Maria L. Murphy

Tips for a faster, better month-end close

Speed and accuracy during the month-end close process are necessities in business today. Here are questions to ask and tips to follow.

May 7, 2015
by Maria L. Murphy, CPA

Speed and accuracy are a constant challenge for those involved in the month-end close process. Many organizations are seeking information at an accelerated pace. But they also need to be able to trust the data they’re acting on.

In a recent survey by software provider Adra Match, just 28% of respondents said they trust the numbers reported in the month-end close. At the same time, 90% said they are under pressure to close faster. Meanwhile, just 39% said they are satisfied with the quality of the closing process.

Even among companies with a nearly fully automated close process, less than three-fourths of them are able to close their books in six or fewer business days, another survey by Adra Match showed.

In a real-time business environment, a quick close is a necessity. But the definition of a “quick close” varies, based on needs of the users of the financial information, the industry, the size of the company, and the number of reporting units. There are also different interpretations of when the books are really closed (hard vs. soft close, divisional vs. consolidated close). In considering whether the close cycle needs to be shorter, and by how much, questions to ask include:

  • Is anyone complaining about the length of the monthly close?
  • Who will benefit from a quicker close?
  • Can the close go faster without sacrificing accuracy?
  • Is there specific information that can be disseminated before the close is finalized?
  • Can nonfinancial data, such as human resources or production data, be used to close more quickly?

Frequently, the impetus to take time out of the close process comes from executives or users of financial information, such as internal stakeholders, analysts, regulators, and lenders, who want quicker results. To shorten the close time, it may be possible to request critical data during the month rather than at or after month-end and to analyze significant or trouble areas before the close starts. By shortening the close cycle, it is possible to make more time between the end of the current month-end close and the start of the next one, freeing up time for more analytics and investigation.

What are the hurdles to your close?

There are many areas in an organization that provide information needed to close the books each reporting period. Each can have process issues that can cause delays. Management’s philosophy about financial reporting and what information management wants to see to run the business directly affect the outputs and timing of the close. To identify current and potential hurdles to a more effective close, areas to evaluate include:

  • Internal departments in addition to finance and accounting, including operations, sales, human resources, and systems.
  • External sources of necessary data, including vendor invoices, bank information, and customer and supplier information.
  • Outdated processes and systems.
  • Resistance to change.
  • Staff tenure and training, and ability to accept and implement change.

The close can be delayed by areas outside finance’s direct control. Obstacles include having to wait for other departments to provide or enter data, invoices being miscoded or not sent to accounting, late billing or late vendor invoices, delayed approval signatures, and systems being down at month-end due to traffic or maintenance. On the IT side, potential hurdles to a timely close include inadequate systems and system constraints, including lack of general ledger interfaces, inadequate tools for querying and reconciling data within the system, and the need for manual journal entries due to lack of automation.

Checklists can help with communication and compliance, by identifying all the critical inputs and steps in the close process and areas causing delays and ensuring that all key steps are completed each period. Adobe PDF signatures can facilitate getting timely signatures and providing required audit evidence. Process mapping, narratives, and flowcharts, including step-by-step instructions for staff involved, are ways to improve internal controls over the close process. They also help ensure that all areas involved in the close know what is required and what the critical steps are to meet deadlines. Documentation should be updated at least annually, with sign-offs by those responsible.

Tips for shortening the close

Kathy Lockhart, CPA, CGMA, the vice president and controller for national restaurant chain Noodles & Company, has shortened the close cycle in various environments. This includes Noodles & Company, whose close process changed under her leadership from almost two weeks to several days. Here are Lockhart’s tips for shortening the month-end close:

  • Break the close process into pieces. By breaking it down into little pieces, it is more manageable, easier to get started, and easier to finish. One way to break up the close is to start at the end, with the final deliverables and due dates, and work backward. Another way to break the process into pieces is to look at the balance sheet line by line and identify ways to get each line item done faster.
  • Perform a risk analysis. Identify lower-risk areas of financial statements and processes that may not need to be perfect for each close. Back out of the details to establish a tolerance level that everyone can accept. An example is accruals that are good estimates based on forecasts that can be monitored and trued up in subsequent periods. Direct accounting staff to work with operations, such as sales and marketing, to have an ongoing conversation about what they have spent, what they are working on, and what they anticipate spending. Get operations to provide invoices during the month so accruals can be started in the two weeks after the close rather than waiting until after month-end.
  • Change mindsets from looking backward to looking forward. Accountants often deal with history in periods after it happens, rather than projecting where numbers will or should be. By changing the approach, working during the month with the finance team that knows the forecast, it is possible to do a better estimation process along the way. By working from good forecasts, amounts can be accrued for the difference between what has been spent and what had been estimated and then monitored and adjusted over time. Management can be reassured that the numbers would not have changed significantly from the estimated ones.
  • Evaluate close areas that can be done in different time periods. Some financial statement areas can be accounted for on a quarterly basis rather than a monthly basis to save time. Areas such as bad debt allowances can be looked at in detail in the second month of each quarter rather than the third month and then reviewed at a higher level at quarter-end. Also, required annual impairment analyses can use trailing 12-month data through the end of the third quarter and then be reevaluated at a higher level and updated as necessary in the fourth quarter.
  • Use technology. Simple applications, such as Excel, QuickBooks, Dropbox, and SharePoint, can be implemented quickly and result in more efficiency for accumulating and sharing data and for reporting. Implement technology outside of the company. Reach out to vendors, a few at a time, to request they send invoices electronically rather than on paper. This results in better data for accruals, facilitates paying invoices electronically, saves time and money (for the company and vendors), and permits accounting resources to be redeployed. Also, contact people in your network to find out what works for them.
  • Communicate. Get the people involved in shortening the close to “own it” by suggesting changes and believing they can make a difference. Hold group staff meetings to identify areas that can change now, where training is needed, where money needs to be spent, and where change is dependent on other departments. Have monthly postmortem discussions to identify processes or persons that caused closing issues for follow-up. Outside of finance, talk with the operating areas that generate revenue and find out what financial information is important to them and would help them achieve better performance. Engage them in close-process improvements by sharing with them the direct benefits of a faster close: The faster they can see the results of how they performed last period, the better they can do next period.

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Maria L. Murphy, CPA, is a freelance writer based in Wilmington, N.C. She has worked in public accounting as an audit and technical review partner and as a national office director, in private industry in accounting and financial reporting roles, and most recently as editor-in-chief of The CPA Journal.