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Optimizing the Month-End Close Process: 5 Steps to a Faster, Better Close
If time is money, then your 15-day month-end close process is a gaping hole in your corporate wallet. Because every minute your close needlessly marches on is a minute your team isn't spending on analysis and other value-driving activities. And that's just not great.
Thankfully, a close process riddled with errors, bottlenecks, and other assorted potholes isn't inevitable for you. Far from it. In fact, we've developed a game plan that can transform your month-end close from a perpetual thorn in your side to an absolute font of efficiency and timely, relevant reporting. So let's get to it.
Streamlining the Month-End Close Process: An Overview
Before diving headfirst into our five-step process to a faster, more accurate and reliable month-end close, let's take a step back and think about everything you're leaving on the table with an inefficient, prolonged close process.
Yes, as we said, time is money. But a slow month-end close is more than just an inefficient use of your time and resources. Think about it – every month, your staff feels the weight of that cumbersome, stressful, time-consuming close process on their shoulders. Without fail. So, from your team's perspective, each month ends with an exercise in frustration as people scramble to find data, fix data, and keep the record-to-report bus moving.
But what if your closing wasn't like that every month? What if your month-end close was a streamlined, hyper-efficient process – as swift as 6 days in a best-case scenario – rather than a 15-day slog through a swamp of disparate data and miles of assorted financial records? Between accounts payable, accounts receivable, bank statements, and expense accounts – not to mention dependencies on external data sources like consolidated parties and third-party data – even closing in 15 days can sometimes feel like the heaviest of lifts.
Suffice it to say, you would immediately benefit from reduced stress across your team by streamlining your close, all while increasing capacity – potentially leading to FTE rationalization – to analyze financial data rather than shuttle it between innumerable Excel spreadsheets.
Aside from the obvious benefits to employee engagement and satisfaction – particularly important when accountants are quitting in droves – a streamlined process also means you're making fewer top-side or correcting entries to review and explain since everything – your data, processes, and handoffs, to name a few – is more accurate. Likewise, you're suddenly more available to respond to quarterly and annual audit requests.
So, by optimizing your close process, you're allowing your finance team to add value in more strategic and analytical ways, keeping them happier and more engaged while also driving cost savings and improved transparency, risk mitigation, and decision-making. And as we're about to describe through our five-step process to a better close, it's really just a matter of being proactive rather than reactive, and effectively managing exceptions as you go.
Five Steps to a Faster, Better Close
We realize this is what you're here for, so we'll jump right in.
1. Set a Closing Day Target and Develop a Timeline
The first step in your journey is establishing a specific closing date target. Although a two or three-day close process is the stuff CFOs dream about, your target should be realistic and align with your organization's goals. In other words, a six-day close may be a noble – and doable – endeavor.
Once you have your target date, develop a timeline with progress touchstones to help you track your way. This means assessing the current state of your close process and identifying any gaps or bottlenecks you must address to reach your ideal future state. As a starting point, we suggest reverse engineering your closing calendar based on the target date you choose.
2. Identify the Critical Path to Achieving the Target
The critical path is the sequence of tasks and activities you must complete on time for what you define as a successful close for your company. By identifying this path, you can focus your efforts on the most essential activities and ensure you complete them efficiently.
To proceed, evaluate each step in the closing process and identify dependencies, potential roadblocks, or other areas of inefficiency. This type of analysis lets you streamline the process and eliminate unnecessary delays or redundant tasks.
Zooming in a bit further, a thorough process analysis will help you understand your existing processes backward and forward, identify inefficiencies, and determine areas for improvement. While you’re at it, you’re also looking for roadblocks – whether potential one-offers or recurring issues – that could throw a wrench into the close.
Along those same lines, scoping helps define critical guide rails for your month-end closing, ensuring everyone and everything remain focused, feasible, and aligned with your specific needs and goals. Put another way, a scoping exercise will determine what you will and won’t look at, making sure you allocate resources more effectively.
