In the early and late 1990s, companies across different industries started to compete on who would be able to close their accounting books faster. The focus was on speed, with companies trying to outdo each other in a race to reduce the overall closing time. By the early 2000s, after Enron and other large-scale scandals hit the financial world, speed as main driver over quality was no longer as desired. New accounting rules and regulations such as IFRS and the Sarbanes–Oxley Act of 2002 shifted the focus back to more rigorous accounting standards in an evolving and increasingly complex business world. The new focus was now back on accuracy rather than the pure speed of closing the books.
In recent years, the focus in accounting and finance is moving back to improving the overall closing process, supported by advanced technologies for accounting and finance. A few examples include the availability of innovative in-memory databases, which allow much faster access to data than regular databases and platforms.
Software companies also started to optimize and update their system architecture and data models to improve access to accounting solutions for users. While accounting processes became increasingly complex over the years, new accounting applications and user interfaces now support accounting and finance professionals in a way never seen before. With advances in technology and system architecture, accounting professionals are better equipped to improve the quality and precision of the data delivered from subsidiaries to the group level. The focus in the closing cycle can now shift to an increase in transparency across the entire organization with a requirement for a better integration of data with partner organizations. Access to on-time availability of data is considered to be essential for the success of the accounting department. The elimination of potential functional and technical issues, and a reduction in the reconciliation effort between the various (sub-)ledgers, currencies, and cross-company and cross-country activities, are main focus areas of the accounting department.
Faster access to financial data
As new technology and processes became available to support the accounting department, a new goal emerged: achieving a soft (sometimes called continuous) close to produce even faster results – sometimes even mid-month – to produce aligned financial data for individual segments, sub-companies, or foreign subsidiaries. For managers, such a soft close would give them quicker access to their financial data and allow faster analysis and countermeasures in case something appears to move out of budget.
To be able to deliver a soft close and create the required set of financial statements on demand at any time, accounting departments will have to focus on these central building blocks:
- Centralized accounting systems
- Highly integrated financial data across the entire organization
- Highly integrated and standardized accounting processes
- Evolved processes to monitor and support closing activities
Centralized accounting systems
To execute a soft close, the accounting solution must be based on a single source of financial truth. This will increase the reliability, transparency, and speed of the financial consolidation processes.
A centralized accounting system combines legal and management consolidation and reporting capabilities in one solution. A single version of the truth accelerates the corporate close while cutting costs and also helps prevent the merger of multiple reports across companies. The solution needs to support various currencies and global reporting standards.
A corporate headquarters is able to establish a single source of financial truth and deliver better financial insight with improved data quality via built-in system-wide validations. Harmonization of master data is achieved “on the fly” (central chart of accounts, single controlling area, single operating concern, and so on). Preparation for a soft close with allocations and adjustment postings can be executed centrally.
Highly integrated financial data across the entire organization
Highly integrated data allows users to massively cut down on reconciliation time, as data is integrated and reconciled across the organization, countries, and segments. Users can get real-time insight into the financial close process, drill into details to quickly resolve delays, and create statements and disclosures that comply with financial reporting standards such as IFRS, U.S. GAAP, and other legal or managerial requirements.
Once data is integrated, users can execute harmonized internal and external reporting while having higher flexibility in analysis and significantly reducing the overall reconciliation effort. Reporting of financial statements, balances, and line items is possible across company borders.
Highly integrated and standardized accounting processes
Accounting departments will implement streamlined accounting processes to achieve a more compliant and faster soft (and hard) financial close. As accounting process are integrated, financial closing activities and reporting are accelerated as standardized and harmonized data is available across the general ledger, sub-ledgers, and logistics.
The transformation of the accounting processes to a soft close facilitates the accounting department and allows for better balancing of the workload during the close period.
New accounting processes increase the ability to simulate accounting decisions even before the overall close process starts and substantially accelerate month-end activities.
As intercompany reconciliation is very labor-intensive (and often time-consuming), the process needs to be transformed from a batch-centered process (executed at period end) to a continuous process (which can be executed whenever required).
Evolved processes to monitor and support closing activities
The final building block is the enablement of faster execution and powerful governance during the financial close. This enablement boosts the speed of entity closes and ensures compliance with regulatory and managerial requirements. It also supports real-time error correction, status updates, and support to identify mismatches. Planning, execution, and monitoring of close processes across multiple cycles and entities can be centrally executed, while best-practice processes are shared across the company and overall governance and efficiency are improved.
Many organizations are looking for finance to spend more time analyzing the business and adding value and less time on the actual close. By following the above-mentioned central building blocks, the soft close helps an organization to achieve its strategic goals and objectives.
Hence, the soft close is an outcome that can be accomplished by leveraging leading practices, governance, and integrated technologies to achieve an organization’s vision. The soft close is gaining traction given today’s improved technology, increased reporting demands, and steeper regulatory requirements.
The soft close is back!
To learn more about how finance executives can empower themselves with the right tools and play a vital role in business innovation and value chain, please visit the SAP finance page for additional research and valuable insights.
My co-author for this article is Natalie Schweikhard. Natalie is a business enterprise consultant in the business unit CFO Advisory and has worked for SAP since 2015. She works on finance and controlling projects with national and international mainly large-enterprise customers. Natalie holds a master’s degree in business administration from the University of Applied Sciences in Mainz, Germany.