Part 1 in the 3-part “Universal Journal” series
It’s no longer acceptable to make decisions based on information available at the end of a financial period. Continuous accounting – performing activities traditionally executed only at the end of a financial period in real time, as required – is the new game in town. This means finance professionals need tools that provide financial insights at any time. They need financial results on demand as if it were the actual period-end.
The result of this execution is a soft close. Performing a soft close means that the books are closed without reconciliations, revenue recognition jobs, and without exporting data to a business warehouse or off-system analytics tool.
The old adage that knowledge is power remains true when talking about your financial situation. By providing a quick snapshot of your finances, soft closes have an invaluable place in the accounting process. If you can’t do a soft close, then you’ll only have the information at period-end to rely on, which may be too infrequent for your needs.
You can be certain that many of your competitors use financial software that allows them to perform soft closes according to their business objectives. So, what are you missing out on when you don’t have the ability to get an accurate picture of your cash position at any time of the month?
1. Product pricing
The financial performance of a product is a key indicator of its proper pricing. For example, if an item’s profit is better or worse than expected, that may be a sign that the price should be raised or lowered, respectively. With less information about your financial situation, however, you’ll have more of a challenge deciding where your prices should be.
2. Hiring decisions
Bringing the right people on board can make all the difference when it comes to gaining a leg up over your competitors. Of course, most businesses are more reluctant to hire new employees when they’re going through a rough patch. Without performing a soft close, however, it becomes much more difficult to determine how much cash you have on hand. Committing to salary costs based on a false picture of your financial position and outlook is a real danger.
3. Production changes
In industries where product cycles are short and the business environment changes rapidly, being able to quickly carry out production changes is critically important. Performing a soft close enables managers and executives to easily assess how they’re doing and to make course corrections to production as necessary.
If everything is going fine at your organization, you might decide that some of your employees should receive a well-deserved promotion. However, learning that you don’t have the budget to do so after you’ve given out the promotions would be a disaster. When you do a soft close, you can verify that your cash position is strong enough to reward your employees for their hard work.
A traditional financial close gives organizations insight in financials once every month; the continuous close helps organizations to have real-time insight at any moment. The speed of modern business, with more innovators threatening greater disruption than ever, demands that you have the tools to respond when you need to – not at an arbitrary time in the future. To achieve this, finance must move from the bookkeeper towards the role of strategic advisor, and evolve strategic and tactical ideas quickly.
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