5 Indicators That Your Company Needs a Finance Transformation- Monthly Financial Close Cycle Time
This is the fourth in a 5-part series of blog posts that will help you identify if your company needs a Finance Transformation.
The acceleration of the monthly Financial Close is one of the most common frustrations from Controllers and CFOs. When fewer days are devoted to the Financial Close, key reports can be distributed sooner and more days can be focused on analysis and planning.
Although timeliness tends to be the primary driver of a Financial Close optimization process, it can also include:
Improved accuracy to enhance financial credibility, decrease re-work and mitigate risk.
Enhanced transparency of the drivers “behind the numbers” and as measurement against the plan, strategic objectives, and targets.
Increased reliability to react faster to unknown or uncontrollable business events, increase compliance while decreasing the cost to manage compliance.
In addition, with a greater focus on principle-based as opposed to rule-based accounting, there is a greater scrutiny on not just the accuracy of the numbers but documenting how the numbers were derived. Creating that support takes precious time but is necessary, especially for any organization that must go through an audit.
How Long Should the Monthly Financial Close Take?
According to APQC, leading organizations can close the books it less than 5 days. Bottom performers close in 10 days with a median of 6.4 days. Speeding up the Financial close gets the numbers to FP&A and business operations sooner where time can be spent on Financial Forecasting, decision support, business improvement initiatives, compliance, and communication. Closing the books earlier speeds up the entire organization and makes it more flexible to address issues and capture opportunities.
Why Does Closing the Books Take So Long?
Frequently drivers of the delay include:
Delays due to systems issues where one system does not talk to another (E.g.: integrations).
Delays due to internal dependencies such as when Accounting needs to wait on approvals or estimates for an accrual from the business.
Delays caused by external dependencies where Accounting may be waiting on approval from clients regarding hours, acceptance or status.
Delays caused by poor data quality where Accounting is forced to scrub and analyze the data before it can be entered into the general ledger via journal entries.
Companies that can close within 5 days or less typically exhibit the following characteristics:
Well-documented policies and procedures, including process flow documentation that is kept current.
A comprehensive close calendar and checklist with clear deadlines and managed by a senior leader of the accounting organization.
This entails daily meetings during the close to gauge status and identify roadblocks, bottlenecks, and other hindrances to meeting the target close date.
The assignment of clear roles and responsibilities for all close participants, including Accounting and Finance, Operations
and external parties.
The shift of performance for non-critical activities to other times during the month.
Requiring and enforcing strict cut-offs.
Application of materiality thresholds and appropriate approval limits.
Automation of recurring transactions and using accruals whenever practicable and possible.
Leveraging technology solutions including Robotic Process Automation (RPA) and workflow automation.
Consistent master data used throughout the enterprise, such as a common chart of accounts.
Communication of prioritized information incrementally throughout the close (e.g.: the creation of a flash report).
Identifying and monitoring key close performance metrics to drive continual improvement.
If your organization takes longer than 10 days to perform the monthly Financial Close process it may indicate that a Finance Transformation initiative would be beneficial.
Don’t Go It Alone
Planning and effectively executing a Finance Transformation is hard work. It requires executive buy-in, a careful assessment of a Company’s existing processes and procedures, the identification of pain points, gap analysis, prioritization of initiatives and program management. The ability for an existing resource to take this on in addition to their regular duties is a recipe for failure. Using an external partner to work in conjunction with an internal designate produces the optimal mix of internal knowledge and external resources to produce tangible results.
