Accounting Close Optimization: 5 Keys to an Effective Process
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This document discusses optimizing the accounting close and financial reporting process. It recommends taking a holistic approach that considers people, processes, and systems together. The methodology discussed is lean six sigma, which focuses on end users, improving processes incrementally using a team-based, fact-driven approach. Best practices include viewing the close as a supply chain and setting goals for both efficiency and effectiveness. An optimized technology solution should provide workflow, visibility into status and metrics, and bridge multiple systems used in the close. Overall success requires senior management commitment, a strategic plan, focused resources, and continuous improvement.
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Accounting Close Optimization: 5 Keys to an Effective Process
- 1. Ask, Share, Learn – Within the Largest Community of Corporate Finance Professionals A Holistic Approach to Accounting Close and Reporting Effectiveness: It’s So Much More Than Technology
- 2. Welcome to Proformative Proformative is the largest and fastest growing online resource for senior level corporate finance, treasury, and accounting professionals. A resource where corporate finance and related professionals excel in their careers through: • Uniquely valuable, online Peer Network • Direct subject-matter-expert advice • Valuable Features and Resources All of it completely noise-free Check it out at www.proformative.com
- 3. Learning Objectives After participating in this event you will be able to understand: • Understand the 5 key challenges to improving your company’s accounting close and financial reporting. • Define an Optimized Close for your company. • Understand how to better align process and technology for your company’s financial close and reporting environment.
- 4. Ask, Share, Learn – Within the Largest Community of Corporate Finance Professionals A Holistic Approach to Accounting Close and Reporting Effectiveness: It’s So Much More Than Technology
- 5. A Holistic Approach to Accounting Close and Reporting Effectiveness Agenda / Goals ◦ Introduce the Financial Effectiveness Framework ◦ Dynamics of Accounting Close and Financial Reporting. Discussing the Whys – Overview ◦ Complete Solution Approach to Optimization Methodology Best Practices Technology Focused Resources and Strategies
- 6. Overview Accounting Close and Financial Reporting Automation Question How long has Accounting Close and Financial Reporting been a challenge? a) b) c) d) e) f) Since ERP was introduced Longer than I have been in accounting Forever Since Sarbanes-Oxley All of the above None of the above Why does this challenge persist?
- 7. Business Environment Challenges Existing Environment Challenges • • • • • • Difficult economic & business risk environment Changing Regulations & SOX/MAR compliance Auditors under PCAOB pressure Boards / Audit Committee increased accountability Fraud - Few significant bad apples in the news Whistleblower and FCPA concerns Future Environment Challenges • Enormous technology driven paradigm changes • Increasing global competition
- 8. What is the Speed of Changes? How Fast is the Business Environment Changing? 1900 10mph Baseline 1933 30 mph +20 mph 1966 65 mph +35 mph 2000 120 mph +55 mph 2033 ?? mph +?? mph What does the future bring? Faster Same Slower
- 9. A Finance Seat at the Table ―Today’s CFOs and finance organizations need to execute on a much broader range of responsibilities than existed in their traditional role as corporate accountant – including those related to finance function effectiveness, information quality and consistency, finance talent management, internal controls and corporate governance, business performance management and others.‖ ―Today, the CFO must be increasingly responsible not just for releasing information about the business to external users of information, but also for delivering timely, practical information about the underlying drivers of business unit performance to internal audiences. What’s more, the CFO’s team must deliver risk analyses and performance analytics to anticipate some of the challenges the business could face. A common obstacle is that the finance team sets the wrong priorities.‖
- 10. A Finance Seat at the Table “In many organizations, the CFO is seen as the number cruncher, sitting in an office applying procedure and saying „no‟ to budget requests…The challenge for the CFO and for their company is to create an environment where the Finance team and CFO are encouraged to expand their responsibilities and take an active interest in every area of the business.” -Steve O‟Neill, CFO EMEA North, EMC Executives Report From The Road
