Newsletter – October 2018

Why Does it Take So Long to Close?

Paul Karr, Director, CFO Consulting Partners LLC

This question gets asked at companies of all sizes and industries. Legacy processes and systems, combined with growth in scale and complexity of the business and often multiple sets of accounting principles, are some of the reasons for this. In this article we suggest some ideas on how to address this challenge.
People, processes and systems are the three key elements of any finance function.   Each of these elements impacts the closing process, but the theme of this article is leveraging existing resources to see how the closing process can be improved within the context of the finance function’s existing resources.
Why start with the process, rather than implementing a new system, reorganizing or hiring personnel, or making other changes? For one thing, it’s more cost effective than making other, potentially expensive changes, particularly before the potential of the existing process has been fully realized. Also, implementation of a new accounting system necessarily requires focus on getting it done on time and on budget, which are obviously important objectives but take the focus away from process improvement, despite best intentions. The result can be automation of a suboptimal process, sometimes known as “paving the cow path.”
So where does one start the process work? We offer the following areas and suggestions for your consideration:
  • Closing period. Measure the days from the end of the accounting period to when the last journal entry has been booked and the financial statements have been prepared (the closing period). Not the day everyone wanted to be done, or should have been done, but the actual last day. If there are separate GAAP and regulatory financial statements and the timelines are different, they should be measured separately. The point of defining the closing period is to look at the true performance of the process as it exists today.
  • Closing activities. The activities during the closing period can be thought about in the following general categories:
    • Drivers of last entries. Having laid out the timeline(s), the next issues to explore are what the last entries are, and why they happen when they do. Dependence on information from operations or other functions outside of accounting may be a factor here.
    • Timing of activities. Further analysis of closing period activities can be done by putting them in the following buckets: (1) what can be eliminated (through standardization or other process improvements); (2) what can be done before the end of the accounting period (such as planning, estimates, some audit procedures); and (3) what can be done later.
    • Account reconciliations. These are sometimes done late in, or after, the closing period. This timing can lead to late entries, unnecessary differences between GAAP and Regulatory or Statutory Accounting Principles, or between parent and subsidiary financial statements, and concerns for top management, auditors and regulators. This timing is often seen as the result of resource constraints, but it can also be driven by issues with the reconciliation process itself and unavailability of timely data to perform the reconciliations. These process and data issues need to be addressed, but a quick way to address timing is prioritizing account reconciliations based on risk and performing lower risk reconciliations on a rotating basis and/or at non-peak times.
  • Documentation. Roles and responsibilities are usually not as clear as people assume. Even if they were clear at one time, changes in personnel and in demands on the process can create significant, undocumented changes that may need to be addressed. Also, a question that can be asked here is, “would a new employee know what to do?”
  • Calendar. This needs to be sufficiently specific not only to know who is to do what and when, but to be able to measure whether the closing process is on track.
  • Pain points. There is a great opportunity here to ask everyone in the process what’s bugging them, from those providing the input, to those doing the accounting, to those using the products of the process. Everyone loves to do this! The only imperative is, once all the stakeholders have been debriefed and all the issues are on the table, it is important to do something about those issues, and be transparent about what is being done and when, even if some action is deferred.
We hope some of this resonates with you, and you see some opportunities for “quick hits” that can help build confidence on the part of your staff that process improvement is achievable. We can help assess your closing process, tailor an improvement program and manage the resulting improvement projects to successful completion. Please let us know if you would like to discuss.