- Frustrated with the limitations of the monthly close, especially now that many finance teams are performing them remotely, some businesses are moving to a continuous close.
- A continuous close reveals crucial business information in real time, empowering finance and accounting leaders to influence strategic decisions.
- Companies looking to adopt a continuous close need to embrace cultural as well as process and technology change.
In a classic ’80s Dunkin Donuts commercial, Fred the Baker repeatedly says “time to make the donuts” as he endures rain, snow and exhaustion in his quest to produce the perfect chocolate raised.
Many finance professionals can relate when they contemplate the long hours and monotony that come with the monthly close process, which can carry on for days or even weeks.
Closing the books is a resource-intensive job that requires a concerted effort, not only by the finance team, but across all functional segments of the company. Recording and totaling journal entries, producing trial balances, reconciling bank statements, recognizing revenue and other tasks integral to the process are not how most accountants or controllers would choose to spend the bulk of their working hours, even with a box of maple glazed nearby.
“I’m rushing like mad, I’m booking a journal entry, I’m preparing an analysis, I’m reconciling stuff, and it’s like I’m just doing it so I can get done with it … I want to go home to my family, it’s 10 o’clock at night,” said Tom Kelly, senior director of product marketing at NetSuite and a former CFO at multiple businesses. “Guess what happens the next month? The same thing all over again.”
Much like Fred, accountants are too often chained to that one process — meaning they don’t have time to be the true business partners their colleagues need.
An Outdated Approach
For years, accounting teams have operated like assembly lines. Some still do. Each team member had specific responsibilities for the monthly close, and a company could get the final product — financial results — only at the end of the line.
The problem is, by the time the finance team finishes the process, potentially weeks after the numbers came in, that product is old news and therefore of minimal value to decision-makers. It’s a snapshot of the company’s past rather than a window into its future. There’s also little time to analyze results from the previous month before the focus turns to closing the books for the current month.
Implementing a continuous close will pay off should your company need to perform a remote close — a process that itself delivers benefits, including fostering team collaboration and formalizing data security and access processes. Here’s our 12-step plan to succeed at remote closing now.
“There’s a lot of truth to that [saying] that accountants give you information that’s worthless, because to an extent, in a growing business with people trying to make the right decisions and move forward, it really is worthless, because it’s old,” Kelly said. “Data that’s three weeks old, it’s ancient in this day and age.”
And the limitations of the traditional monthly close don’t end there.
When closing the books takes so much time, it limits the ability of finance professionals to participate in forward-looking activities like forecasting and data analytics, which could inform major strategic decisions. No wonder that, despite the finance team’s unique perspective, its voice often goes unheard: Just 46% of 660 senior finance executives surveyed say they are viewed as trusted advisers that operational teams turn to before making big decisions, according to a 2019 Future of Business Partnering survey by FSN.
Processes That Hinder Business Partnerships by Company Size
FSN asked respondents which processes create barriers to working with lines of business.
|Business Process||Fewer than 500 Employees||500 to 3,500 Employees||More than 3,500 Employees|
|Spreadsheet bound: There are too many spreadsheet-bound processes, so we cannot provide timely support to operational business units.||58%||60%||66%|
|Lack of standardization: Lack of standardized processes makes it difficult to provide a consistent approach to business partnering.||65%||67%||73%|
|Lack of automation: It takes too long to provide results and KPIs needed to provide timely support for business partners.||68%||70%||77%|
|Lack of Unification: Lack of unified transaction and reporting environment makes it difficult to assemble a complete picture of performance.||62%||65%||65%|
Data: FSN Future of Business Partnering Global Survey
Why is that? Likely because 45% of surveyed CFOs said they struggle to find time to be business partners and weigh in on these decisions.
“If it’s taking you two, three weeks or longer to close the books every month, there’s really not a lot of time for you to interact,” Kelly said. “If you could interact with the rest of the organization, you could internalize certain things, be more intuitive to what’s going on and be a better business partner, delivering key insights to improve decision-making and ultimately results.”
In staff, the stress and extended hours brought by that end-of-the-month crunch also lead to overtime, burnout and employee turnover.
