It strikes me that the motto of successful salespeople – “ABC: Always Be Closing!” – could apply equally to corporate controllers, albeit in the accounting sense. For a while now I’ve been advocating continuous accounting, a holistic approach to managing the finance and accounting function that, in part, emphasizes using technology to distribute workloads more evenly over an accounting period – in effect to always be closing rather than waiting until the end of the month or quarter. Continuous accounting also stresses improving efficiency by automating repetitive processes and enhancing organizational effectiveness by improving data integrity in finance processes.

By consensus, companies should close their vr_office_of_finance_09_fast_closers_have_more_timely_informationbooks within one business week, yet our benchmark research on the Office of Finance finds that only 40 percent of them are able to meet that goal in their quarterly close. This is not a trivial matter – there are solid business reasons for closing within a week. An important one is that a fast close enables company executives and managers to access essential performance metrics quickly and to take action sooner to address an opportunity or issue. Our research confirms this correlation. Three-fourths (75%) of companies that close their books in one or two business days said they have timely information available to run the company, compared to just 10 percent of those that take more than two business weeks to complete the process. However, despite nearly universal agreement (among 83% of companies in our research on developing a fast close) that it’s important or very important to accelerate their company’s close, we also find that companies on average are taking a day longer to close their quarterly books than they did a decade ago.

Using ineffective technology certainly plays a role, as I’ve discussed, and a poorly designed or badly executed process is also a barrier to closing quickly. Conversely a well-designed, well-executed process that uses the right technology opens an avenue to accelerating a company’s close.

Closing the books is a highly definable, repetitive procedure, similar in that way to a manufacturing process. In both cases, attention must be paid to the design of the process. It must be examined step by step to determine, for example, whether there are unnecessary or redundant steps and whether the steps are in the most efficient sequence. The execution of the process must be evaluated to confirm that handoffs between individuals are always crisp and that exceptions are handled quickly. As in manufacturing, it’s important to take a total quality management approach – one in which design of the process and related methods eliminates as many sources of defects as possible. Building quality into the process minimizes the need to spend time discovering the source of a mistake and then fixing it. On average research participants estimated that they could save one to two days in closing if all errors were eliminated.

vr_office_of_finance_11_automation_speeds_the_financial_closeIn the case of the close, the process should be supported by systems designed to prevent errors from occurring. Our fast close research has led us to conclude that having overly manual processes is a major reason why the average time to close increased over the past decade. Our research also finds a correlation between the degree to which companies have automated their close and how soon they’re able to complete the process: 71 percent of companies that have substantially automated the parts of their close that can be automated said they close their books within six business days, compared to only 43 percent of those that have automated some of their close processes and just 23 percent of the companies that apply little or no automation.

Technology also supports the objective of distributing workload across periods. Today’s financial software gives companies much more flexibility in how and when they perform their work. However, the classic accounting calendar is so engrained in our minds that almost nobody even thinks about changing it. But it is worth thinking about. The monthly, quarterly and annual cadences of the accounting cycle aren’t set in stone, and adapting them appropriately can make the department and the corporation more efficient and effective.

Much of what we think of as “normal” bookkeeping and accounting procedures are actually rooted in the centuries-old limits imposed by paper-based systems and manual calculations. Periodic processes that are performed, say, monthly or quarterly developed as the best approach to organizing, coordinating and executing the calculations that are needed to sum up the debits and credits in journals and ledgers. The pacing of these manual systems represents a trade-off to balance efficiency against control. Their timing is the result of having to wait for there to be a sufficient volume of entries to justify taking accountants off line to perform manual summations, adjustments and consolidations. At the same time, companies need to maintain financial control by regularly checking their books for fraud, procedural issues and errors. In practice, weekly was generally too short a period to be efficient, while quarterly was too long to maintain control. That’s why there are so many monthly tasks.

Even when computers began to be used to automate doing the debits and credits, the old accounting calendars persisted. That’s because the limits of technology forced software companies to use batch processing that could be run on only weekly and monthly schedules. But within the past decade or so information technology reached a threshold to support transformation of core finance and accounting processes by enabling a continuous approach to transaction processing. Technology now allows companies much more freedom to schedule their accounting cycle tasks to distribute workloads across the period. For example, it’s not necessary to do all of intercompany reconciliations and eliminations at the end of the month – it can be done more frequently, reducing the end-of-period workloads, shortening the close, reducing the need for temps and destressing the department. Technology, especially as it affects ERP and financial management systems, can also spread workloads more evenly. For instance, in many cases it’s possible for corporations to cross-post intracompany transactions to eliminate discrepancies at their source. Increasingly ERP vendors are adding analytic capabilities, which I’ve commented on, to these transactional systems to enable a weekly (or theoretically even a daily) soft close. That can substantially reduce the amount of period’s-end work that accounting departments must perform.

