Day 0 of month-end close arrives and your F&A organization launches into yet another 5, 7, or 20-day close marathon - but at sprint speeds. Late nights are expected. Ironically, you are grateful when a weekend lands in the middle of close, so your team can work the two additional days and maybe actually meet the close deadline.
After several years with Arthur Andersen and Hitachi Consulting helping companies to re-engineer their F&A processes, including close and consolidation, I was directly on the firing line myself in my first CFO role at Zetec, a public company wholly-owned by of Roper Technologies, with a strict 4-day close deadline to submit trial balance numbers.
When I first arrived, we closed our books in five business days at best, even working nights and weekends. Within a year we were able to close our books in three days without working nights or weekends.
We continued to improve such that despite operations around the world, multiple legal entities, and five functional currencies, we progressed to the point we were able to close our books in 12 hours total – 8 hours on Day 1 and 4 hours on Day 2. No nights or weekends.
Accelerating the close is possible for every company. In this whitepaper, I’ll briefly touch upon two key principles that should guide your strategy, followed by identification of the three levers available to you to execute your strategy. Then we’ll shift our focus to specific strategies and methods you can deploy in your own environment.
Your close deadlines are fixed. That leaves your close acceleration choices limited to two fundamental principles:
- Reduce the total amount of work
- Move work outside of the close window
The first principle is obvious. Many F&A organizations overlook the second principle. Some close tasks do not easily lend themselves to effort reductions but can be accomplished outside the rigid confines of close without sacrificing control or quality.
With the key principles in mind, you have three levers available to affect work – often depicted as a triangle:
You can deploy each of the three levers independently or in conjunction with other levers, depending on the specific improvements you are implementing.
Your staff are critical to both effective technology and process. You will need to evaluate both the individual and the organization to implement improvements. Individual areas include aptitude, knowledge, skills, and capabilities. Surrounding the individual is organizational management including roles, scope, and responsibilities. Poor organizational management can throttle talented individuals.
A classic description is: A process is a consistent set and sequence of activities or tasks that result in consistent outcomes. However, process also includes surrounding policies, taxonomy, and definitions. You can change process without changing technology; however, recognize that most technology changes should and will necessitate process changes.
Both your choice of technology and how it is implemented matter. Certain technologies simply codify existing poor processes and systems – e.g. RPA. More powerful are new technologies that eliminate work. Where possible, your strategy should be to have a consistent technology for a given function across the organization so people can collaborate with a similar look and feel. For example, a single budgeting platform, or ERP, or etc.
I used all the methods and strategies discussed below to accelerate the close at Zetec. We’ve separated the individual areas into two categories: The Quick Win category and the Long Term Strategy category.
Quick wins are strategies and methods you can implement or deploy rapidly – generally within days or weeks – that immediately contribute to close acceleration.
Accruals are accounting estimates, but fully accepted by auditors as bona fide if there is a decent methodology and reasonable accuracy. Accruals can be used across a variety of accounting categories from revenue to COGs, expenses, and reserves. Accruals are especially helpful in cases where final numbers are hostage to upstream processes.
For example, a project-based company with long-term projects used percentage of completion based upon labor completed to-date and remaining estimates. Actual time was reported and managers updated their projections weekly which was compiled by F&A at month-end. Month to month changes were small. Close required 35 days, largely because of dependencies on and lags of the upstream reporting and projections. If the company had used three weeks of actuals and an estimate for the last week of the month, it could easily have taken at least 15 days out of the close process.
At Zetec, we initiated soft closes consisting of weekly fast reconciliations for our most complex and highest volume reconciliations. Doing so allowed us to identify and resolve problems well before month-end and reduced the number of new transactions to reconcile in the close to 4 days of transactions at most. Daily reconciliations are especially effective in high-volume environments. This strategy is one of the easiest and fastest to implement while avoiding technology change dependencies.
