What does the efficiency of your company’s financial close process say about the health of your company? Some experts claim that having a long financial close process can be a symptom of other underlying problems.
Why? Because the month-end or quarter-end close depends on data produced from many other accounting processes and systems. In fact, Robert Kugel, SVP and Research Director at Ventana Research, recently commented on this in an article titled “Accelerating the Close Can Fix Other Problems.”
Back to My Roots
The financial close process is one of my favorite topics in enterprise performance management (EPM). As a former accountant, I spent a number of years closing the books on a monthly, quarterly, and annual basis in banking, manufacturing, and high-tech companies. The majority of my time was spent collecting data from different systems and remote operations, entering the data into a computer system, consolidating the numbers, reconciling intercompany activity, reconciling accounts, reviewing results, making adjustments – and eventually producing the financial statements.
Running this process back in the mid-1980s, using archaic technology, typically took 15 business days or more. This left 5 days or less per month for other work. Then we were back into another closing process. And I do remember working nights and weekends a few times to complete certain tasks, especially at year-end.
(I also have vivid memories of coming into the office on Monday morning after a working weekend to the sight of piles of pizza boxes, donut boxes, coffee cups, beer cans, and other debris.)
State of the Market
Fast-forward to the 21st century. For the past 15 years or so, a 5-day close has been viewed as the best practice benchmark. But in Rob Kugel’s article, he highlights how recent benchmark research by Ventana indicated that 60% of companies surveyed take 6 days or more to close the books. In fact, the Ventana study showed that it’s actually taking longer for companies to complete their close now than it did a decade ago.
- The monthly close process is averaging 6.8 days, compared to 6.5 days a decade ago
- The quarterly close process is averaging 8.0 days vs. 7.5 days a decade ago
Mr. Kugel considers the main reason for this increase is that companies are using outdated manual close processes, which often are poorly executed and rely heavily on spreadsheets. He goes on to say that shortening the close allows companies to deliver financial results to internal stakeholders faster, to help in decision-making – but it also creates an opportunity to drive efficiency in all accounting processes.
Getting to the Root of the Problem
The reasons cited in Mr. Kugel’s article for long period-end close processes are consistent with what I’ve observed in working with clients over the past 15+ years:
- Too many manual processes
- Reliance on spreadsheets and email for critical processes
- Inadequate financial systems
- Management complacency
In his article, Mr. Kugel also suggests a number of solutions to the problem:
- Reducing reliance on spreadsheets and manual processes, automating manual steps
- Upgrading or consolidating legacy systems that may be bogging down the process
- Closing sub-ledgers earlier
- Changing the threshold for account reconciliations
I agree with these points, as well as the suggestion that the most important step companies can take in shortening the period-end financial close process is to act like a doctor – diagnosing the symptoms and prescribing a remedy.
You need to analyze each step of the process, identify the bottlenecks, and take action to control and streamline the process. This should be done every month and quarter – so you can compare and analyze closing cycles over time to understand which issues might be temporary glitches vs. ongoing problems.
This type of diagnosis can be done manually using spreadsheets, but that can be time-consuming. This is much easier to achieve using modern financial close and consolidation systems. These systems have built-in workflow and process management capabilities that allow companies to track each step of the close process, flag bottlenecks and focus efforts to overcome obstacles, and complete the entire process as quickly as possible.
And of course, speed is not the only goal in the financial close, consolidation, and reporting process. Accuracy is also a key imperative. This ensures that internal management is making decisions based on accurate financial and operating results, and that investors are doing the same. If there’s one thing that keeps CFOs awake at night – it’s the risk of having to restate financial results. So speed and accuracy of financial reporting need to go hand in hand.
Reaping the Rewards
Companies that are successful in streamlining the financial close process – from 10 days to 5 days, or even 15 days to 10 days, while improving accuracy – typically receive a number of benefits:
- Accelerate delivery of financial results to internal management – to support faster decision-making
- Accelerate delivery of results to external stakeholders and financial markets – whether it’s good news or bad, getting it out sooner is a sign of a healthy company
- Free up Accounting and Finance staff to spend less time on closing and more time analyzing results and helping management with strategic decision-making
One of the key benefits cited by Mr. Kugel is that companies can use the learning from streamlining the close to improve other financial processes. In the course of streamlining the close, a number of upstream accounting processes will get reviewed and impacted, including accounts payable, payroll, accounts receivable, fixed asset accounting, revenue accounting, general ledger accounting, and other processes.
But Mr. Kugel’s point is that the learning that companies gain from reducing reliance on manual processes and spreadsheets in the financial close process can be extended and applied to other processes, such as budgeting, planning, and forecasting.
To learn more, you can read Mr. Kugel’s article directly here. I also encourage you to check out the Host Analytics white paper titled “Five Reasons to Move Off Excel for Financial Consolidation and Close.”