How to Achieve Optimum Financial Close

It’s been ten years since companies started pushing the financial-close envelope to its limits. Cisco Systems was one of the leaders of the ‘virtual close,’ moving from a 14-day window to being able to close the books and produce consolidated financial statements within hours.

 
As a result, the networking equipment company cut its finance costs in half and was able to provide its executives with the data they needed to achieve sales targets, manage expenses, and make daily decisions that resulted in increased shareholder value.
 
But data from BPM International, a business performance management consultancy, suggests that while some improvements have been made to shorten average close cycle times, significant improvements have not occurred, the Ciscos of the business world notwithstanding. Indeed, the data suggests that many leading companies actually increased the number of days it takes to close.
 
In part, that’s because much has changed in the world of finance. In addition to the global financial crisis, finance outsourcing and offshoring have become large topics. Many finance operations have been significantly downsized; complicating the picture still is a set of accounting rules and regulations that are becoming more complex.  
 
This article highlights several aspects of a financial close improvement program. If you have not reviewed your close cycling with an eye toward efficiency, now is this time.
 
How fast should I close?
Research by the Hackett Group indicates that the top 10% of global companies close their books internally within five days. 
 
Further research by BPM International indicates that there is a direct linkage between the number of days to close and the health of the finance group, finance processes and systems that support the financial close. If your close is taking longer than 30 days, there are significant issues, in plain sight or not, within the financial close process.
 
Benefits of a faster close
In addition to the cost benefits from the reduction of manual input and reconciliation, a faster close supports better decision-making due to timely access to information. This allows managers to work from the same set of facts. Since the data is timely and consistent, proper behaviour can be measured throughout the organisation. Shareholder value is increased as more time is allowed for analysis of market opportunities, with the reduction of time spent performing the close.  
 
Financial system changes
One of the key aspects of Cisco’s success is that it adopted a fully automated financial system through the organisation. The solution was fully integrated and included an automated financial consolidation system.
 
Cisco also implemented an automated intercompany accounting system that allowed transactions to occur between entities without the need for accounting and finance intervention. 
 
The final aspect to Cisco’s strategy was leveraging an online analytical processing database that allowed users to run their own ad hoc queries and analysis. This engine had a web portal front end that also allowed for central distribution of reports.
 
Cisco’s strategy serves as a model for companies improving their systems with reduced financial close as the goal. In summary, the financial systems strategy goals are:
  • Fully automated financial system including automated financial consolidation system
  • Automated intercompany accounting system
  • Online analytical processing database
  • Web portal
 
Close calendar
  • As a finance leader, ask yourself the following questions:
  • Do you have visibility into the close cycle?
  • Do you have a standard close checklist? Can you prove that your staff uses it?
  • Has the checklist been reviewed in the last year?
  • How are issues captured and resolved?
  • Do you feel like there is accountability and ownership for all close activities?
 
If you don’t have a flight plan, how will you arrive at the right airport on time? Developing a close calendar can provide finance with the ability to identify sources of information for key activities and track progress against milestones. Additionally, assigning ownership to individual tasks can help improve status reporting and accountability.
 
The close calendar displays the key events that occur every month during the company’s monthly financial close process. Each month’s closing schedule follows a recurring pattern that involves the first few working days of the month. Everything else follows from that. Each task should have an owner so accountability can be achieved.
 
Test your policies
  • Are the policies and procedures accessible to all relevant employees? Is there a single version of the truth?
  • Are manual processes documented? Are they sustainable?
  • Are policies linked to procedures and procedures linked to activities?
 
Finance governance is difficult to achieve if everyone is not fully up to date on what the processes and procedures are. As a finance leader, it is difficult to hold people accountable when process bottlenecks and procedure breakdowns occur if you don’t know who to hold accountable. Utilize a web portal to communicate current policies and procedures and make sure the web portal contains the most up to date versions.
 
Internal control holdup
  • Have you examined your control environment recently in light of potential changing materiality (due to a financial crisis, for example)?
  • Does clear accountability exist for control performance?
  • How is control performance and review tracked and managed? 
 
A high percentage of key and entity-level controls relating to the financial close are usually tested as part of Section 404 compliance. If your external auditor is not comfortable with the governance of the financial close and consolidation process, the company can quickly be exposed to the risk of a material weakness. Strong entity-level controls enable a company to manage the process with a smaller set of controls, permitting greater internal process efficiency and significantly reducing time to close.
 
Summary
Financial close excellence is achieved when people, process, and technology are combined to optimise and streamline financial close processes. The results are lower operating costs, increased business performance, avoidance of risks, and increased visibility into market opportunities.
 
About the Author
Jonathan Collins writes the blog CFO Newsletter, where this article first appeared. He is a senior manager for KPMG China in Hong Kong. Combining a passion for finance and accounting, an enthusiasm for business improvement and deep experience in technology, Jonathan specializes in turnaround and improvement efforts for CFOs and CIOs. He can be reached at [email protected].
  

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