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Sep 01, 2009

Imagine an activity that is performed in your business each and every month. This activity requires eight full days of effort for four staff members and consumes 70% of their time. This task takes about 180 man hours to complete each and every month. Now imagine this activity requiring 2 full days of effort from four staff members devoting 95% of their time to the task. Now the task takes about 60 man hours of effort. Would you be interested in generating 120 man hours in a department that could be devoted to other activities without hiring any additional employees or contract laborers?

 

I don’t think many business owners would say no to this proposition. Every company should close their books each month and most companies do. However, not all companies focus on the process and reinforce the need to close the books in as short of a time frame as possible to generate accurate financial statements and operational reporting. I proffer that upper management should actively stress the need to issue accurate monthly statements in the shortest time period possible. Some benefits of this focus include:

  • Freeing up more time for the accounting staff to provide analysis. This analysis should help company executives better understand trends and customer behavior to improve sales and profitability.
  •  Freeing up more time for the accounting staff to more routinely reconcile balance sheet accounts. Surprises in earnings and results many times result from a lack of monitoring balance sheet activity. Reconciling key accounts monthly and all accounts quarterly greatly reduces this exposure.
  • Providing fresh information to key executives. Understanding the current performance of a company with meaningful comparisons to benchmarking data is crucial. This information needs to be provided as quickly as possible after month end to support critical decisions. Statement packets delivered in the third week of the month will simply be ignored as executives focus on the month at hand.

 

 

One of the greatest keys in reducing the time to close is the support of upper management. The CEO should set a clear goal for the accounting team such as “I would like the financials and reporting to be ready 4 business days.” When the financials are ready, the CFO should review them as quickly as possible and ask questions. The CFO and CEO should have a pre-scheduled meeting to review the financials. If the statements are left on the corner of the CFO’s desk to gather dust or there is not a timely meeting with the CEO, the accounting department will wonder what all the fuss and rush was all about and lose critical commitment to the goal.

 

Another key is to use a “Continuous Process Improvement” approach. Key processes and task dependencies should be mapped to determine the critical path to completing the close. The most time intensive activities should be tackled first in order to make headway as quickly as possible. New techniques for data extract, manipulation, and journal entry uploading should be explored. Manually keying of data should be minimized if not eliminated. Once improvements have been made, close should not proceed in the same way for months on end. Each step and procedure should be examined for potential improvement each month.

 

Using shortcuts and increasing the use of accruals and estimations is not an acceptable solution. The key to shortening the close process is a deeper understanding of the sources of accounting information and the ability to improve the accuracy of the statements while reducing the time to produce them. This may sound intimidating. However, viewing the month end close process as a repeated repeatable process that is critically important to perform as well as possible is the first step in dramatically improving it.

 

If you notice in the first paragraph I changed the amount of time spent during close on close activities from 70% to 95%. This increase first requires the CEO and other top executives to understand “the accountants are closing” and to respect the process. It will be easier for them to do this if they continue to receive their more accurate statements more quickly. It also requires a shift in the mindset of the accounting team to believe the dogged commitment to closing the month is absolutely critical and important. A key element in getting this commitment is to recognize the achievement with awards and recognition.

 

I have had great success in my career in shortening the month end closing window while improving the accuracy and quality of financial reporting. I trust if you adopt the mindset above you can do the same. I wish you well and am here to help if you need it.

 

 


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