Robert Kugel's Analyst Perspectives

Using the Close as a Finance Department Diagnostic

Posted by Robert Kugel on Dec 7, 2012 11:12:59 AM

Earlier this year we published our Trends in Developing the Fast, Clean Close benchmark research findings. The most significant was that, on average, it takes longer for companies to close their books today than it did five years ago. In 2007, nearly half (47%) we closing their quarters within five or six days, but now only 38 percent can do it as quickly.

Some think that the increase in the time it takes to close is the result of increased regulation and other fallout from the financial collapse in 2008. It’s a reasonable hypothesis, but the numbers from our research don’t bear this out as the major factor in the increase. It’s true that half (49%) say that economic and regulatory events over the past five years have increased their workload, but only one-third of these report any lengthening of their closing period. So, while external issues are a factor, they don’t appear to be a major reason for the slower close. Looking at the results of the benchmark research, companies that experienced an increase in their closing period are ones that are more likely to use less automation and have more manual processes. Many finance organizations, especially in North America, reduced staffing in the wake of the 2008 recession and have been reluctant to rehire ever since. This means fewer people handle the workload. Rather than redesigning the process, using better information technology to support the close or managing the process more effectively, these companies are putting up with a slower close.

For companies that take more than a week to close their books, the financial close is more of an opportunity than a problem. I assert that the close is a useful measure of the overall effectiveness of a finance organization. Take two companies and assess their close processes. On paper the two corporations may be nearly identical: same size, same industry, same geography, same ownership structure, same number of ERP systems, same degree of centralization of the accounting function and so on. One closes in three business days; the other in 11. Why?

There’s a real danger is thinking that a close that takes more than a week or one that’s lengthened over the past couple years is the result of external factors. In effect, it excuses poor internal performance as the inevitable result of external factors. I submit that most of the difference between a company that takes three days to close and one that takes 11 is the result of management decisions that amount to this: Closing faster is just not important enough to warrant the effort. I also suspect that if I proposed this interpretation to the controller of the slower company, he or she would tell me that it’s not entirely true. They tried to improve closing speed but they found that it wasn’t feasible because of [fill in the blank]. Some reasons might be that (for example) it takes that long to do inventory or to complete the allocations or to perform reconciliations. Yet behind the fill-in-the-blank explanations are deeper issues that likely dog the overall effectiveness of the finance department. For instance, using desktop spreadsheets to collect data, resolve disparities and perform analytical tasks such as calculating allocations adds time to the process compared to using dedicated software to automate this function or, at the very least, using an enterprise spreadsheet. An inability to get data in a timely fashion is not a given. Even something as basic as failing to rethink the process can be a cause for a too-long close. It’s not “cheating” to close subledgers before the end of the period, provided it’s done consistently and doesn’t inherently result in a misstatement. Accuracy is not negotiable in bookkeeping but materiality must guide decisions in accounting. Setting higher thresholds for reconciliations can save a substantial amount of time without adversely affecting the quality of a company’s financial statements. A relentless drive to shorten the close also requires executives to rethink and question a lot of “givens” that routinely degrade their performance. “Relentless” means that it becomes a high priority that challenges a “we’re too busy to improve efficiency” mentality.

I propose that every company that takes more than a business week to complete its monthly or quarterly close should set a goal of reducing the time by at least two days over the next three years. If it takes 11 or more days, it should be four days. Shortening the close is worthwhile for three reasons. It enables a company to provide vital financial and managerial information sooner and increases efficiency. Moreover – and possibly of even more value – the process of identifying the issues and bottlenecks that prevent a faster close is also likely to point to other peopleprocessinformation (data) and technology issues that hamper a finance organization. Fixing the close process issue can be an excellent diagnostic tool for everything else that might be ailing finance.


Robert Kugel – SVP Research

Topics: Office of Finance, close, closing, Consolidation, Controller, effectiveness, XBRL, Business Performance Management (BPM), CFO, Data, Document Management, Financial Performance Management (FPM), Financial Performance Management, FPM

Robert Kugel

Written by Robert Kugel

Rob heads up the CFO and business research focusing on the intersection of information technology with the finance organization and business. The financial performance management (FPM) research agenda includes the application of IT to financial process optimization and collaborative systems; control systems and analytics; and advanced budgeting and planning. Prior to joining Ventana Research he was an equity research analyst at several firms including First Albany Corporation, Morgan Stanley, and Drexel Burnham, and a consultant with McKinsey and Company. Rob was an Institutional Investor All-American Team member and on the Wall Street Journal All-Star list. Rob has experience in aerospace and defense, banking, manufacturing and retail and consumer services. Rob earned his BA in Economics/Finance at Hampshire College, an MBA in Finance/Accounting at Columbia University, and is a CFA charter holder.