Introduction

In recent years, there has been an increased focus on the close cycle. Besides serving as a measuring stick to benchmark the closing process against other organizations, it has also become a lightening rod for criticism as companies are forced to supply more information to internal and external stakeholders in a compressed timeframe. Much has been written about the concept of a virtual close whereby companies close their books and produce financial reports at any time during the month with little more than the push of a button. Motorola and Cisco have popularized the virtual close and the technology sector, industry analysts, and consultants have hyped its benefits. The general concept of a virtual close may be attractive to CFOs; however, achieving and sustaining it carries a significant price tag and can be extremely time consuming to implement with little assurance of a return. Improving the record to report process puts less emphasis on the overall length of the closing cycle. Instead, the focus is on the quality of data, incremental process improvements and the utilization of the existing technical architecture.

Challenges With the Close Cycle

Organizations experiencing issues with their close cycle, and those that believe their close cycle is inefficient, exhibit a wide range of symptoms (see sidebar). Challenges to the close cycle are caused by a number of situations: decentralized/autonomously run operations, frequent organizational restructuring, merger and acquisition activity, limited use of enabling technology, and lack of continuous improvement or process redesign initiatives.

Other issues are related to technical integration and manifest themselves in the form of manual interfaces and multiple platforms. While poor integration is a common problem, the inefficiencies associated with the closing cycle are also embedded within business processes and the culture.

Understanding the Virtual Close

The virtual close, the ability to close the books (within four to eight hours) on any given day within a period, has attracted a great deal of attention. Although not widely achieved, the real benefit of closing within such a short period is redirecting highly skilled resources to value-added analysis to improve shareholder value. The trade-off lies in the cost to attain and sustain this level of operation.

A virtual close is enabled through end-to-end integration of application systems, typically a costly investment. Depending upon a company's starting point, the conversion to such a solution can be a major transformational change, impacting an organization's structure, business processes and systems. The existence of legacy systems, older and less flexible systems, adds to the complexity of the implementation.

Sustaining a virtual close requires constant monitoring and standardization of upstream business processes. Finance must maintain a pulse on the entire company in order to proactively address changes in operations. New business units and acquisitions must be assimilated quickly. Changes in the legal, tax, or management structure of an organization must be thought out by finance in advance.

Average vs. World Class

Many companies experience difficulties delivering accurate monthly financial information on a timely basis. Finance and accounting personnel are preoccupied with completing the tasks associated with the period-end close, including reporting and reconciliation activities. As a result, there is not enough time for more in-depth analysis or improving existing practices and procedures.

The average company takes approximately six days to close the books and six days to report, for a total of 12 days to complete the close process.1

Companies moving towards a world-class close can close the books in four to six days, which allows more time for analysis and forecasting.2 In an uncertain economy, managers need to make proactive decisions. In order to effectively manage the record to report process, organizations must have the ability to allocate resources quickly to allow them to take advantage of new opportunities. Having access to accurate information in a timely fashion is a major tenet of a world-class close.

New pressures are expected from an external reporting perspective as well. In February 2002, the SEC proposed a number of new disclosure rules that are intended to give investors more information about publicly traded companies on a more timely basis. These include the requirement to accelerate the filing of 10-Q quarterly financial statements from 45 days to 30 days after quarter end and 10-K annual reports from 90 days to 60 days after a fiscal year end.1 With investors putting pressure on companies to increase transparency, the quality and completeness of the information that is being provided has become a requirement, not an option.

Business Case for a World-Class Close

As CFOs continue to look for ways to reduce costs and improve the services to internal and external customers, the financial close has been targeted as a key opportunity for improvement.

According to a recent research report conducted by the META Group, "By the year 2006, leading organizations will have gained competitive advantage, with days trimmed from their closing process, by simplifying accounting processes, focusing on delivering key business metrics to management and deploying IT solutions to produce results in a more timely manner.(3)"

With top-line and bottom-line improvements serving as drivers, companies will not only need to shorten the closing cycle, but also deliver the right information to the right people at the right time. Thus, a strict focus solely on the time dimension of the closing process (e.g., the virtual close) ignores a number of important world-class close characteristics:

• Statutory and management data captured once at the source
• Minimal manual adjustments, corrections, reclasses, and reconciliations
• Clearly defined key performance indicators (KPIs)
• Structured, coordinated close schedule
• Global, common integrated systems
• Leveraged technology solutions (i.e., data warehouse reporting and Web-enabled distribution)
• Hard close on the quarter, soft close off quarter
• Clear and timely management review checkpoints

Benefits

The benefits of a world-class close include improving the accuracy and accessibility of information, reducing manual efforts, refocusing on value-added analysis, and strengthening financial reputation. Additional benefits can be achieved when other initiatives incorporate the overall world-class solution, such as shared services, ERP implementations, performance management, and data warehouse reporting.

