TechWeb

A High-Priority Close

Nov 23, 2005 (09:11 AM EST)

Read the Original Article at http://www.informationweek.com/news/showArticle.jhtml?articleID=174401603


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Summary
Accelerating the financial closing process can pay big dividends to companies in the form of cost savings and more timely delivery of actionable information to business units. It can give public companies more time to prepare the management commentary that accompanies financial statements. Done properly, it also can reduce the risk of fraud and errors in the statements and reduce external audit costs. But in practice, little progress has been made in shortening the close since the mid-1990s, when companies achieved some improvement by investing in enterprise resource planning (ERP) systems. Ventana Research advises CFOs and controllers to create an explicit, annually updated set of priorities that makes shortening the close one of the top three objectives for the finance department.

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In a recent study sponsored by Cartesis, Clarity Systems and Cognos, Ventana Research found that 74 percent of survey respondents with finance titles in companies having more than $100 million in sales or at least 1,000 employees rated accelerating their closing process “very important” or “important.” Yet only 32 percent reported completing their monthly close in four or fewer business days, and 52 percent said they could close their quarter within six business days. Almost two-thirds said they wanted to accelerate their monthly close, and just over half thought their quarterly close should be done faster.

A rapid close can achieve multiple benefits. For the business, a faster close can mean getting information to managers sooner. In general, the quicker the reaction to what just happened, the better the results. For companies that take a particularly long time to close monthly, substantially reducing the interval could eliminate the need for “flash” reports and therefore would save money. For all but the smallest U.S. public companies, the shortened quarterly and annual reporting deadlines have put a premium on time after the close to prepare financial statements and conduct management discussions around it. Shortening the close also enables companies to report their results sooner, possibly offsetting the additional time some non-executive members of the audit committee may need to give the results proper scrutiny. Moreover, Ventana Research asserts that many of the steps that help to achieve a fast, clean close can also streamline finance department operations, increase the controllability of the accounting function and decrease external audit costs.

Closing faster almost always involves a combination of people, process, systems and information. An effective “people” element includes good training, clear instructions and a project management-style approach to the close. Process covers a range of options, including the change from a sequential, end-of-period approach to more frequent steps or a staggered close of certain subledgers or entities. Doing many small things, such as cutting the number of bank accounts and legal entities or increasing the threshold of materiality, also can have a measurable impact. U.S. public companies will benefit if they integrate the accounting cycle steps with their periodic Sarbanes-Oxley Section 404 and 302 activities rather than viewing them as distinct processes to be managed separately.

The systems and information elements offer the best opportunity for shortening the close. Companies that do not have dedicated consolidation software or have outgrown their existing package should weigh the benefits of making new investment as part of an initiative focused on achieving a more rapid close and quicker access to corporate information. Greater automation of the process itself — eliminating manual steps — can shorten time spent on it and reduce errors. Automating the flow of data from one system to the next, which used to be difficult and time-consuming, is far more cost-effective today. More than half of the participants in our study believed they could shorten their close by a day or more if they could eliminate errors.

Standalone spreadsheets are a notorious cause of such errors. Luckily, enterprise spreadsheets now are available that build on familiarity with spreadsheets and years of investment in models and macros while providing substantially greater control. For the longer term, metadata management holds the promise of eliminating information flow bottlenecks that stem from such facts of life as disparate charts of accounts and isolated information silos.

Assessment
Achieving a faster close takes more than recognition of its importance. Until there is an action plan with real commitment behind it, it will not happen. Unless the CFO sets a specific target for reductions in the time required for the monthly, quarterly and annual closes and makes this a top priority for the finance department, achieving a faster close will remain elusive.

About Ventana Research
Ventana Research is the leading Performance Management research and advisory services firm.  By providing expert insight and detailed guidance, Ventana Research helps clients operate their companies more efficiently and effectively. These business improvements are delivered through a top-down approach that connects people, process, information and technology. What makes Ventana Research different from other analyst firms is a focus on Performance Management for finance, operations and IT. This focus, plus research as a foundation and reach into a community of over two million corporate executives through extensive media partnerships, allows Ventana Research to deliver a high-value, low-risk method for achieving optimal business performance. To learn how Ventana Research Performance Management workshops, assessments and advisory services can impact your bottom line, visit www.ventanaresearch.com.

© 2005 Ventana Research