Robert Kugel's Analyst Perspectives

Ventana Research’s new financial close benchmark research reveals that many companies are taking longer to close today than they did five years ago. Whereas nearly half (47%) were able to close their quarter or half-year period within six business days five years ago, just 38 percent are able to do so in our latest benchmark. Similarly, five years ago 70 percent of companies were able to complete their monthly close in six days; today only half can. The research confirms that most companies (83%) view closing their books quickly as important or very important. Participants acknowledge that they can do better, saying on average that their company can cut at least two days from both the monthly and quarterly closes. And the longer it takes their company to close, the more time participants think they could save. Although there is some evidence that external factors such as economic and regulatory events have increased the workload in the close process, which in turn has extended some companies’ close period, I believe that organizations that take more than a business week to close their books have not made much effort to shorten the close, as I noted in a recent blog.

For those that want to close faster, process design and execution are important to achieving results. Our research shows that there is unlikely to be only a single process issue prolonging a company’s close. Therefore, one of the most effective ways to achieve results is to establish a formal process to manage the close. Three-fourths (77%) of companies that had a program in place to shorten their close succeeded, compared to just 15 percent that lacked a formal commitment. Such a process includes frequent reviews that look for and address issues that can extend the close. Two-thirds of companies that do this monthly and half that do it quarterly got good results; only 10 percent of those that do it semiannually or annually have had success.

Useful modifications of the process can be a variety of little things. Participants who said that their company has shortened its closing period most often said (71% of them) they control the closing process more effectively and consistently. About half (52%) of successful companies optimized their use of journal entries. Other steps cited less often include centralizing more of the accounting functions, automating intracompany reconciliations and simplifying financial reports. Each of these changes usually helps improve speed, reduce errors and increase control.

Among the straightforward process management improvements is “simply” documenting the close process and providing instructions for the roles and responsibilities. Anyone who has documented such a process understands that it isn’t simple. Yet it’s not difficult or overly time-consuming if approached methodically (and isn’t that what accountants do best?). Documenting the process step-by-step can be helpful, especially when it leads to identifying bottlenecks, simplifying or eliminating steps or putting steps in a better order. Once established, the process definition must be viewed as a living document that is updated as process improvements are implemented. In addition to detailing the specific steps, it’s important also to enumerate standard operating procedures and the escalation procedures that follow to resolve finance-related issues. This and other process documents must be available electronically. Designing it so that is can be cross-referenced by specific role as well as an overall process is even more helpful.

Another useful process management tool is having a five-forward-quarter financial close calendar. This enables managers to plan ahead for holidays, vacations and internal corporate events that might interfere with individual schedules. The calendar must also assign responsibility for sending advance notifications to third parties involved in the process (consultants, auditors or vendors) to confirm their availability on the days they are needed, verify the identities and contact information of the people involved and manage the work-arounds if issues arise.

Also indispensable is having a comprehensive and up-to-date list of internal contacts and alternate contacts for areas of responsibility along with the hours they can be reached. It should include subject matter experts who may not have direct responsibility for the close (such as people in Tax or IT). Having a published hierarchy of exceptions with specific materiality thresholds and the specific steps taken when these are breached eliminates ambiguity and speeds resolution.

Standardizing journal entries through the use of templates is another useful step and should incorporate as many pre-filled attributes as possible (such as legal entity number, cost/profit center number or entry type, to name three). This prevents errors from occurring and facilitates reviews and audits of post-close journal entries.

Don’t overlook the importance of checklists to ensure that responsible parties complete every necessary step and (as important) that they provide the subsidiary details related to each step. For example, each journal entry should include the owner of the entry and information about its type (revenue, expense, asset, liability or equity), a brief description of the entry (ideally using wording consistent across the company), the date executed, the effective date, the amount, the account number, the legal entity number, cost or profit center number(s), account name, journal number identifier, currency and other local system ledger information. That sentence alone should show the need for such lists.

The adage to “plan for success but prepare for failure” applies to closing. Finance departments should have contingency plans that deal with disruptions large and small. Natural disasters, communications disruptions or IT outages can be anticipated, along with the steps, roles, responsibilities and escalation procedures necessary to address issues.

I suspect that poor process management is a key culprit behind long accounting closes. It’s also likely to be the reason why corporations that take more than a business week to complete their process have not been able to show any progress. Establishing a finance department culture of continuous process improvement can address issues that delay the close and improve the department’s efficiency in other ways as well. Organizations hindered by unnecessary complexity or poor process management should be able to address these problems systemically and achieve results without major disruptions or cost. Indeed, better management of the entire financial close-to-report effort is likely to boost productivity and enable a finance department to deliver timelier, accurate information to senior executives and managers.

Our research shows that while some companies are able to close within a business week, half or more are taking longer. The latter have the same basic characteristics as the former, being in similar businesses of similar size with similar organizational complexity. They have similar IT environments. Yet some succeed in closing measurably faster. There may be many reasons why a finance department takes more than a business week to close but no good ones for letting it continue.

Regards,

Robert Kugel CFA – SVP of Research