Manually intensive activities, such as journal entries, intercompany billings, reconciliation, management reviews, and spreadsheet-based reporting can be addressed through a number of different initiatives (see sidebar).

Leverage and Extend ERP Implementations

While a large number of organizations have implemented an ERP system, many have not taken advantage of the full functionality these applications can offer. New modules like treasury and performance reporting are extending the reach of ERP into other areas of the business. Additionally, improved functionality and integration offers companies' the ability to streamline manually intensive processes and improve the quality of information that is delivered to key decision-makers.

• Optimizing ERP applications offers a number of low-risk, high-reward improvements to the close process:
• Validation of code block in subledgers to reduce amounts in suspense.
• Automated workflow to route entries for approval and to post to the appropriate personnel.
• Single data source and automated update of ledgers to reduce reconciliation effort.
• Auto posting capabilities that allow criteria to be set for journal sources, categories, and dollar thresholds.
• Formula-based accruals that ensure standards and policies are applied in a consistent fashion.
• Two-way, intercompany processing that alerts business units or departments to charges hitting their books.
• Flexible organizational hierarchies to support rapid consolidation of results as well as pro forma analysis.
• Drill down capability to allow users to access source information in subledgers.

Implement Process Improvement

Process improvements help organizations realize quick wins and immediately impact the closing process. Some of the opportunities are to:

• Establish and continuously monitor close metrics:

  - Assign accountability for metrics to process owners

  - Identify levers that impact the metrics

• Standardize processes and data definitions across business units which leads to improved decision-making:

  - Single chart of accounts

  - Journal entry and account standards

  - Cutoff dates for subledger entries

  - Single, global closing calendar

Validate reporting requirements to ensure strategic objectives are addressed:

- Critical reports

- Dimensional views

- Verification of source and use of each report

Develop an Integrated Technical Infastructure

While configuring an ERP to maximize value and improve the closing process offers some benefit, investment in technical infrastructure, best-of-breed products, and application integration offers a compelling value proposition.

• Web-based distribution of reports reduces paper costs and ensures the right people receive the right reports at the right time.
• Self-service applications are integrated with the financial systems reducing manual intervention:

- Procurement

- Travel and entertainment (T&E)

- Finance portals

• Standardized technical infrastructure reduces maintenance costs:

- Databases

- Networks

- Applications

• Best-of-breed consolidation engines and data warehouses provide easy access to consistent data.
• Electronic submission of data to external stakeholders (e.g., XBRL) improves commu-nication with customers and suppliers.

Utilizing Performance Management and Data Warehouse Reporting

The real value of a world-class close comes from getting information into the hands of key users so that they can manage business proactively. Performance reporting and business intelligence solutions offer flexible, robust reporting and analysis capabilities which increases the value of the data collected by back-end systems.

• Unification of all financial and operational information (actual, budget, forecasts, statistical).
• Advanced analytical capabilities to perform modeling and "what if" scenarios.
• Achieves a balance between historical and predictive information.
• Web-enabled solution supports a more collaborative organizational structure.
• Flexible tool that offers users the ability to perform multidimensional analysis, drill down capabilities, and exception based alerts to facilitate better decision-making.
• Actionable data that is modeled to meet organizations' reporting requirements.
• Extract, transform, and load tools that are built for specific source systems automate the data extraction and loading processes.

Conclusion

A world-class close strives to efficiently deliver an accurate and complete representation of a company's financial performance to key stakeholders on a timely basis. A world-class close is not synonymous with a virtual close. In fact, the concept of a virtual close may be too costly to achieve and sustain in the long run. A world-class close is characterized by highly efficient, standardized business supported by appropriately skilled resources and enabled by strategically integrated application systems.

The value proposition for achieving a world-class close includes reduced manual intervention, increased accuracy and timeliness of information, increased focus on value-added analysis, improved confidence by shareholders, and a new competitive advantage.

Depending upon an organization's starting point, achieving a world-class close may require a major change program. Defining the initiatives that will help an organization achieve its goals is the first step in making this vision a reality.

Endnotes

1 Business Finance and Hyperion Survey, 2002.

2 Ibid.

3 John Van Decker, META Group, 2002.