So why do finance pros stay on the treadmill? Because for years, they had no choice. Manual or early computerized accounting systems, which processed transactions in batches, and physical bank statements prevented work from being done in real time.
There are other options, but many finance teams are resistant to change.
“The mindset of accounting is to do things exactly the same way over and over again,” said Robert Kugel, Ventana Research’s financial performance management practice leader.
This outlook is partly — and correctly — based on the idea that accounting practices, and the methods by which teams interpret data for financial reporting, must be as consistent as possible.
“Accounting processes, however, change, and they should change over time because the resources and technologies available for accountants and auditors evolve over time,” Kugel said. “If that wasn’t the case, then we’d still be recording transactions using quill pens in bound paper ledgers.”
A New Approach: The Continuous Close
One of those new processes is continuous close. Also called continuous accounting, it’s an appealing alternative for companies looking for a faster and better way to close their books and gain real-time access to financial data.
A company that practices continuous close should be able to perform a “soft close” at any time because the accounting team is constantly processing and aggregating relevant financial information. The organization may still perform a “hard close” at the end of each month or quarter, but it shouldn’t take long to complete. With continuous close, the work of closing the books is spread over the month. Instead of reconciling 70 items at the end of the month, a staff accountant may reconcile two or three items every day. Journal entries never have a chance to pile up because they’re addressed as they happen.
This approach also has positive upstream effects. The continuous close should make accountants’ day-to-day jobs more enjoyable and empower them to have more influence over strategic business decisions. It’s a philosophical change in how a business approaches accounting, with benefits valuable enough to convince many companies to make the switch.
However, continuous close has yet to reach anything close to critical mass. Kelly estimates less than 10% of businesses currently practice continuous close, and Kugel concurs that it’s a “small minority.”
But everyone we spoke to agrees that a growing number of organizations are trying to get there.
Benefits of a Continuous Close
The central value proposition for continuous close — faster access to the financial information that drives decision-making — brings a cascade of other benefits.
On-demand closes: Breaking up the work required for a monthly close means whenever a business decides to officially close the books, it’s a fast process. Organizations still need official financial statements for investors, the board of directors and, in the case of a public company, shareholders. Finalizing those statements, however, will no longer have accountants spending nights and weekends at the office because the close doesn’t involve a tidal wave of information.
Empower accounting and finance: When closing the books isn’t sucking up two or three weeks every month, accounting and finance staff now have time to interact with colleagues. They can act as a mission control for financial insights, an extremely valuable resource for the organization. More broadly, accountants can take on a strategic role — they’re not just counting the beans, they’re growing them, too.
More informed decisions and a higher CFO profile: Immediate access to critical financial data — including basic KPIs like revenue, cash and days payables outstanding (DPO), along with industry-specific stats — leads to better-informed decisions. Informed decisions set up a company for success and growth. A more proactive accounting function should ultimately give CFOs a stronger case for finance team members being strategic business partners who can concentrate on activities that, as Accenture notes in its “The CFO Reimagined” report, are not amenable to automation, like planning, analysis and advisement.
Improved data integrity: Even companies that automate their accounting will occasionally have errors, usually introduced at initial data entry. When someone reviews key information daily, these mistakes are more likely to be spotted before a missing period turns into a bigger problem. The same goes for spotting fraudulent transactions. And, the more accountants practice this routine, the better they will get at it, improving overall data integrity, Kelly said.
Less staff burnout: An accounting team freed from the drudgery sometimes synonymous with the monthly close should be happier and more motivated to collaborate with business colleagues. Younger accounting and finance staffers in particular have a lower tolerance for such repetitive work — they don’t want to be “spreadsheet jockeys,” said Marc Huffman, president and COO of financial software provider BlackLine. Reducing employee churn saves money.
Easier compliance and auditing: The less manual intervention in a business’ accounting processes, the more likely that organization is to stay compliant with statutory requirements like ASC 606 and IFRS 15. With all that information in an automated system rather than spreadsheets, auditors can easily see the source of everything because relevant files are attached to all records and transactions. They can answer many of their own questions. An organization could even consider an open-book audit, where it gives the auditor read-only access to its system instead of handing over binders of printouts, Kugel said. The same goes for a bank, investor or landlord that needs to review data.
