What is a financial management system (FMS)?
The earliest accounting records were found among the 7,000-year-old ruins of ancient Mesopotamia. This predates the invention of the wheel by over 3,000 years and speaks to the historical and cultural importance of trade and commerce in the evolution of human society. But it was not until the late 15th century that we saw the genesis of modern bookkeeping with the popularization of double-entry accounting by the Italian mathematician Luca Pacioli. With it, businesses could see both their present (debit) and future (credit) situation, and a rudimentary financial management system was born. Of course, modern financial management systems would be unrecognisable to signore Pacioli.
Financial management system definition
A financial management system is the software and processes used to manage income, expenses, and assets in an organisation. In addition to supporting daily financial operations, the purpose of a financial management system is to maximise profits and ensure long-term enterprise sustainability. They help finance teams:
- Streamline invoicing and bill collection
- Optimise daily, monthly, and yearly cash flow
- Maintain audit trails and comply with accounting regulations
- Automate finance processes and reduce accounting errors
- Deliver better budgeting, forecasting, and planning
- Speed up financial close and reporting activities
- And much more
Financial management software can be part of a company’s enterprise resource planning (ERP) system, which consolidates financial and operational data and provides teams with a comprehensive view into the business. Standalone financial applications can also be combined to create an end-to-end financial management system. Increasingly, CFOs are choosing cloud-based ERP and financial management software that can rapidly scale to handle growth and provide functionality for different geographies, languages, currencies, and regulations.
Essential components of a financial management system
An effective financial management system provides companies with a full suite of accounting software and a single source of truth. Within the system are many different tools, which can be grouped into the following four categories:
- General accounting and financial close: Tools for accounting and financial close support essential bookkeeping activities such as general ledger, accounts payable (AP), accounts receivable (AR), and payroll. They help teams generate reports, create financial statements for income, expenses, and balances – and close the books quickly and with less effort. Tax management features also help ensure tax accuracy and compliance.
- Revenue, cash, and treasury management: With revenue accounting tools, finance teams can automate billing processes, view up-to-the-minute payments, and ensure compliance with statutory regulations for revenue recognition, such as IFRS 15. Cash and treasury management tools help teams predict cash flow, improve liquidity, and proactively mitigate risk. This software also integrates with banking systems, so users can get real-time visibility into bank balances and simplify reconciliation in accounts.
- Financial planning and analysis: This set of planning, forecasting, budgeting, and analytical tools help CFOs and their teams support the company’s overall financial health. FP&A software is critical for analysing costs and profitability, improving performance, predicting and navigating future conditions, and providing fast and accurate decision support to the C-suite. It also supports multi-scenario planning and collaboration between finance and every other department.
- Governance, risk, and compliance: GRC tools help teams align organisational activities to business goals, identify and mitigate different types of risk, and ensure compliance with laws and regulations – from GDPR and SOX to international trade agreements. By synchronising data across corporate governance, risk management, and compliance activities, companies can operate more efficiently, navigate uncertainty, and act with integrity.
Digital finance transformation and new technologies
Most companies are still in the early stages of applying digital technologies like cloud, augmented analytics, robotic process automation (RPA), artificial intelligence (AI), and blockchain to finance processes – but they are on the cusp of a major shift and the pressure is on. Not only are CFOs and their teams increasingly expected to provide rapid decision support to the business, but hard lessons learned from the COVID-19 pandemic are forcing leaders to accelerate finance transformation and new technology adoption.
It’s easy to see why. The benefits of digital finance transformation – like instant intelligence, highly accurate predictive modelling, and more agile and automated processes – are the ingredients companies need to navigate change and adapt to the new normal. AI in particular is a driving force behind finance transformation, completely revolutionising finance analytics, automation, and every process – from financial closing activities to risk mitigation and compliance.
- Cloud financial management: In addition to scalability, cost-efficiency, and the ability to connect to more Big Data sources, cloud-based ERP financial management offers secure access to the system from anywhere – which is especially important now that so many employees are working remotely. The cloud is also the gateway – and prerequisite – to new and intelligent technologies like AI, machine learning, and blockchain.
- Advanced finance analytics: Finance analytics powered by AI and machine learning can mine massive sets of structured and unstructured data – from inside and outside the organisation – in near-real time. These analytics empower finance professionals to create more accurate forecasts and plans, model future scenarios, understand the financial impact of potential decisions, generate on-demand reports, and predict risk and opportunity. Ultimately, advanced finance analytics can be used to steer the business in the right direction and ensure long-term sustainability.
