/18)
• Reconciliations (publish date: 7/3/18)
• Post Close meeting (publish date: 7/10/18)

The aforementioned building blocks were all implemented simultaneously and not in succession. The collective success of each building block is the key to having an excellent close process. The next article discusses best practices for the Pre-close Meeting. Feel free to follow along in succession or focus on the building block that will most impact your organization.

Kelsey ICO is continuously striving to learn and collaborate with other industry leaders. Please feel free to email Seth Barreras at seth@kelseyico.com with any insights or improvements to our best practices shared in this case study. If your organization would benefit from a close process assessment or any other accounting and finance projects, please email seth@kelseyico.com as well.