Many accounting entries may be made outside of the close window. Certain entries are known in-advance and may be made before month-end. For example, reversing entries certainly can have the reversal posted outside of close. Other examples are rent or lease entries that are consistent or are generated based upon an amortization or other schedule. Scrutinize your recurring and known JEs and pull that work outside of the close.
Intercompany (I/C) accounting in most companies is truly a cesspool. Co-mingling I/C transactions with third-party transactions is often the first mistake companies make. The second mistake is using netting to settle I/C transactions versus full settlement. The result being an inordinate amount of close time and effort being consumed attempting to reconcile I/C. The right thing to do is eliminate co-mingling of transactions and completely separate I/C transactions and accounts. That, however, is not a trivial effort.
The starting point is to avoid making the problem worse. An easy change is to shift to full settlement of I/C transactions, which helps the close because you are not making new problems. You can then start to deal with your historical problems outside of close. At Zetec - where we had a high volume of I/C transactions -we fixed both problems which reduced I/C effort in close to trivial.
Rapid deployment and automation technology may sound like an oxymoron; however, there are emerging technologies that can be implemented literally overnight with little effort that deliver close process speed and labor reduction improvements immediately. An example is Sigma IQ’s cloud-based AI-powered enterprise matching reconciliation engine whose patent-pending auto-implementation technology allows F&A teams to be up and running in as little as 1 day, even in situations involving disparate systems, thereby gaining immediate benefits.
I am a strong proponent of process that is “thin but not light”. In other words, simplifying process to improve overall efficiency and effectiveness while retaining sufficient control. Your own staff are the experts to best identify and implement these kinds of improvements. Often it starts by mapping a current state process and critically examining the what / how / why against the outcome requirements to simplify. We did this when I was CFO at another company (Moz) to improve enterprise customer invoicing, which also tremendously reduced the time to close revenue and reconcile AR.
The quick wins noted above will make a big difference. Some changes, however, take longer and require greater levels of effort.
Disparate technologies spread across the enterprise for the same function become like quicksand when closing the books. When I started at Zetec, I had four different ERP systems spread across the world. Of course, none of the systems talked to each other and F&A staff was siloed by system. It was impossible for staff to coordinate, help each other, or easily resolve issues, plus it added tons of manual processes from system to system.
In response, we implemented a single ERP instance worldwide using functional staff as the implementation team. As a result, the worldwide F&A team had a common taxonomy, metadata, and process base along with a common look and feel, while still allowing local nuances as needed. The benefits of consistent technology are valuable regardless of the function being automated – e.g. a common budgeting and forecasting tool, common TER tool, etc.
With the exception of conglomerates comprised of heterogenous businesses, most mid-and-large enterprises can hugely benefit from a standard data taxonomy. Similar to the negative effects disparate systems can have upon the close, inconsistent data taxonomy encourages and almost forces the rise of manual processes to compensate for the heterogeneity of account use and format.
For example, before we harmonized all metadata at Zetec in conjunction with the ERP implementation, account numbers were re-used for different purposes within different businesses / legal entities. Account 11400 was an AR account in one business unit and an inventory account in another. Consolidating trial balances was an arduous hours-to-days long effort to map balances into a common COA. A standard data taxonomy quickly reduces effort and reconciliation issues because of less mapping, fewer manual transformations, and a far smaller number of entry errors needing correction.
Increased technical skill levels by staff become not only an enabler for many for the improvements noted above but also allows staff to take on higher-level and higher-impact activities as their attention shifts away from repetitive manual tasks. User friendly technologies like Sigma IQ, Concur, or etc. provide dual benefits – easy to use means staff gains the benefit of immediate time-saving and efficiencies, which also allows staff to shift their efforts toward resolving bona fide issues and addressing upstream root causes, or accomplishing data analysis to permit better decision-making.
Close deadlines are only going to get shorter and quality expectations higher. Competition and business tempo are only going to speed-up. Many management decision-making analyses are dependent upon final trial balances. In this whitepaper, we tried to be practical and specific with strategies and methods you can deploy in your own organization. My hope is we were successful. Now let’s deliver.