Benchmark Your Accounting Close
January 5, 2015
The theoretical, achievable limit for the monthly accounting close is one day, and that may be true for every business regardless of size, industry or consolidation complexity. That's in a near-perfect world with sufficient resources. Based on responses to a discussion I started on FSN (Financial Systems News for CFOs, FDs and Controllers), CFOs, Controllers and other financial folks believe the accounting close should take no longer than 5 working days. Some of them even insist it can be done by the second or third day for both publicly-traded and privately-held companies alike.
Several respondents differentiated between the accounting close and the Financial, Planning & Analysis (FP&A) stage of the month-end process. Their comments indicate the accounting close should take no longer than 5 days, but they are OK with FP&A taking an additional 2-3 working days. Others have experience with organizations that can perform both the close and FP&A within 5 days.
The comments also point out that quarter ends and annual closes should naturally take longer than month ends.
Some businesses are currently stuck with a slow accounting close, but the condition doesn't have to be a permanent one.
Some of you may be reading this and saying, "Hold on! The earliest my company can possibly close is mid-month because of ...[insert your problem here]." I agree that some businesses are currently stuck with a slow accounting close, but the condition doesn't have to be a permanent one. Depending on how antiquated your company's processes and systems are, you could be on your way to a world-class close within 6 months to a year.
So, how do we get to a faster monthly close? First, financial leaders must impose order and eliminate existing bottlenecks. Then, an investment in systems, people and processes may be required. Finally, some "financial evangelizing" is probably in order.
Accounting Close
The comments to my FSN discussion thread overwhelmingly insist on a disciplined and well-communicated closing process. This includes assigning responsibility and holding team members accountable.
The specific technique most frequently cited by commenters is a well-defined accrual process, preferably accomplished before month end. Respondents noted that accruals are more reliable for consistent, non-volatile accounts versus the ones that change significantly month-to-month.
Delays associated with bank transactions, A/P cutoff, Purchase Orders and revenue billings were all cited as potential bottlenecks to a quick accounting close.
A series of post-close adjustments is far more painful than late delivery. --John Rees
Several respondents discussed the accuracy vs. timeliness dynamic. John Rees, CEO of Black Point Associates Ltd, stated, “[A] series of post-close adjustments is far more painful than late delivery.” While speed shouldn’t come at the expense of losing integrity around the data, commenters believe it’s OK to sacrifice accuracy for non-critical, immaterial accounts.
Systems
In a 2011 Ernst & Young survey of 60 large and medium-sized Danish companies ("Closing Excellence"), respondents cited IT systems as the number one challenge to an efficient accounting close. IT systems can encompass everything from operational systems to ERP systems.
In my experience, revenue capture can be a source of bottlenecks in an otherwise efficient accounting close. Depending on the sophistication of these activities/systems, we could be talking about anything from handwritten work orders to automated capture in a point of sale system.
In the FSN discussion, respondents overwhelmingly stated poor systems prevent a quick accounting close. The comments indicate systems limitations may be less pronounced at larger organizations, which typically have more resources available to them.
Often with old systems come poor processes and untrained personnel
I have worked with a number of startups, midsized businesses, and mom-and-pop companies—all of whom have customers you would readily recognize—who are system constrained because they never thought to make the investment. Often with old systems come poor processes and untrained personnel, which should be reevaluated in conjunction with a system implementation. At least two respondents to the FSN discussion touched on the notion that businesses with accounting close challenges have underlying systemic problems.
Not all constraints to an efficient close lie within the Accounting Department
Partner with Operations
Not all constraints to an efficient close lie within the Accounting Department. Cross-functional coordination is listed as the fourth challenge to an efficient accounting close in the 2011 EY survey.
Revenue generation is the best example of an area outside the direct control of finance. Depending on reporting relationships, inventory management could also fall under the purview of operations. When bottlenecks arise in these and other operational areas, financial leaders need to work hand-in-hand with operations personnel to redesign processes.
New systems implementations represent a logical entre into operations, but there are other opportunities. I once used rampant overspending as a reason to partner with the COO and begin an ongoing dialogue with operations management. The spending issues stretched across functional lines, so we needed to coordinate our efforts.
If we had attacked the spending issues separately, we wouldn't have been nearly as successful in rooting out problems. More importantly, this finance-operations partnership outlasted the specific reason we started working together. It later enabled us to cut our accounting close from 15+ working days to 5 days.
Lead the Charge!
A five-day close may seem like a daunting challenge, or it may be routine in your organization. If you're in the latter category, consider yourself fortunate. I have experienced firsthand the challenges of shortening the accounting close process. Some obstacles are basic, while others can be intractable.
Making change happen takes time, resources and commitment. Major change initiatives resemble marathons, not sprints, so be patient. Mid-course corrections are not uncommon. The process represents an opportunity for accounting and finance professionals to show organizational leadership. Start in your corner of the organization and spread the word to the rest of the company.