Chapter 3

Your Guide to Implementing a Flux Analysis Process

Flux analysis is used for a variety of purposes: A way to seek answers, identify missing data and errors or implement extra controls to your close. Understanding fluctuations within an account — whether monthly, quarterly, or annually — provides insights. The variances signal a need to explore and explain. 

Flux analysis is critical, not just for an accounting team but for the company as a whole. The insights gathered inform companies and help them make better data-driven decisions. Moreover, it’s a highly beneficial monthly practice for finance teams and a complement to the close process.

Jeff Roest, VP of Finance at Qualia, believes strongly in a monthly flux process. At his company, the finance team each has a section to work on. He says, “The review is first, but when you add the result, you also have a super control. And when you bring your team together to look at it, you get the benefit of everyone getting the big picture. People learn more about the business and learn to develop analysis and presentation skills.” His belief is that flux analysis is something you should be doing monthly no matter what your business size.

When is the right time to implement a flux process?

Roest feels it's a no-brainer — you should implement a flux process as soon as you’re doing monthly balances. However, he says, “You need to have a decent chart of accounts first.” But doing it right from the beginning lets teams understand what’s happening month to month.

The key is ensuring that you can perform it on a timely basis, focusing on what’s valuable, so the process doesn’t feel cumbersome or irrelevant. At a minimum, a flux process enables you to do high-level substantiation that lets you catch mistakes before sharing information. It gives you the why behind what happened. It lets you review and make needed changes. 

An investment in the flux process is super control.

Setting up your flux analysis for success

Closing keeps accounting teams busy. But a flux analysis process lets you hit pause to talk about what happened — and can help you to inform workflows. Roest says, “A flux process is great for identifying things that are in our recurring processes or things that aren’t working well.” And although you might not see results that drive adjustments every month, it’s an excellent way to find out if you’ve missed a journal entry, have a need to make something a part of your closing checklist, or for adding more detail to your closing process.

When setting your flux analysis up for success, there are logical actions and foundations to build from. 

Pinpoint your business drivers

Drivers affect every financial facet of an organization. Pinpointing what drives line items in your financial statements lets you identify activities and key inputs that influence operational and financial results. Determine what’s important and what will guide strategies or decisions. 

Start with natural ledger accounts 

A commonsense place to start your flux process is with your natural ledger accounts. Going too deep into detail may lower your ability to catch errors. It creates more work. The inverse can also be true, in that a too high level review, may lower your ability to catch errors.  The goal is to have the right amount of operational visibility that optimizes quality assurance while informing decisions.

Consider materiality

Finding the right materiality threshold is crucial for your flux process, albeit not always easy. Too high and errors may be missed. Too low and you may force preparers to explain operationally immaterial variances. To determine what you consider material changes, Roest suggests considering the size of adjustment that would cause your team to reopen a prior period and ensure that the threshold is lower than this amount. Roest likes to use a percentage and dollar amount threshold.  This helps to filter out low value accounts with very low dollar amount changes but high percentage changes and high value accounts with large dollar but low percentage changes. In general, keep it simple, continually assess, and make adjustments.

Set expectations

Not having a variance can indicate an issue — especially if you expect one.  An example is that Roest likes to ask his team to obtain an explanation for all significant revenue accounts no matter if the monthly change hits the threshold due to the importance and complexity of revenue.  The flux process is also about having an expectation of what will happen and recognizing why if something doesn’t happen.

Inviting your team into the flux process 

A flux process benefits the accounting team in unspoken ways. It’s a chance to give visibility into everyone’s nonspecific workflows and ensure the team learns more about the company as a whole. Roest also says, “You can make sure people understand not only their own specific action items but also others’.” He often uses the flux process as an opportunity to provide feedback to team members and to break down silos. He feels it’s important for teams to see the overlap between domains. When the teams are invested in the flux process, the meetings become a place to discover important relationships between accounts, which eventually will let you tighten your process. 

Onboarding people into the flux process

If it’s someone’s first time performing a flux analysis, offer examples and then walk them through the process. They can help develop explanations in the first month, and at the flux meeting, they can see what the team is producing to get a sense of the business and how to present the why of what happened. 

After they draft their first explanation, review it before the meeting and give feedback when it’s necessary.

Overall, flux meetings are an important tool. Have an open discussion and encourage people to ask questions and challenge. It lets everyone learn. 

Narrowing the focus: Taking your flux analysis to the next level

Once the flux process is up and running, you can move past implementation into fine-tuning.

Optimize explanations

Explanations take time — and when done right, provide a detailed understanding of what occurred. It’s easy to under or overdo your explanations. As Roest says, he doesn’t want something basic like, “Payroll went up because we hired more people.” He’s looking for explanations that add value and are more nuanced. “It needs to be detailed enough so that we know that the change is actually reasonable.” And just because it sounds right doesn’t mean it gives you the details to show that it’s right.

Drill into trends with company-wide perspectives

Bringing outside teams into your flux process allows you to get a deeper perspective on variances. This can include reaching out to other teams like sales, facilities and HR. They may have pertinent insight into key business trends. Use those insights to adjust if needed.  Roest also invites the FP&A team to the flux analysis review meeting as they likely have expectations and insights into the numbers that differ from the accounting team’s.  

Implement tools

Integrations, automations, and products are often worthwhile investments that let you take your flux process to the next level more quickly. Today’s technology makes it easier to unify data and compile numbers. You can enter explanations and having it all in one place makes it easier to compare to past data. 

A flux analysis is worth it 

Roest feels resource constraints prevent people from implementing a flux process or having the belief that it doesn’t really affect financials. In reality, the flux process benefits the company as a whole. It’s more than just a review. It’s a second set of eyes that identifies problem areas. It offers super control. Most importantly, a flux process creates explanations that can drive business decisions, which further allows accounting teams to be valuable resources to their organization.

Continue to 
Chapter 4
If You Want to Close Faster - Here’s What to Do
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