Culture of continuous improvement: If we look at the finance team as a “numbers factory” that takes data (raw material) and turns it into financial statements (final product), it makes sense to adopt the continuous process improvement philosophy popular in manufacturing, Kugel said. Accounting standards, the state of markets and technology change quickly, and continuous process improvements allow the finance team to keep pace. The continuous close will encourage this mindset and keep accounting on the cutting edge.
One important note: A true continuous close doesn’t mean just spreading the same tedious manual processes over the month. All that’s doing is front-loading work. Automation is what makes a continuous close possible — and a lack of technology is one of the biggest barriers to adoption.
Every time a person moves information from one system to another, introducing errors is a real possibility. That’s why the ability for systems to transfer and validate information without human intervention is foundational to continuous close. That automation capability is built into most modern financial software: A finance team would define the business logic to, for example, process invoices, and that process would then be executed by software versus a bookkeeper.
When a system has machine-learning capabilities, it can also spot and flag anomalies. For example, when someone initially enters an invoice, the system compares it against thousands of previous bills and flags the entry if it doesn’t match the established pattern.
“What that means is, you’ll fix errors before they get into the system,” Kugel said. “You’ll reduce, significantly, the number of things that have to be fixed at the end of the month or during the course of the month. So there will be less staff time spent finding, fixing, resolving errors, which is still today a ridiculous amount of what people do in accounting departments.”
Besides ensuring accuracy, automation saves time that would be spent double-checking data and performing reconciliations — again, freeing up time for finance pros to strategize.
Automating revenue calculations, in particular, is vital for continuous close, per Kelly. Revenue recognition standards, like ASC 606 and IRFS 15 for U.S.-based and global organizations, respectively, are complex and unique to each organization. Without automation, those standards can easily be problematic during audits and laborious for accountants. Software, however, can be programmed specifically for these requirements.
“64% of businesses that prioritized investment in back-office systems can close their books in five days or less.” —FSN survey
Accounting teams may also want to generate and compile a lot of financial information, quickly and efficiently, for internal stakeholders. That’s more difficult when there are many disparate data sources. In the spirit of continuous improvement, and to better enable continuous close, reduce the number of data feeds as much as possible. Pare down to the solutions that provide you with competitive advantage, minimize custom integrations and get as much on a single platform as you can.
Then, work to push that consolidated data to decision-makers and stakeholders regularly using dashboards and automated reports that support various roles and provide strategic insights. For example, the accounts receivable clerk may have a role-specific dashboard to monitor the pulse of incoming payments and some standard actions to take based on that information, while the head of sales might get a report that shows the average value of deals closed, broken down however provides the most immediate, actionable insights.
When business is in flux, speed is critical.
The Pandemic Effect
COVID-19 has highlighted the importance of on-demand access to core financial data. Cash flow quickly climbed to the top of the list of priorities for most businesses, as leaders suddenly needed to know how much cash they had on hand and develop an accurate forecast for the immediate future.
With calculations for accounts receivable, bank reconciliations, accounts payable disbursements and T&E automated, an accounting team practicing continuous close could deliver an accurate view of the company’s current standing in hours instead of days. And, being able to generate automated reports helps accurately predict a company’s cash position for the coming weeks and months.
In fact, the pandemic could drive more financial leaders to adopt continuous close, said Kugel, as they realize the importance of up-to-the-minute visibility.
“One of the reasons why I’m hopeful is that the time between getting a pretty substantial wake-up call and being back to something close to normal is going to be a lot shorter now than what it was the last time we went through this,” said Kugel, referring to the 2008 financial crisis. “Back then, you learned the lesson, but you were still constrained about the kinds of investments you wanted to make into your financial systems. It really took years and years before CFOs, controllers really felt comfortable, like let’s put some money into this stuff — and by then, nobody remembered.”
