Part 11 in the Continuous Accounting Series.
With increasing transactional volumes and complexity, it’s no surprise that the repetitive manual processes and late nights compressed into the financial close window often top surveys of accountants’ biggest frustrations about their roles.
At most enterprises, the financial close remains an intensely resource-intensive process, with dozens of parallel monthly closes occurring within subsidiaries and divisions. A failure in any one of them can delay the close at corporate, or worse, place the financials at risk.
The challenge has become more acute as organizations have increasingly become inherently global at every level, from looking to tap into high-growth emerging markets through acquisition or launching new lines of business. All are associated with a proliferation in legal entities, which in turn have their own global complexity. McKinsey summarized the issue as a “globalization penalty.”
At the individual entity level, a recent survey by the Corporate Executive Board (CEB) found that while the fastest closers take just four days, that’s not the whole story. Despite the common call for a faster close, teams the survey identified as “high performing” take seven days to close. Those teams balanced the need for a fast close with being a good business partner and adviser by having established operationalized and detailed close checklists and controls. They balance speed, analysis, strategy, and risk.
In addition to having more detailed internal controls and close checklists, typically they are able to provide interim results to management faster, perform a complete analysis (such as greater balance sheet and cash flow planning), and work better with better with line of business teams.
Within a subsidiary framework, higher-performing accounting teams can typically provide better financial visibility to corporate, meaning corporate can better trust subsidiary general ledgers to move confidently into the consolidation and reporting process and minimize the number of pre-consolidation checks.
So how do entities navigate the balancing act within their financial close – achieving a fast-enough close, ensuring strong controls, minimizing risk, providing analysis and guidance to business partners (including corporate), while being cost- and resource-conscious?
1. Assess goals, issues – and create a blueprint
There’s no point in jumping into a financial close improvement project without a plan. What are the goals of the improvement? Is it to improve governance? Reallocate accounting resources towards strategy? Provide more transparency to corporate? Be more efficient?
Improving the entity close requires an assessment of controls, processes, people, and technology. Are there too many unintegrated transactional systems in place resulting in manual, painful reconciliations? Is there a problem with documentation and audit trails behind transactions? Are controls and close activities too coarse-grained? Is reporting too manual? Does everyone know their roles and responsibilities? For divisions or corporate, is the bottleneck around intercompany processes (like intercompany eliminations and reconciliations), currency translations, or the financial consolidation process?
Creating a blueprint and scorecard of the process enables a financial close improvement project to focus on high-value targets.
2. Improve orchestration at detail
If you’re like many, your close checklist is in spreadsheets. But spreadsheets and documents are rarely referenced and fail to operationalize the close, leaving the process to email, phone calls, and online chat. In this scenario, relatively informal close checklists are held at too high a level, they are not operationalized, vital steps are missed, or team members unintentionally delay the process. Worse, if key employees leave, the process may disappear with them.
Modern tools provide an online, up-to-date list of detailed financial close activities across cash and bank reconciliations, inventory, fixed assets, prepaid expenses, and other areas. The controller gets a real-time view of where the close is in the process, and workflows route the right activities to the right people at the right time, control sequencing and dependencies, and auto-schedule repetitive tasks.
3. Move from month-end to continuous
Increasingly, accounting organizations are shifting to a soft close, moving more tasks out of month-end, instead doing them on a continuous basis over the course of the month. For example, does all your month-end financial reporting hinge on getting through a significant backlog in matching account balance, doing bank reconciliations, or reconciling other subledger detail? What if you performed those reconciliations over the course of the month instead? Are allocations deferred until the last-possible minute? If you could perform more activities during the month, could you allocate more time in the close to management reporting instead?
While some activities must remain at month-end, many repetitive tasks can be performed as they happen using automation, provided the right tools are in place. For example, these tools can perform tasks such as intercompany processes, reconciliations, and profitability analysis allocations and reporting in real time, reducing pressure at the close and providing a clearer picture of the financials throughout the month.
4. Measure, iterate
The story of the financial close at most high-performing accounting organizations is success built on success – rather than an overnight transformation. Their accounting leaders have continually measured incremental improvements, such as the number of hours spent on different processes or end-to-end cycle times for different steps in the close, and made step-by-step improvements. However, without a financial closing system, measurement, while not impossible, is a significant challenge simply because many of the processes take place in spreadsheets, emails, journal postings, extracts, and manual rekeying. Without the ability to gauge who is doing what, and who is waiting on whom, it’s challenging to know where the individual bottlenecks are and how successful improvements really are. Using a closing cockpit that breaks down activities and shows trends around tasks enables improvements to be applied month after month and measured to ensure that they’re paying off.
Improving the close starts with the first step
The truth is that there is no silver bullet to transforming the financial close. It takes clearly identifying the shortcomings, applying opportunities to automate, improving collaboration that is grounded in well-developed workflows, and continuously measuring and improving. It’s the real confluence of people, process, and technology. Taking the first step on any of these axes is the first step to creating a better close.
To learn more, read the Ventana Research Paper.