Now, that said, while scoping and analyses are vital, they aren’t the actual chess pieces putting everything in motion. When you’re dealing with such a web of dependencies requiring coordination, consistency, and cohesion, those month-end close chess pieces – your people, processes, and technology – will always be front and center, and not just on the AR and AP fronts.
In practice, people, processes, and technology act as the proverbial three-legged stool supporting the entire fast close methodology. Thus, it only takes one failure for the entire stool to fall. Granted, technology tends to be the focal point in this area – and for good reason. As we’ll discuss in a bit, the right tools can be absolute game changers for your month-end close. But even the shiniest, most advanced software platforms won’t do much good if the foundation of the house – including sales and purchase orders – is already rotting away.
The same goes for an inconsistent or dirty data environment – messy data will always yield messy results. So, how do you avoid such calamities? Well, as we discussed in our CFO’s Roadmap to Finance Transformation, it’s a matter of optimizing all three – your people, processes, and technology – in coordination with one another. People are the foot soldiers carrying out the tasks, processes are the guide rails keeping everyone on track, and technology is the set of tools making everything more efficient and effective.
3. Implement Materiality Thresholds, Use Estimates, and Request Critical Data Sooner
It takes a village to close the books every month. And that village includes both internal and external stakeholders, so you'll have to rely on other departments and organizations for essential information.
Since this can be a tough hurdle to overcome for many organizations, our advice is to begin by implementing materiality thresholds. Sure, in a perfect world, every piece of information – material or not – finds its way into your close. However, that's just not feasible, so implementing critical materiality thresholds will prevent you from spinning your wheels or needlessly waiting for data that won't ultimately impact your financial reporting.
To put a finer point on it, will a $100 entry make a material impact on a multibillion-dollar company? Probably not. But if eliminating that journal entry saves your team an hour of effort, then eliminating ten entries can preserve an entire workday a team member can devote elsewhere.
Typically speaking, companies use material thresholds most often in three areas – accruals, balance sheet flux analysis, and intercompany reconciliations. Although less frequently, some organizations also use thresholds for manual journal entries, balance sheet reconciliations, and reclassifying journal entries, with most companies setting thresholds lower than 1% of revenue. Likewise, as a precursor to this step, we suggest using invoice tolerance thresholds to minimize AP invoice exceptions.
Similarly, establishing sound estimates can be useful when dealing with data dependencies and timelines. However, estimates can be a slippery slope, so always use caution and diligence in your estimations, regularly reviewing them to ensure accuracy and effectiveness.
Aside from these key areas, taking a few other distinct steps can work wonders in mitigating or eliminating delays or detours from those stakeholders you're relying on.
- Setup recurring entries in your ERP, if possible
- Communicate with internal and external stakeholders to establish specific due dates for material information or the completion of essential activities.
- Categorize your monthly or quarterly account reconciliations, putting low to medium-risk reconciliations outside the monthly or quarterly close schedule.
- Set a timetable for expectations of high-risk account reconciliations, using judgment to further reduce reconciliations where possible. For instance:
- High – by WD+7
- Medium – by WD+9
- Low – throughout the quarter
- Minimal – semi-annually
4. Analyze Journal Entry Volumes
Journal entries play a pivotal role in the month-end closing process. Thus, analyzing volumes can provide valuable insights into areas where you can improve and optimize. Begin this step by determining who enters, reviews, and approves the journal entries. Remember, their time is limited during the close process, so identifying and addressing any inefficiencies or bottlenecks can be a massive octane boost to your workflow.
Likewise, identify any recurring entries that don't require approval. These, along with manual entries, can be minimized or eliminated through process improvements or automation. As you go, take note of the types of journal entries – recurring, system generated, manual, and reclassifications, amongst others – and when the highest volumes occur. This will help you further refine your close by identifying where and when you should devote additional resources to high-volume instances, thus avoiding bottlenecks down the road.
