This article is part three of a seven part series providing a practical playbook for today’s CFOs

What is the close process?

The close process refers to the bridge between business processes and the ability to report financial results. The basic components of the close process include subledger and journal activity such as bookings and allocations; reconciliations, including balance sheets and transaction-matching; consolidation efforts such as the creation of financial statements and merging multiple ERP solutions; and reporting and analytics, which include management and external reporting, as well as statutory and regulatory requirements. 

While accounting and finance professionals rarely look forward to the procedure, the ability to right-size the close process through a risk-based, data-driven approach will help facilitate a more streamlined, efficient course for the entire team. 

Common issues that impede the close process

Because many organizations struggle with issues such as staffing shortages, laborious manual processes, inadequate technology and unreliable data, the close process can feel unmanageable. A growing number of companies have moved away from a traditional close approach because they are hindered by requirements to report more in less time, coupled with demands for increased transparency and governance.

The length of the ideal close depends on a variety of factors unique to each organization, including its structure and resources, risk tolerance, internal and external reporting deadlines, control considerations, and the quality and timeliness of desired business insights. Regardless of these specifications, there are several strategies that will help organizations meet today’s close process demands, including:

• Streamlining the period-end close cycle
• Ensuring visibility and predictability in financial consolidation and close
• Integrating financial controls to ensure accuracy of results
• Avoiding delays from unexpected reconciliation issues
• Addressing all external and statutory and internal reporting needs
• Managing costs related to financial reporting and filing

How to obtain a practical close

In order to support the desired future state transformation of the close process, four key components must be improved within an organization’s operating model:

1. Dig into the data. A company can gain an understanding of its current state financial transactions and associated timing and materiality by identifying resource requirements, including staff and software. It is also important to acquire all available data and perform data dumps out of the various source systems. Data must then be formatted into a digestible, comparable structure that enables it to be joined and analyzed by various systems.

2. Review policies and procedures. An organization must review and analyze current policies, tasks and close activities to determine alignment with organizational close goals. Compiling inventories and analyzing tasks for completeness and validity is essential.

3. Analyze roles and responsibilities. It is critical to align the optimal employees with the right duties by leveraging capabilities and providing growth opportunities. Begin by taking an inventory of resources and documenting staff members’ experience and current responsibilities, both close and nonclose related. Consider areas where they are either burdened or underleveraged, their strengths and weaknesses, growth opportunities and impacts on other teams.

After prioritizing these resources, create a road map that balances department needs and individual interests. This process should include preparing a gap analysis of the current setup versus optimal capacity, interviewing key stakeholders, empowering employees to work together on solutions, reallocating duties while maintaining backups, and emphasizing training and adoption exercises.

4. Review and optimize technology solutions. It is also vital to architect data flow among technology systems that contribute to the close process and perform a related fit-for-purpose analysis. This includes inventory applications and technology that contribute to close processes such as ERPs; third-party sub ledgers such as bank and treasury systems, fixed-asset systems and payroll; consolidation applications; close management systems; and point solutions. In addition, identify challenges related to the current system environment. These can include optimizing existing technology to “fit for purpose,” implementing point solutions to fill in gaps and fully automate, and establishing an integration strategy.

Considerations of a practical close

To achieve a practical close, the following five considerations should be taken into account:

1. Assess the risk. Evaluate the critical components of the data and perform analyses on journal entries, reconciliations and flux, using the outcomes to guide best practices. In addition, question each account to determine the risk of certain activities and use those answers as a guide on what to change.

2. Make policy considerations. Identify areas for efficiency gains, such as:

• Materiality threshold prepaids, accruals, journal entries, post-close, and flux and variance analysis
• Write-off policies and unidentified reconciliation differences
• Moving from manual controls to an automated, preventative control environment
• Reconciliation and subledger close policy—hard or automated cutoffs for different subledgers
• Flux policy—type, frequency and scope (account versus financial statement line level) of analyses
• Internal and external reporting—frequency, detail, timeliness, standardization and recipients
• Regulatory requirements—industry, debt
• Internal audit usage—research deficits during the month instead of during close

3. Understand the difference between the hard and soft close. The hard close encompasses a thorough, detailed and often rigid process, with time spent more on surface-level fixes than root causes. Often appropriate for quarter- or year-end, the hard close will capture all activity in that period and may be the appropriate choice to meet certain compliant requirements.

Conversely, the soft close tends to be less thorough and precise, eliminating or simplifying some activities. While generally a shorter process, it leaves more time for analysis of issues. While it will ideally capture all material activity in the right period, the soft close’s reliance on assumptions and trends may not be precise enough for certain requirements and could result in catch-up work.

4. Eliminate tasks that are no longer needed. Standardize or centralize similar tasks that are performed by multiple entities. In addition, optimize any relevant tasks that can be updated to improve certain aspects, while preserving tasks that remain relevant and necessary for the optimized close.

5. Technology investment. Modern finance architecture should consider integrating transactional, storage and reporting systems end-to-end in order to drive finance automation across critical business processes and data elements. Understanding the tools designed for this purpose will guide informed technology investment decisions. Key areas include:

• ERP
  • General ledger
  • Accounts receivable
  • Accounts payable
  • Inventory
  • Treasury
  • Fixed assets
• Robotic process automation (RPA)
  • Bot deployment for structured, repeatable and logic-based tasks
  • Reduction of human error rates and enhanced compliance and security
  • Productivity improvement (five times faster than humans with 24/7 runtime)
• Financial close automation (FCA)
  • Account reconciliations
  • Period-end checklists
  • Variance analysis
  • Journal entries
  • Intercompany eliminations
• Enterprise performance management (EPM)
  • Budget and forecast modeling
  • Scenario planning
  • Financial statements
  • Management reporting
  • Dashboards (basic)
  • Financial consolidation
• Business intelligence (BI)
  • Data warehousing
  • Master data management
  • Dashboards (advanced)
  • Predictive analytics
  • Big data and internet of things

Obtaining value from a practical close

By improving the four key components of an organization’s operating model and considering the practical close, an organization can achieve significant value through:

• Efficient processes leading to a shorter close time and a more engaged staff
• Increased visibility during and after the close
• Optimized, purpose-built policy delivering consistent and reliable reporting
• Timely insights leading to better decision-making
• Automated, preventative controls environment that reduces audit and business costs

Read next: The Practical CFO Playbook, Part Four: Empower your people—cultivate talent, align the organization