A golf score. A blood pressure reading. In these cases, a lower number equals better results.
Likewise, controllers will use the number of days to close as a benchmark: the lower number of days is inferred to be better. But, is that truly the case?
One of the major areas for improvement in the accounting function is financial reporting; specifically, the monthly accounting close process. That being said, there are questions outside of "how long it takes" that one must answer before considering the monthly close process improved.
Understand your objective
The first question in understanding the close process is simple: What are you attempting to accomplish by closing the financial statements? Without knowing the purpose of your organization's close, the timeframe is irrelevant. More specifically, consider the following questions:
- What strategic action(s) do we make based on the financial statements? If the statements are nothing more than a monitoring tool, will it matter if the results come out in four days as opposed to three?
- Does the accounting team follow or believe in best practices? If best practices are not important, the tools and justifications to speed up the close may be discounted. If the company does not have other tools to monitor daily and weekly progress, the financial statements may be a primary tool for monitoring the company.
- If the close could be completed sooner, would there be other value-added functions that the accounting staff could perform?
- What is the average time to close the monthly financial statements? The top organizations close their financials in one or two days. The average number of days to close the financial statements is between five and seven days. However, keep in mind the organization's goals. The time to close the monthly records is irrelevant if it is not aligned with the goals of the company.
Eliminate the waste
To improve the close process, consider using lean accounting techniques as a guide. Overall, lean management has two primary tenets: Only do what the customer values, and relentlessly identify and eliminate waste. Both concepts are helpful in reducing the number of days to close.
To get started, it is important to determine what your managers need from the financial statements. Consider sending them a formal (or informal) survey. Do they need timeliness, accuracy, increased detailed information, aggregated information, a combination of financial and statistical data, etc.? It is possible that your accounting team is preparing unused reports and wasting time.
One of the best tools to eliminate wasteful processes is the value stream map. Similar to flowcharting, the value stream map starts at the end from the customer perspective and identifies the sequential steps (in reverse), and also tracks the time it takes to complete individual steps. Steps that do not add value should be eliminated during analysis of the value stream.
Be on the lookout for other improvements
There isn't one universal solution to improving the monthly close process. An accounting department can consider any of the following strategies:
- One of the first places to investigate is the accounting department's Excel spreadsheets. Now, it's not necessarily bad to use Excel. However, anytime an Excel spreadsheet is used, it highlights a shortcoming in your accounting software or management processes. It is necessary to understand the underlying reason that the spreadsheet is being utilized. For example, many departments use best in breed software. As a result, Excel (or a similar tool) is used as a bridge or translator to move data from one system to another. It may still be the best practical solution, but not necessarily the optimal solution.
- Another way to find inefficiencies is to review best practices for accounting processes. It may be possible to skip the value stream map exercise if your team can identify best practices that are not being used. By adopting the best practice, the organization will automatically reduce some of the inefficiencies.
- You can also speed up the close by reducing the time in the report distribution cycle. Consider implementing data warehousing along with data drill down capabilities. End-users can be empowered to access their information once the financials are closed.
- Reduce the close process by reducing detailed analysis or increasing materiality levels. Determine what level of accuracy is necessary. Significant time can be wasted trying to get the financial statements down to the penny. Materiality levels should be created for journal entries and monthly accruals. Usually, the biggest drawback for accruals and estimates is a lack of understanding for some senior managers.
- Could your accounting team conduct a "practice" close? Consider the amount of time sports teams practice and contrast that to the small amount of time that accounting departments practice. What could be the benefits of performing a trial close with everyone else critiquing one another's process? Suggestions for alternate approaches, as well as challenges to existing procedures, will result in more efficient processes that consume less time. Consider reviewing the close process with multiple staff critiquing each step.
Sometimes, accountants are forced to create new processes because other employees do not perform their duties. For example, department heads that are required to approve invoices routinely fall behind. As a result, invoices are not accounted for at month-end because they are sitting on the individual manager's desk. As opposed to dealing with noncompliance of executives, it is easier to assign a clerk to keep track of the invoices sent out for approval with an Excel spreadsheet. On the positive side, the clerk can identify which invoices are missing and prepare the proper accrual. On the downside, the accounting department is adding nonvalue work because other managers are ignoring their responsibilities.
One last point to keep in mind is that your financial statements should confirm what management already knows is happening in the business. Ideally, an organization should have daily or weekly reports that combine units of production with financial information. Good managers will already know if the company is profitable or performing well based on the units provided.
Understand, then execute
There are many ways to reduce days to close, and we have only explored a handful in this article. Always understand the purpose of your financial statements to determine when they should be produced and available.
Jim Lindell, CPA, CSP, CGMA is president of Thorsten Consulting Group, Inc. Jim is a CEO Coach, former CFO, a regular speaker for MNCPA events and author of "Controller as Business Manager." You may reach him at email@example.com or 262-392-3166.