Facilitate a Real-Time Financial Close with SAP S/4HANA Finance: An Infographic
There’s a new term in town: continuous accounting.
The concept of continuous accounting is that activities which were typically only executed at the end of a financial period can now be executed in real-time throughout a period. In this context, it is similar to the term “soft close.” Where “continuous accounting” is the execution of these activities in real-time throughout the financial period, the “the soft close” references the result: a company can see a financial snapshot of the company at any time throughout the period, simulating the financial results as if it were the actual period-end.
Let’s now look at the difference between a hard close and a soft close.
Your company, especially if it is public, needs to generate and disclose financial statements by the deadlines set by regulatory agencies; especially global companies need to disclose to multiple tax jurisdictions. And many of these disclosures need to be filed electronically, to satisfy financial and tax reporting requirements. These financial statements are a snapshot of the financial state of the company at the end of a period, be it the end of the month, quarter, or fiscal year. These numbers do not change.
For years, companies have been working for years to accelerate their period-end close. While this is in part due to the need for external disclosures, including to shareholders, the other part of the equation is that the sooner the information about the financial state of the company is available, the sooner management decisions can be made about the company’s future direction.
The idea behind the soft close is one of the outcomes of continuous accounting. With SAP S/4HANA Finance, there is no need to wait until the end of the period to run processes that have previously been run only at period-end because they required overnight batch jobs, such as intercompany and GR/IR reconciliations, and profitability analysis allocations and reporting. The end result is that finance is able to see a snapshot of the financial state of the company using trial balances and management reporting; these numbers are used for internal decision-making, and may change from day to day, depending on the transactions that flow into the system.
A soft close, which simulates the financial health of a company at any time throughout the period, allows a company to identify issues early and take immediate action, for example if there are delays in collecting on invoices from particular customers. The bigger impact, however, is being able to use the current information to use what-if analysis to provide strategic guidance to the company to make decisions, be it on a project level, or investments into new products and regions – all the way through to M&A decisions.
Before and After SAP S/4HANA Finance
Now let’s take a more tactical approach, as illustrated by the Infographic below: on the left, we see the struggles of Finance when systems are not integrated, and information is delayed – and the impact on the financial close. We also see that in spite of getting the disclosures out the door “just in time,” there is no time left to actually use the information for managerial decisions.
And on the right, we take a look at an organization that has implemented SAP S/4HANA Finance – and how this technology can not only streamline the financial close to meet accounting and disclosure requirements, but also provide more comprehensive management reporting throughout the period, continuously, to allow finance to enable the business to make more effective and profitable decisions.
As you can see, with SAP S/4HANA Finance, our character Henry can skip the step of reconciliation, because only one table, the Universal Journal, contains all the information needed for both transactional processing and analytics. And he also does not need to wait for overnight batch processes in order to proceed – which can even save multiple days. On the opposite side, our character Lawrence finds an error, resulting in a process needing to be re-run the subsequent evening.
Henry can also more quickly get to a trial balance at any time during the period, which also facilitates a real-time close at the end of the period. That being said, the real power is that he now has time for more value-added activities: with instant insight into customers, products and regions, he can use what-if simulations to provide guidance to the company on the strategic direction that promises to be the most profitable for the company.
For more information about our solutions that support the financial close, please visit:
- SAP S/4HANA: sap.com/S4hana
- Finance: sap.com/finance
Nice blog, clear my confusion on Hard & Soft closing.
I was looking for some explanation about soft and hard close. This blog helps understanding the difference. Good job !!
Still unsure about the soft close concept or continuous accounting. In order to get complete financial picture at any time of the month, users are still required to perform the necessary closing tasks eg. depreciation run, settlements, cost allocations, etc. correct? Probably the difference is faster processing and the processes able to post delta changes each time?
So it's not really on the fly accounting?
Hello, yes, it is correct that for a complete financial picture, those processes still need to be run. The advantage with SAP S/4HANA Finance is that these processes can be run regularly, in real-time. Prior to SAP HANA, many processes required overnight batch processing (often over several days due to dependencies between them); this is no longer a constraint, so any follow-on processes can be run immediately.
Alternately, if you only need a financial picture of a portion of the company, or a portion of the financial statements, you can also run only those specific processes.
Thank you for the blog. It does clear some doubts on the subject. However, I am still unable to understand the basics here - I still have to run all the closing processes like Asset Depreciation, Allocations, Overheads etc. So much of the overheads, for example, will depend on labor cost (payroll), which is posted only monthly, bi-monthly. Similarly, financial data is received via interfaces, many of which are not daily, or even weekly. How is a 'continuous close' possible in such a case?