Bain & Co. agrees. In a recent survey of nearly 800 executives, the firm found that the share of companies scaling up automation technologies will at least double over the next two years. Fallout from the coronavirus will likely accelerate adoption because of the potential for cost cutting; the survey found an average of 20% savings from automation projects, with the median payback for labor costs at 13 to 18 months.
Businesses that are stable enough to make strategic investments right now have an opportunity to modernize their accounting practices and emerge from this situation stronger, Kelly said.
“People are thinking, ‘OK, what am I going to do when work returns to whatever the new normal is?’” said BlackLine’s Huffman. “I think that’s driving a lot of interest in things like modern accounting, continuous close, where people are saying, ‘This could be the new norm; I need a better way to run my accounting processes around close substantiation.’”
Art of the Close
Speaking of new normal, the cultural adjustments around moving to continuous close are at least as significant and beneficial as the technical changes. Successful automation projects are championed by finance leaders who are open to new ways of working, fully buy into the continuous close vision and can anticipate objections.
There’s an element of “are the robots going to take my job?” concern that leaders need to address head on, for example.
“[CFOs and controllers] don’t have to be charismatic, but they have to be inspirational enough to bring everybody along, to make them either want to change or be willing to change,” Kugel said.
Another major barrier is a sense among financial leaders that they’re simply too busy to take on a project of this magnitude. Overcome that by breaking the project into manageable pieces. Kelly suggests businesses decide where to start automating by identifying the parts of the balance sheet that have the most errors or pose the greatest challenge when pulling together financial reports. Similarly, Kugel advises companies to build a list of priorities based on fixes that would have a big impact and are relatively easy.
Finance & Accounting Processes to Automate
Bain & Co. finds that some tasks have more automation potential than others
Data: Bain & Co.
Accountants then play the role of investigators and problem-solvers to determine the best processes to start automating. For example, if the booking process for accounts receivable (AR) is the source of many adjusted journal entries and slows down the close, start by shoring up that process.
Next, put a change management process in place and build a project plan that assigns tasks to specific people, with due dates. Promote communication among accounting team members so everyone knows who is doing what. That may be more challenging when everyone is working remotely, including on a remote close, but it’s doable with the right tool set.
The accounting team can keep building from there, refocusing the energy previously dedicated to tracking down transactions to the penny toward achieving a true continuous close.
This transition could take some time: Kelly has seen a business move from a monthly to continuous close in just 10 weeks, but most small-to-midsize firms should be able to make it happen within six months. Even if a business does not get to the point where it can close the books on demand, or it takes longer to get there than expected, the effort should still pay dividends in accuracy; you’ll get time back as a result.
“If you try it and maybe you don’t hit the mark and you’re not continuously closing, I guarantee you, you’re going to be better off from the effort in terms of everything that has to do with your financials,” Kelly said.
Continuous close is a joint effort between finance and IT, so employees who can bridge the gap between accounting and technology are a critical resource for this transition, said Kugel. Ventana Research has found a strong correlation between having these cross-functional staffers and strong overall performance.
In fact, in the FSN survey, almost half of finance leaders see a lack of tech-savvy finance employees as a barrier to innovation.
With a team that believes in continuous improvement and modern systems in place, the continuous close is a realistic goal for businesses, regardless of size or industry.
It will also soon be a competitive advantage as adoption jumps in the coming years.
In the wake of the coronavirus, agility will be the hallmark of successful companies. Businesses that remain tied to spreadsheets and produce key financial reports on only a monthly basis will be anything but nimble. In fact, FSN’s survey showed that 45% of senior finance executives worry their companies are innovating too slowly and will fall behind the competition.
The continuous close is one example of innovation that should benefit everyone involved.
“The idea is not just to say, ‘We’re continuously closing,’” Kelly said. “The idea is that, for the individual employee, it should make their lives and their jobs better. That’s the goal — it’s a win-win for both the individual and the company.”
Ian McCue is a content manager at NetSuite who also contributes to Grow Wire and the NetSuite blog. A former sports writer, he previously wrote about supply chain challenges and technology at HighJump Software. Reach Ian here.