Accounting is a discipline that requires doing things exactly the same way over and over. That provides the necessary consistency. But doing it the same way isn’t necessarily the best way, which is why our definition of continuous accounting includes an emphasis on continuous improvement. “Always be closing” not only suggests spreading workloads more evenly, it also means continually examining the close process, the technology supporting it and human factors for opportunities to shorten it and reduce the time and effort needed for its completion. Controllers who are committed to enabling their finance organization to play a more strategic role in their company should always be closing. With a determined effort, they can reap the benefits of doing that.

Regards,

Robert Kugel

Senior Vice President Research

Follow Me on Twitter @rdkugelVR and

Connect with me on LinkedIn.

Vendavo is a vendor of business-to-business (B2B) price and revenue optimization software, which I have written about. A major focus of the conference sessions this year at the company’s annual user group meeting was on practical approaches to successful price optimization initiatives. While this category of software has been achieving increasing acceptance, penetration is still limited in the B2B segment, which includes, for example, industrial goods and services.

One reason for the slower uptake in B2B companies is that adoption has been hampered by the need to simultaneously address people, process and data issues that cross organizational silos. By contrast, the transportation and hospitality industries required fewer organizational changes to implement revenue management. In particular, it’s usually necessary to effect change management. This effort aims to bring together several groups within a company (typically some combination of sales, finance, senior executives and operations) to agree on adopting an optimization strategy and developing ways for it to be put into practice. Companies also must be able to manage the process effectively on a daily basis through executive buy-in, ongoing training and having an organizational structure to support a sustained price optimization strategy. And having the right data to be able to price more successfully usually requires a substantial up-front effort and a well-defined ongoing process to ensure the data is clean and relevant.

Analytics applied to the data is another important tool, but in general our Office of Finance benchmark research finds that relatively few companies have implemented advanced analytics to manage profitability. Overall, only 29 percent of companies employ analytics for product profitability, 26 percent for customer profitability and just 15 percent for price optimization.

The Vendavo conference sessions featuredvr_Office_of_Finance_23_adoption_of_advanced_analytics companies that have been able to address these issues. Its software is designed to support an iterative approach to pricing that begins with analyzing prices and the pricing environment, uses the analyses to decide the optimal set of actions and trade-offs to make and then supports execution of these decisions. Since “optimal” choices typically have short life spans in business-to-business dealings, pricing decisions must be reviewed on a regular basis and adapted to changing market conditions.

Vendavo’s suite of software manages the iterative pricing process. Its Profit Analyzer application assesses customer and product profitability over time. It is designed to identify the factors that have the greatest impact on profitability (particularly the sources of margin leakage) that managers can address to enhance profit margins while supporting revenue objectives. Customer segmentation is critical to price optimization because not all customers value products and constituent components (such as shipping or adjunct services) equally. Identifying these segments and using that knowledge in price setting and negotiations is crucial to boost profitability.

Price Manager facilities the creation and updating of price lists and pricing policies based on the optimization analysis and is especially helpful in evaluating the impacts of potential changes on prices and terms. It’s designed to eliminate the substantial amount of time companies typically waste when they manage the process in spreadsheets. It also supports greater consistency in pricing decisions across a company, which by itself can improve margins. Price Optimization Manager along with Deal Guide and Deal Manager uses the intelligence created in the system to provide sales organizations with optimized target prices and consistent, data-driven pricing guidance to enable them to negotiate more effectively.

In addition, Vendavo’s Business Risk Alerts uses predictive analytics to monitor business conditions and identify at-risk customers. Given the cost of acquiring customers, especially in recurring revenue or subscription businesses, a “defector detector” that spots unhappy customers can boost profit margins.

The market for price and revenue optimization software in the B2B segment appears to be arriving at an inflection point as the number of customers increase and demonstrate their ability to apply the technology commercially. That it has taken this long is only partly the result of the slow maturation of the technology. It has taken time for software vendors to move beyond merely offering pricing algorithms and make it easier to apply the results of advanced analytics in relevant everyday business activities, such as facilitating its use by deal desks and streamlining market segmentation efforts. Greater emphasis on price and revenue optimization as a management strategy by strategic consultants would help expand demand at a faster pace. Change management initiatives, especially those that require cross-functional collaboration, are most successful when driven by senior executives. In many cases strategy consultants can be more effective in making the case for implementing price and revenue optimization than software companies or internal managers.

I recommend that all companies investigate how they can use price and revenue optimization in their business. Especially in slow growth economies, this can be a winning strategy. Vendavo is one of the vendors that they should evaluate in this process.

Regards,

Robert Kugel

Senior Vice President Research

Follow Me on Twitter @rdkugelVR and

Connect with me on LinkedIn.

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