- Finance automation: Ninety percent of corporate controllers will soon be using a combination of RPA and AI to automate everything from financial reports and closes to tax preparation and payroll. RPA bots not only automate repetitive tasks and free up workers to focus on higher-value work – they can complete more work faster, minimise costs and errors, optimise workflows, and orchestrate activities across human-bot teams.
- Blockchain: In finance, blockchain technology offers new levels of transparency, efficiency, and security. For example, finance teams can use blockchain to create a single, immutable ledger that’s always up-to-date and doesn’t require reconciliations. Blockchain-based smart contracts – contracts that automatically execute once predetermined conditions are met – can also be used to automate and accelerate activities like payment processing and regulatory compliance.
advanced finance analytics was a top priority for finance leaders in 2020
of finance leaders have implemented or are planning to implement RPA
The best cloud-based financial management systems now embed intelligent technologies like advanced analytics, AI, machine learning, and blockchain directly into their tools – which dramatically speeds up finance transformation and offers rapid time to value and ROI.
Financial management FAQs
Accounting is one component of a financial management system. An accounting system supports the booking requirements of the enterprise – general ledger (GL), the accounting apps that directly feed the GL including accounts payable, accounts receivable, and payroll. A financial management system includes tools for managing all financial aspects of the organisation including treasury and cash management, cost accounting, strategic planning, analytics and financial forecasting, governance, and more.
Enterprise resource planning (ERP) is an integrated suite of business management software designed to address the broad range of functionality needed by a business. Financial applications – such as accounting, reporting, and treasury management – are a key part of an ERP suite and a good place to start if you're looking to better manage your finance processes.
Accounts receivable (AR) is the business function responsible for managing incoming revenue, typically the money owed by customers for purchases and credit extended to customers in the form of payment terms. Accounts receivable starts with billing, manages collection, and keeps records of amounts owed, receivables aging, and payment history.
Accounts payable (AP) is the business function that tracks and manages the amounts owed to suppliers, subcontractors, lenders, and other outside parties. Payable (debt) typically starts with recognition of the purchase invoice and ends with payment. Accounts payable tracks amounts owed and to whom, aging, payments, and cash requirements.
Revenue management seeks to increase revenue by accurately predicting demand and consumer behaviour – and then optimising products, pricing, promotion, and placement (distribution) to achieve the best possible financial results.
A subset of the accounts receivable process, receivables management primarily refers to the collections process – communications with those who owe the company money, and collection activities undertaken to secure payment.
Reconciliation refers to the process of matching records in two or more sources or repositories in order to identify any differences, determine which is correct, and bring the records into synch. Examples include comparing general ledger entries to source documents and matching bank records to payments received and made.
Generally speaking, an accounting system is the mechanism used to keep track of the money flowing into and out of a business. Often, the term refers to a set of software applications that tracks financial activities. Basic accounting system functions or ERP finance software modules include general ledger, accounts payable, and accounts receivable. Optional functions include payroll, cash management, credit and collections, and others.
Financial planning and analysis is a set of planning, forecasting, budgeting, and analytical activities that support a company’s overall financial health. FP&A tools help finance teams provide rapid decision support to the C-suite, build detailed financial models and forecasts, plan for multiple scenarios, identify and assess new revenue opportunities, and more.
Cash flow is the movement of cash in and out of the business. Cash coming in from sales is held in bank accounts and other liquid investments until it is spent for materials, payroll, loan payments, and other expenses. The Cash Flow Statement, one of the three basic financial reports (Income, Balance Sheet, Cash Flow), tracks changes in an organisation’s cash during an accounting period: beginning balance, cash received, payments out, ending balance.
Cash management is the process of collecting and managing cash flows. Centered on cash on-hand in banking and investment accounts, cash management determines where incoming cash is placed, and how it is allocated out to working capital, investments, cash reserve, or other dispositions.
Similar to cash management, treasury management is the management of funds within the organisation, focused on working capital, with the aim of maintaining liquidity and making the best use of funds to optimise company performance.
Expense reporting is a form that tracks and accounts for business spending. Most typically, an employee performing duties away from company premises will be expected to report all expenses incurred during that activity – such as transportation, lodging, and meals. Expenses are either paid directly from company funds or paid by the individual and reported for reimbursement.
When an employee pays for business-related items and cost from personal funds, they will report such expenditures to the company so that the company can repay them. This is common practice for travel expenses incurred during trips for sales, meetings and conventions, equipment installation and service, and the like. It can also apply to consumables or supplies needed to complete a project when it is more expeditious to just buy them rather than go through normal purchasing channels.
T&E stands for travel and expense. An employee traveling for business purposes will report the costs incurred for transportation, lodging, meals, and other expenses using a company T&E report (paper or electronic). Expenses may be company-paid directly (travel agency account or company credit card) or paid by the employee and reported for reimbursement.
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