What closing the books reveals about a finance function's health

Find out why one expert thinks focusing on faster monthly closes could diagnose larger problems within the finance function.

CFOs often cite closing the books faster as a reason to adopt new financial management software. But how important is this aim? In this Q&A, Rob Kugel, senior vice president and research director of Ventana Research, based in San Ramon, Calif., explains what a slow close process can reveal about the overall state of a finance organization and gives a benchmark for the optimum monthly closing time. He also provides tips on what technology to choose for financial consolidation and how to use it.

Why is closing the books faster important?

Rob Kugel: There are three reasons. One is that if it's taking more than a week to close the books, then very likely your management is not getting information as soon as they should in order to do necessary reviews and adjustments. The second reason is that if it's taking a long time to close the books, then you're probably using too many resources to accomplish what really ought to be nothing more than a mechanical task. A related third reason is that if you focus in and figure out the reasons why [you] can't close the books faster, you're probably going to solve a lot of other issues you've got in [the] finance organization. So you might find out that you don't manage the process particularly well, [or] you don't have a continuous improvement attitude. If you look at everything else you do in your finance organization, you'll probably see that the same problem is repeated over again in every corner -- how you manage accounts payable and accounts receivable, how you deal with accounting issues, treasury management -- all of these things probably are being performed at about the same level. That is to say, not as optimally as [they] should [be], in terms of process. It may be there's a lack of training. It may be you're not using the appropriate technology. There's a benchmarking element, which is if you're not closing the books within a week you're probably doing a lot of other things wrong that need attention.

What enhancements in terms of process can help organizations speed the close?

Kugel: The one reliable thing that enables you to close faster is having a process in place to close faster. Simply saying "this is what we're going to do, and we're going to be methodical about it" is step one.

The second point is this notion of continuous improvement. Part of that process is having at least a quarterly, but ideally a monthly review after every close. There's a debrief on what went wrong, what went right and what you're going to do to address whatever issues came up. It's a way of eliciting feedback from your organization [so] you know what's working and what's not. That's really important.

What we usually find is it's not any one thing that's going to get you to close faster in terms of process, it's just honing everything down [until] you've got it nailed, as well as [using] automation to manage the process to ensure handoffs are handled automatically so you don't have slips occur.

At the Boston IBM Finance Forum, guest keynote speaker Steve Player said, "There are a lot of good reasons to close the books faster, [but] if you say that it's to give operating people more timely information, it's a bogus reason, because even if I could do it at the stroke of midnight on the last day of the month, it's too slow." What's your take on this view?

Kugel: Well, if the entire purpose of the review of what's happened is to drone on through a complete list of all the variances in the general ledger, that's pointless. If the purpose is to focus in on the key performance drivers and the variances there and what caused [them] and what do we do about it, then I don't think that's a waste of time. [But] if it's purely financial with no operational context, then it's a waste of time for everybody except the finance department.

What are some of the key considerations companies should bear in mind in terms of consolidation technology?

Kugel: Don't use spreadsheets -- don't use them to manage the process [and] don't use them to support the process. By that, I mean companies that pull all the numbers together in a bunch of spreadsheets and use that versus a dedicated statutory consolidation package take longer to close and, I'm going to guess, use far more resources [and] find more errors, so it's not good for that. But even companies that have dedicated consolidation software use spreadsheets to one degree or another. The ones that have little or no use of spreadsheets in the consolidation process close faster than the ones that are heavy users.

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You want to limit [use of spreadsheets] and also make sure the consolidation software you're using is up to snuff for what you need to do. What you sometimes find --particularly after a number of years -- is that companies have messed around with and changed things, and [the consolidation system] can no longer do what you need it to do, and part of the reason you're using spreadsheets so often is you have to work around issues that you can't easily resolve with the consolidation software you have. So you need to be on the lookout for that as an issue.

[So] make sure you're using consolidation software, you're using it properly and it's not now so old and messed up that it's not getting the job done.

Do you feel that there are any finance technology initiatives that get prioritized lower than closing the books that perhaps should be prioritized more highly?

Kugel: It has a lot to do with company circumstances and the things that need to get fixed. But one of the conclusions I drew from [Ventana's] last Fast Close benchmark was the value in focusing on a faster close is that it's probably the most straightforward way of gauging the efficiency and effectiveness of the finance organization. If it's taking nine days to close, you really ought to be asking yourself why, because there's a company exactly like yours that's closing the books in two. The answer to that question is a perfect diagnostic for what the CFO, controller [and] head of accounting need to do to run that finance organization better. It may be systems, people, process [or] data, and finding out what those problems are can help you best prioritize what needs to be done. Things may be alterable with little or no direct cost, and the impact is going to be to save money and resources. [So] I think figuring out what's wrong and how wrong it is is a good first step to figuring out the priorities, and the close is a great little test of what might be wrong.

Emma Snider is the associate site editor for SearchFinancialApplications.com. Follow her on Twitter @emmajs24 and the site @SearchFinApps.

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