Robert Kugel's Analyst Perspectives

The most intractable issues that face finance departments are those that “everyone” knows must be addressed but somehow never muster the collective urgency to do so. Many couch potatoes know they need to watch their diet and exercise regularly. If asked, they would say it’s important or even very important. Yet there they sit. Based on our newly completed benchmark research “Trends in Developing the Fast, Clean Close”, it appears that closing falls into this category. This is especially true for companies that are slow closers, by which we mean those that take more than five or six business days (essentially one business week) to complete their monthly, quarterly or, for those that publish their financial statements only twice yearly, semiannual close. Our research shows that in general there has been no progress in achieving fast closes – indeed, there’s been some backsliding – over the past five years and, indeed, since our initial research on this subject in 2004.

The one-week close is a generally accepted metric that reflects the business need to have complete and accurate financial and management accounting data available as soon as possible. Faster closing means that companies can spot and address opportunities and issues sooner. In this respect, closing faster is an important way that finance departments can play a strategic role in their company. As well, corporations that are required to provide their financial statements to third parties (such as a securities regulatory body or a lender) must meet deadlines, and freeing up additional time to create and review the narratives or other related analyses can help ensure that their reports meet all requirements. on the other hand, failure to close in the one-week time frame suggests that an organization has process, management, data or technology issues (or some combination of these) that must be fixed.

Ventana Research has investigated the closing practices of more than 1,000 midsize and larger organizations since 2004. Our new findings show that compared to our 2007 benchmark, companies are taking longer to close their books – on average 5.7 days for the monthly close (up from 5.2 days in 2007) and eight days for the quarterly close, up from 7.5 days five years ago. (Quarterly closes are usually more complex and therefore take longer to complete.) In 2004, the averages were 5.3 days monthly and 7.3 days quarterly. The latest research also shows that 41 percent of companies made no change in the length of their closing period over the past two years; another 41 percent decreased it, while the remaining 18 percent experienced an increase. The distribution of responses five years ago were largely the same.

Why did the average closing time lengthen since 2007? One factor may be that, according to half of the participants, economic and regulatory events have increased their workload. These companies more often said their time to close increased over the past two years. Companies that take longer to close after their quarter now gather more information than in the past and have to do additional levels of review and checking for errors. Some may be doing it with a smaller permanent staff than before.

In the context of the days-to-close data, the pattern we discern from these three benchmark projects is that over many years, companies have had a static average time to close with some year-to-year fluctuation around this mean. We see several scenarios here. Sometimes, for example, a company finds that its quarterly close has increased by a day and then establishes a target to reverse that. Another may decide to shorten it by two days, achieves that for several months and then falls back into its old pattern. Either case would account for the fact that over the better part of a decade there has been no permanent change for the better.

In my judgment, the serious issue is not with fast or average closers. Completing the close in a day or two is laudable, but I think it’s difficult to fault companies that can close in five or six business days when so many are taking longer. When some companies are able to close within a week while others with almost identical characteristics (such as industry, size, geographic location, IT complexity, and degree of centralization in the accounting function) take more than a week, it makes one wonder why there should be such a disparity. If our hypothesis that companies’ closing times changes little over the years is correct, slow closers made no meaningful progress over the past decade. This has remained the case despite all the attention paid to the importance of closing faster by accounting thought leaders, consultants and the business media, as well as consistent recognition by slow-closing participants in our research of the need to cut days from their closing period and their avowals that reducing the interval is very important.

I think the main reason why so many slow-closing finance departments have not accelerated their process is poor management. Here’s why.

One of the best ways to start shortening the close is simply to be serious about doing it. In our new research, three-fourths (77%) of companies that put a program in place to shorten their close reported a time reduction over the past two years. Only 15 percent of those that said they had taken no deliberate steps achieved a reduction in that period. Like those couch potatoes, companies that take longer to close may have good intentions but take no concrete action to shorten their close. While 54 percent of those that take six days or fewer to close have such a program in place, just 41 percent of those that take nine or more days have taken methodical steps.

The new research once again shows that there is no silver bullet that will shorten the close. It requires diligence and forethought – in short, good management. Better process management (including having monthly or quarterly reviews to identify factors that are slowing the close), improving data quality and using more of the right software are the broad areas that slow closers need to address.

So if it’s feasible to complete the accounting close in five or six business days, why don’t more companies do it? My guess is that like many things that happen in finance departments, inertia is a big factor. It’s also possible that many slow-closing finance departments have made adaptations (such as doing incomplete “flash” reports at the end of the month or quarter) to get around the delay that would be intolerable if executives and managers had to wait for two or more weeks. Unfortunately, all of these adaptations consume people’s time – time that could be better spent concentrating on fixing the root causes of slow closes. There may be many reasons for companies taking more than a week to close their books, but no excuses.

Regards,

Robert Kugel – SVP Research