Building a capability for a daily ‘soft’ closing of ERP books to reduce the burden of month end tie outs between trading and accounting PnL.
Abstract: Month end processing for liquid hydrocarbon trading and accounting functions have long been a time consuming and often cumbersome effort. With advances in technology for both ETRM (energy trading and risk management) systems and ERP/GL (general ledger) systems, this effort has been significantly reduced and in the best implementations almost eliminated with a daily ‘soft’ close effort that ties out trading and accounting PnL every day. This paper explores the combination of Policy controls, Process controls, Interfaces and System capabilities that have enabled the rapid completion of the month end accounting. Having policies that ensure the timely submission of information with the support of tight enforcement, building processes that anticipate and check for errors and material deviations every day and enabling corrective actions right away, using technology to enable the information to reach the desired destination accurately and in near real time using interfaces, and finally having the ETRM and ERP/GL systems’ roles in the effort clearly defined and operational will diminish the heartache that can be the month end closing process today.
White paper:If the month end process to publish the final accounting results at your organization has been completed on the 5th, 10th or even after the 15th of the following month, there are tools now that may make the process significantly smoother and quicker. Staying in compliance with the changing regulatory environment is making an effort to improve the accuracy and timeliness of the position and PnL numbers within the trading business a requirement for all levels of an organization. Some organizations have implemented capabilities that enable a daily ‘soft’ close – a daily tie out between accounting and trading PnL – which has reduced the effort of the month end process significantly, while maintaining or improving accuracy and audit trails. This white paper looks at the environment at a supply and trading organization that achieved significant cost and time savings by linking its ETRM solution with a major ERP general ledger system supporting the crude, refined products, NGLs and petrochemicals businesses.
Timely Information – “Best Available Values”:
In order to achieve a daily ‘soft’ close, the operational information must be correctly reflected in both the ETRM and the ERP systems. Achieving this requires a combination of strong policy initiatives that are backed by tight enforcement and business processes that can handle exceptions rapidly. An example is around the entry of trade data and quantity data. A policy that all trades must be entered within a particular time on the date of execution into the ETRM system along with the business process that tracks and improves compliance on this aspect is rigorously enforced. Errors that are encountered during the contract confirmation task or through risk control activities are immediately corrected and the system of record updated. Similarly an effort was undertaken to identify when the quantity and quality information related to a movement was first encountered by the organization. Business processes were fine tuned so that the ETRM was the first to be updated and controls placed to check compliance on timing. Such interventions made the appropriate system of record reflect the business realities and not surprisingly also brought to light many duplicated efforts or inefficient steps that could be eliminated to realize greater benefits. It was important to adjust to the reality of multiple changes over time to the information received and rigorous error trapping and cancel and correct procedures were implemented both as proactive and reactive measures to the flow of information. Thus the first step was to make the ETRM truly reflect the ‘best available values’ for each data set and provide the user community with the confidence that the information was accurate.
Synchronized IT ecosystem – Interface technologies:
Building on the efforts to have the appropriate system reflect the ‘best available’ information, the next task was to ensure that the ERP and ETRM systems were periodically synchronized. Mapping out the sequence of events in the month end process and layering over such a map, an intraday sequence of actions was the next step. Interfaces were updated or built that would bridge both ledger entries as well as accounting details on an hourly or daily basis. For example – open contracts being marked to market were automatically sent once a day with their valuation and AR and AP information was sent multiple times daily from the ETRM to the ERP system. In the opposite direction payment information properly allocated from the ERP as well as credit related information was updated hourly. When possible if the actual quantity or updated forecast quantity information was available to a system, it was updated in the ETRM or ERP system as appropriate so the entire IT ecosystem would reflect the same information at least once a day. In other cases trades entered on electronic platforms or the exchanges were interfaced in to avoid rekeying errors. Using real time services that would push or pull the information, having clear visibility into the business rules applied for each interface, and ensuring the right monitoring and notification tools were engaged, provided a high level of confidence in the reliability and the validity of the data in both systems. When errors or issues were encountered, the technology group intervened rapidly with temporary workarounds or permanent fixes thereby consolidating the sense of faith in the IT ecosystem.
Rules and Roles – Communicating definitions and expectations:
Getting to a daily ‘soft’ close can be derailed without adequate communication. The daily procedures standardised and adopted, the sequence of actions controlled, the evaluation of exceptions for materiality, the handling of corrections and updates etc. all need to be well defined and communicated as well as nurtured and supported till they become part of the nature of the business. Simultaneously expectations of the GL for book keeping purposes and the role of the ETRM for trading purposes should be properly managed. If the business community knows that inventory costs and valuations are fed into the ERP while the calculations are managed by the ETRM, an investigation into the value of a blend product or a looped inventory can be properly directed to help avoid any frustration. Similarly processes such as rolling inventories or rolling hedges or making prior period adjustments or managing credit notes for overpayments etc. should only have one defined system for the interaction. Reduced ambiguity to start with, and a continuous improvement mentality to thoroughly investigate and understand any exceptions while bringing them into standard processes, will set apart those efforts that result in minor impacts and those that truly realize the savings and benefits of a daily closing of the books.
Improving the accuracy and timeliness of the numbers reported from either the ETRM system or the ERP system needs targeted efforts engaging the latest tools and practices in the trading industry. Starting with a clear vision of the capabilities to be built and then focusing on the right policies and processes, the appropriate technology and interfaces and the proper change management can make the daily ‘soft’ close a reality and shave significant efforts from the month end close process. Ancillary benefits such as improved decision making, reduced operation costs and better compliance make the returns on investment on such an intervention multiply many times.