Optimizing the Financial Close: How Midmarket Firms Can Find More Timely and Actionable Data

By Daniel Wheadon, Kyle Pochini and Sean Coffey

In today’s uncertain market, the financial close process is often a missed opportunity for many businesses because it is viewed as a low value-add, recurring requirement. However, the financial close process shouldn’t be viewed as a burden but as a potential lever for success.

After six years of market volatility, profitability, cash flow and risk have been at the forefront of boardroom discussion. As a result, the influence of CFOs has increased and the pressure to improve financial planning and analytical capabilities has been heightened. To remain competitive, CFOs should reduce the time it takes to complete the monthly, quarterly and year-end close process. Completing the close process enables management to make informed decisions proactively instead of reactively.

Challenges to middle-market finance organizations

Middle-market companies often experience tighter budgets, less urgency due to fewer external regulations and less formal financial processes, leading to diminished accountability during the overall close process. Furthermore, middle-market companies often invest significant resources into enterprise resource planning (ERP) systems to process transactions, yet rely on Microsoft Excel to manage the process that makes ERP data meaningful.

Challenges to middle-market financial close processes

As a result of many operational challenges faced by middle-market organizations, the financial close process can be significantly impacted negatively. One of these challenges is the presence of multiple ERP systems which often slows the flow of data required to close. Adjustments are then required to finalize the process, many of which require manual intervention occurring outside of companies’ core systems.

Another challenge for middle market organizations emerges when non-close, lower value-add accounting and operational activity is performed during the close cycle. This scenario often stems from corporate ledger closing requirements that have not been formally defined. Furthermore, companies are not always proactive in performing enough prework prior to period end. Finally, middle-market companies often overlook tracking and reporting on close process performance to identify bottlenecks and recurring issue and allow for continuous improvement of the financial close process.

Solutions to improving the financial close

Companies can implement several strategies to introduce improvements with a focus on people, processes and technology.

People

The first step toward optimization is to create a centralized ownership position and define close key performance indicators. Is the company’s goal to close faster, or to improve on accuracy, or both? Finance leaders must find a way to effectively balance the two.

Companies must also enforce internal deadlines, and performance should be tracked and reported on. After tracking and publicly publishing on-time performance by tasks, it is imperative to report those metrics to executives. This creates urgency and establishes accountability for functional departments and individuals.

Close processes should also limit finance’s ownership of non-finance activities. Finance departments often become a catch-all for all types of reporting, financial and operational, throughout the organization. While it is natural for finance teams to assume the final reviewer role, finance should not be tasked with preparing operational reports and metrics.

Process

Companies must define and publish a close calendar and carefully define policies, procedures and a communication plan. Start by outlining key policies and standards. For example, establish standards for accepting and justifying late entries. The ability to track and categorize late entries is critical, so they can eventually be reduced through root cause analysis. The materiality threshold for process changes and accepting late entries must also be detailed; consider the impact on net income when determining the limit.

In addition, define the day in the close process where journal entries are considered late. Communicating the specific date improves compliance, potentially reducing audit fees.

When evaluating the close processes, concentrate on rationalizing reporting requirements. Specifically, companies should consider the following approaches to report rationalization:

- Establish a formal governance committee to regularly evaluate report inventory: Over time, one-off requests can become regular reporting requirements. Establishing a governance committee will help align finance’s reporting inventory with the organization’s needs.

- Limit the frequency of specific reports: Evaluate where reports can be produced on a quarterly versus monthly basis. Consider reducing the frequency of comparative financial reports (e.g. versus budget, versus prior year) if they are not valuable due to inconsistencies in the organization’s business cycle.

Additionally, lower value-add reports can be shifted to post-close to focus more attention on key processes. In order to collect information about each report, assign an owner and identify the proper approvers to enact change.

Any bottlenecks in processes and deadlines must be identified and redesigned. Individuals’ and functional departments’ ability to meet on-time performance must be monitored, providing insights into delays in processes. Key post-mortem opportunities include:

- Perform a root cause analysis as to why specific subprocesses were late

- Clarify roles and responsibilities

- Clearly communicate between various finance functions, particularly during handoffs

- Identify producer and reviewer roles for key journal entries and reports

Technology

New technology tools can help improve the close process. For example, SharePoint, a workflow tool many organizations use, can centralize companies’ close calendars and key close documents in one location. It improves visibility into close information and has the potential to configure workflow processes to track close task approval and status changes.

Additionally, corporate performance management systems deliver more timely and accurate information to enhance decision-making. The solution also allows for rapid consolidation of information and more powerful analytics capabilities.

The Authors

Daniel J. Wheadon, CPA – Partner, Consulting Services

Dan is a partner in McGladrey’s management consulting practice. He has over 15 years of experience in business process design, planning and reporting process design, back office integration and software selection and implementation.

Kyle Pochini – Supervisor, Technology and Management Consulting

Kyle is a supervisor in McGladrey’s consulting practice where he brings experience in finance, accounting, technology, and sales. He has experience helping firms of varied industries and sizes with business process design, financial close optimization, business process documentation, software selection, and requirements definition.

Sean Coffey – Associate, Management Consulting

Sean is an associate in McGladrey’s Management Consulting Practice. He brings experience in financial and IT services and a focus on fostering professional relationships. Sean has had exposure to various industries including construction, industrial manufacturing/distribution, and non-for-profit organizations.