How PE Firms Can Streamline The Monthly Reporting Process

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Month-end reporting is a critical business process that allows private equity (PE) firms to gain an accurate picture of their portfolios. Depending on the diversity of companies on their portfolios, compiling month-end reports can make for an inordinately huge time and busy work investment for financial teams at PE firms.

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The numbers and trends that these reports reveal drive key portfolio decisions. For instance, identifying portfolio companies that aren't meeting desired financial benchmarks as predicted is critical to achieving market-beating performance that all PE firms desire.

Thanks to data coming in from a variety of sources, month-end reporting processes are fraught with challenges. Here are five ways in which PE firms can streamline the way they compile their monthly reports and bring greater efficiency to their portfolio companies.

Establish a Single Source of Truth

Typically, organizations maintain financial data in a series of shared Excel files that multiple employees update. While setting up this process is easy from an infrastructural standpoint, accuracy is compromised. It's hard to track cell-level changes, and mistakes made by one department have a cascading effect that renders all other numbers invalid.

When these mistakes roll up into a PE firm's portfolio, they are large enough to impact performance and evaluation. The best approach is to enforce a single source of truth by creating audit trails at the cell level and keeping track of formula changes.

It's also useful to use a solution that helps you compare two versions of a spreadsheet easily while highlighting changes made. Using such a solution will help you identify where errors were introduced into the process.

Another issue that creates data integrity challenges is the use of different reporting formats. Company A in your portfolio might present its data in a manner that's different from Company B. While this might make sense to them, it doesn't help you design a streamlined reporting process.

Enforcing standard reporting templates will reduce the possibility of errors creeping in. It'll also help you quickly present data in meaningful ways that can drive portfolio decisions.

Establish Regular Error Checking

Month-end reports always have errors due to the changing nature of a business's cash flow and data having to be updated constantly. No matter how robust your process is, it pays to be realistic and identify the most common sources of reporting errors.

It's also a good idea to establish standardized error tolerance thresholds on all of your data sources and devote resources to increasing confidence levels on high tolerance sources. For instance, if a particular portfolio company's data always requires adjustment, examine their causes.

Constantly review your reports for errors throughout the month. This reduces the chances of them cascading into bigger ones by the end of the month.

Set confidence levels and error tolerance limits on all of your data sources. With these in place, you can create reliable estimates of financial data, even if you don't have 100% accurate datasets by the end of the month.

For instance, you can create a range of reported data from each data source that rolls up into your portfolio to give you a reliable estimate of the data you've aggregated.

Prepare Before the Month Ends

You can't begin preparing month-end reports before the month ends, but there's no reason you can't set the foundation ahead of time. Follow up with your portfolio companies by sending them data lists and remind them of the formats they're supposed to report their data in.

The month-end process is a resource-intensive one, so plan ahead of time which business functions will need pausing while reports are compiled. For example, payroll processes might need pausing, and you'll need to inform the concerned employees about this.

By instituting a culture that calls for constant error checking, you can maintain a good handle on your data's confidence levels as the month unfolds. It’s then easier to resolve any outstanding issues with your data as quickly as possible so that they don't devolve into bigger challenges for you.

Automate as Much as Possible

One of the reasons month-end report preparation takes as long as it does is the need for manual data aggregation and cleaning. A report is only as good as the data that goes into it. As a result, a lot hinges on the efficiency of your data preparation processes.

Many companies still rely on employees manually cleaning data sets. For instance, one company might report financial data as "$100.00" while another might skip the decimal points. When running analysis, data formats must be standardized.

Creating a reporting template is a great first step. The next step is to automate data collection and aggregation. Your employees can then focus on error correction and other value-add processes such as creating financial projections. Automate clerical tasks, and you'll cut down the time it takes to execute your end of month reporting process.

By using automation, you'll also eliminate unnecessary processes that raise costs and limit bottom lines in your portfolio companies. For example, automating AR processes reduces the time it takes to collect invoices and helps employees focus on dispute resolution.

In contrast, manual AR processes are frought with friction, as they require employees to spend time stuffing envelopes and reconciling cash payments to invoices by tracking multiple complicated spreadsheets. Automation streamlines the process and eliminates costly hours spent performing clerical tasks.

Communicate Shared Responsibility

Month-end reporting isn't just a financial task. It's a process that is critical for the success of the entire organization. Communicate the need for shared responsibility to everyone, including your portfolio companies. Without accurate financial projections, it's impossible to allocate capital.

Educating everyone involved on the need for proper process compliance is the key to streamlining your month-end reporting.

Cultural barriers can be just as crippling as process-oriented ones. By educating all people involved, you'll manage to change how the month-end reporting process is viewed in the organization.

Tough but Necessary

Compiling month-end financial reports is a tough task, but it's a critical one. Unless you have a feedback loop in place for refreshing monthly projections and reconciling past projections with what actually happened, informed planning and analysis of investment opportunities becomes close to impossible.

While obtaining 100% accurate data might not always be realistic, there's no reason why you can't introduce tolerance limits to data and create reliable estimates before errors are resolved.

The larger your portfolio is, the more critical your month-end process becomes. Follow these 5 steps to ensure you always receive a clear picture of your portfolio companies' performance every month.