Once again, assess the materiality of journal entries and their impact on your financial statements to prioritize time and effort during the close process. Remember, if an entry won't have a material effect on your balance sheet or income statement, chances are it's not worth waiting or worrying over.
Also, while technology isn’t a cure-all, it can certainly play an instrumental role in addressing Himalayan stacks of journal entries. For example, a tool like Alteryx can help you automate such repetitive tasks, improving data processing across the board that, ultimately, provides deeper insights into your financial information. With Alteryx, you can identify patterns, anomalies, and trends in operational data like journal entries, once again lending far more nuanced insights into your financial health and performance to inform critical business decisions.
Taking it a step further, data visualization tools like Power Bi can be another potential game-changing technology for your month-end financial close, and not just for journal entry analysis. This business intelligence platform lets you visualize and interact with your data in real time through intuitive dashboards and reports. Thus, thanks to its user-friendly interface and powerful analytical capabilities, you can quickly identify bottlenecks, track KPIs, and monitor progress toward your closing day target.
5. Schedule Pre-Closing and Post-Closing Calls
The month-end close doesn't exist in a vacuum. It's a complex business process that improves through iterations and time, but only if you establish expectations going in and review your progress coming out. Therefore, effective communication is absolutely critical to streamlining your close process and improving the next month and every accounting period thereafter.
Upfront, schedule pre-closing calls to set clear expectations with your team and stakeholders about the target closing day and any tasks required to achieve it. During these calls, review your progress and address any issues or challenges that have or may arise.
On the back end, post-closing calls let you evaluate the effectiveness of your strategies, review your estimates, and gather feedback for further improvements. These calls provide critical opportunities for collaboration, alignment, and the continuous enhancement of your closing process.
People, Processes, and Technology Drive a Faster Close
The five steps we just discussed can be instrumental in streamlining your month-end close process, especially when coupled with our handy month-end close checklist of closing headliners – prepaid expenses, inventory count, fixed assets, accrued expenses, credit card statements, etc. However, there are plenty of other ways to make additional improvements, particularly on the technology front.
To state the obvious, this digital world relies on efficient data and systems to make operations go 'round. But if you can't keep up with such a fast pace, it's going to show in your month-end close. And not in a good way.
But thanks to tools like Alteryx and PowerBI – amongst many others – you can identify, collect, analyze, and report timely, relevant data throughout the close process. Collectively, these solutions act as rocket fuel for your closing, driving speed and accuracy while significantly reducing – often eliminating – time spent on manual data entry and approval.
Honing in on a single use case, automating the entire process of generating and posting recurring entries will minimize manual errors and discrepancies, which, just as importantly, reduces the administrative burden on your accounting team. To repeat what's become a common theme today, the right technologies allow an accounting department to focus on higher-value tasks in areas where their expertise can truly shine.
A Final Word from Embark
What we've discussed here is probably a significant change to your monthly closing procedures. In the end, rather than reacting to the close cycle, you're proactively planning for it, executing it promptly, and effectively managing exceptions rather than just surviving the monthly closing process.
Again, the more you streamline your month-end process, the less stress you place on your team at the end of the month. Ultimately, instead of a massive hurdle to leap over in the larger record-to-report process, the close becomes a conduit to bigger and better things. And by bigger and better, we mean more forward-looking, predictive, and insightful, three traits that will put a bounce in any business owner or decision-maker's step.
Granted, what we've covered today looks magnificent on paper, but your organization doesn't operate on a sheet of 8.5x14. The point is, establishing estimates and materiality thresholds isn't necessarily a walk in the park. The same goes for a thorough analysis of journal entries or just implementing the right tools for the job. Thankfully, you're not alone when optimizing such an intricate and fundamental process.
We literally wrote the book – or blog, in this case – on the five-step close optimization process. So, whether you need a bit more guidance or just a team of specialists to take the reins, Embark is ready to lead you to the record-to-report promised land. It's what we do.