A recent survey by Gartner showed that “55% of respondents were aiming for a touchless close by 2025”. However, experience suggests that many organisations are struggling deliver a fast and efficient financial close.
This blog looks at what is meant by financial close and highlights 6 common reasons why, despite years of practice, development and evolution, organisations still struggle with the financial close process.
What is financial close?
The need to perform a financial close is common to every organisation. It is a fundamental starting point to the work performed by the FP&A team and achieving regulatory compliance.
If you type the term ‘financial close’ into a search engine, you will find several definitions. The traditional one is that of “closing the books” which includes the posting of transactions, checking and reconciling accounts and systems, and creating adjusting journal entries. The objectives of financial close are clear and remain unchanged; verifying and adjusting accounts at the end of a period to represent the financial position of an organisation at this date. In organisations with multiple subsidiaries, this is likely to include performing ‘financial consolidation’ to produce group accounts.
Of course, the ultimate step is to produce reports from the accounts and other information that is used by internal and external stakeholders for decision making. Whilst we will refer to it as ‘financial close’, the process can also be referred to as the ‘record-to-report’ (R2R) or the ‘close, consolidation and report’.
Why do organisations struggle with financial close?
In most organisations, the financial close process is repeated multiple times each year. It has evolved over a long period of time.
In the same Gartner survey mentioned above, “86% of respondents were aiming for a faster, real time close by 2025”. And stories of finance teams burning the midnight oil and elevated levels of stress during financial close are common. This suggests that most organisations need to improve their financial close process. There is good reason to do so as top performing organisations close in an average of 6 working days and spend more time on analysis. However, others can take up to 20 working days and even longer, leaving little or no time to add any value.
Given that, at the same time, there have been so many advances in technology, what is behind this struggle to improve a process that is fundamental to the performance of the organisation? We see 6 common reasons:
1. A failure to automate manual processes
The financial close process consists of multiple tasks, often performed by multiple individuals using multiple systems.
There are numerous underlying finance system tasks, such as transaction posting and accounts reconciliation that are time-consuming and repetitive. An increasing number of accounting systems provide a level of automation, such as bank reconciliation. And this assumes that this functionality is in use, which is not always the case. If it is in place and used, tasks can be spread throughout the period rather than concentrating them in the close cycle.
There may also be reconciliations required where multiple systems are in place, for example a stand-alone fixed asset register that needs to reconcile back to the accounting system. And, of course, there will be the classic accrual and prepayment calculations and the need for adjusting journals.
And then, when close is complete, there is the need to communicate with stakeholders in a report that should contain data and narrative. This report creation, including that of more formal financial statements, is typically manually intensive.
While technology has made it possible to automate most financial close tasks, only a few finance teams have embraced these tools. In a recent survey, “100% want to automate the financial close process, but only 21% have done it”. Many finance teams still rely heavily on spreadsheets and other manual processes resulting in close cycles are invariably longer. As Ventana Research has discovered, there are benefits to automation as “88% of organisations that use extensive automation in managing their close can finish within six business days versus just 40% that use little or no automation”.
2. Organisational inertia
To improve the financial close process, it will be necessary to effect change. Any transformation of the financial close process can be hindered by organisational inertia, a resistance to change. Those who consume reports, including senior management, often take the view that they get the information they require, therefore why change? It is those at the coalface who experience the pain and the stress of financial close who understand the need for change. However, even they may be resistant to change as it is high risk, especially where there are complex spreadsheet models in use or legacy systems that have been in-situ for a length of time. It is the role of the CFO is to make the case for change and to overcome the inertia barrier.
3. Collaboration and communication
The finance team is reliant on collaboration with other departments during the close cycle. With the need for data and reliance on systems, IT is high on the list of collaborators. They will have competing priorities and a response in the timescales required may not be forthcoming. Finance may also rely upon other departments to complete tasks, such as invoice processing or to provide non-financial data. Again, these departments may not prioritise these tasks leading to a delay in the close process. When these teams do not work effectively with finance, it can lead to delays, discrepancies and errors.
The way to overcome the collaboration issue is to ensure that other departments fully understand their role in the financial close process and how important it is that tasks are prioritised and performed by the deadlines set. It is also critical that members of the finance team, who contribute to the close, fully understand the process and their part in it. With a move to working-from-home, this issue is becoming more common with finance teams rarely working together in the same location.
4. Lack of standardisation
The financial close process is often undocumented, as is progress through the cycle itself. The knowledge of how it works, and where an organisation is in any particular cycle, is vested in one or a few key individuals.
Without standardised processes and procedures, it can be difficult to ensure consistency and accuracy across the financial close process. It is also difficult to identify bottlenecks constraining the close process and make improvements where necessary. This can lead to delays, errors, and discrepancies in financial reporting. In addition, this creates a high level of risk to the organisation.
The close process should be fully documented, clarifying roles and responsibilities. This includes a timetable specifying when and how key tasks are completed and by whom, preferably visible to all collaborators. This will also identify data sources, control structures and compliance requirements.
5. Integration of actual and plan/forecast data
Any reporting to internal or external stakeholders is likely to contain actual, plan/forecast data. The actuals are sourced from the accounting system (as closed). However, the plan/forecast data is unlikely to be held there. If this is the case, there may be significant work required to bring both sets of data together at the same granularity level to perform the initial analysis of variances and to compile the final report. When time is scarce, this can seriously hider the efficiency of the financial close and the quality of insights provided.
6. The software conundrum
The final reason organisations struggle with financial close, and this addresses most of the issues raised above, is one of technology.
Within the close process there can be the need for multiple technologies. The foundation is the underlying accounting (ERP) system that records transactions and, when closed, provides the actuals. If an organisation has multiple subsidiaries, there could be disparate systems and potentially, software to perform financial consolidation. Alongside this, there could be a reporting solution. Alternatively, spreadsheet models may be used for consolidation and reporting, or a single-platform CPM solution may be in place.
If we go beyond the basics, there could also be specific software for process automation, reconciliation and report creation (disclosure management). And, finally, a workflow solution to oversee the whole close process.
The technology landscape around the whole finance team, including financial close and the FP&A team, can be extremely complex. As a result, it can be exceedingly difficult to understand what software is required and what works with what. This software conundrum can create a significant barrier to changing an inefficient close process.
The financial close process is fundamental to so many aspects of an organisations performance. Given its importance, it is essential that financial close is completed fast, efficiently and accurately. The 6 reasons we have identified that cause organisations to struggle are not insurmountable. The technology is there to support it, there just needs to be a willingness to make it happen. And, if you succeed, the benefits to the organisation are tangible. And the finance team may get home early too!
Discover how Fluence can help your organization plan better and close faster with more confidence.