- 11. A Finance Seat at the Table ―Today, organizations are squeezing their finance and accounting functions like never before. Expectations are at an all-time high, yet resources are increasingly scarce. They must maintain controls and compliance and keep up with complex accounting rules—all this while meeting business demands for faster turnaround and lower costs‖ ―The finance function must undergo a fundamental change and realignment in order to transform it from the transactional operational management role of the past, into a center of cost-efficient and effective strategic valueadd for the future.‖ Its not just us saying this…
- 12. Expectation Gap Automated Number Crunchers Bean Counters Historic focused Always too busy Internal Controls & Internal Consultants Value added Business Advisors Expanding Role “Seat at the Table” Transition And Requires Transformation Past & Future
- 13. Financial Effectiveness Framework People X Processes X Systems Total Effectiveness Qualitative Example Effective Integrated Systems Initial Processes Silo‟s = Low Effectiveness Quantitative Example 0.4 X 0.4 X 2.0 = 0.3
- 14. Financial Effectiveness Framework People Processes X Systems X Total Effectiveness Qualitative Example Highly Synergized Teams Initial Processes Bottleneck 2.0 Effective Integrated Systems = Low Effectiveness Quantitative Example X 0.4 X 2.0 = 1.6
- 15. Financial Effectiveness Framework People X X X 1.2 Systems Total Effectiveness Higher Effectiveness Automated Systems Managed Processes Synergized Teams 1.6 Processes X 1.6 = 3.1 The Balanced approach result in Better Effectiveness
- 16. Process Improvement in Finance Special Focus: CPM and Reporting
- 17. Most Important Goal for a Major Process Improvement Initiative 11.03% 0.69% Both efficiency and effectiveness Efficiency (improve finance cost/productivity profile, accelerate cycle speed, reduce error rates) 15.86% Effectiveness (deliver more effective analytical support to the business) Don’t know 72.41% N = 145 ©2012 APQC. ALL RIGHTS RESERVED. 17
- 18. Most Popular Targets for Finance Process Improvement 78% Plan, budget, forecast/analyze, re-plan 72% Close/consolidate/report 70% General accounting (any sub-process) 50% Accounts payable transaction management 46% Working capital management ©2012 APQC. ALL RIGHTS RESERVED. 18
- 19. Cycle Time in Days Between Completion of Quarterly Consolidated Financial Statements and the Release of Earnings Cycle Time in Days between Completion of Quarterly Consolidated Financial Statements and the Release of Earnings 35.0 30.0 30.0 23.5 25.0 20.0 20.6 20.0 15.0 15.0 15.0 10.0 10.0 12.0 6.0 5.0 0.0 Top Performers Median SSC N = 25 HQ N = 64 Figure 12 ©2012 APQC. ALL RIGHTS RESERVED. 19 Bottom Performers BU N = 107
- 20. Total Cost of Financial Reporting per $1,000 in Revenue $0.60 $0.57 $0.50 $0.40 $0.30 $0.23 $0.20 $0.11 $0.10 $0.00 Top Performers Median All Industries, Revenue greater than $1 Billion ©2012 APQC. ALL RIGHTS RESERVED. 20 Bottom Performers N = 148
- 21. The Faster Close Costs Less $1.20 $1.06 Top Quartile $1.00 $0.80 Median Bottom Quartile $0.67 $0.60 $0.42 $0.33 $0.40 $0.20 $0.22 $0.10 $0.00 The Fastest: Quarterly Cycle Time N = 49 Source: APQC ©2012 APQC. ALL RIGHTS RESERVED. 21 The Slowest: Quarterly Cycle Time N = 42
- 22. Overview Accounting Close & Financial Reporting Definition Question What is the Accounting Close and Financial Reporting? a) b) c) d) e) f) An event A process An important financial process A rite of passage A fun time All of the above None of the above Why does it seem as such a unique process?
- 23. Overview Accounting Close & Financial Reporting Uniqueness Questions • Why is the close different from other processes? – Changes frequently – Catcher of the miscellaneous – Generally has not been an actively managed or highly visible process – 100% ONLY based Grading Scale – “Last mile” of the Financial close process • On Day 3 of a 6-day close, if the CFO asks, “Where are we in the close?” – What do you say? Why?
- 24. Overview Accounting Close & Financial Reporting Manageability Questions How is the Close process managed? Should the accounting close rely on Excel as a process management tool? Why? What technologies are used to manage other complex financial processes? Why?
- 25. Sophistication Progress over time Analysis Financial Systems Process Control Systems Feature Functionality ERP WHY ? Spreadsheets/ Simple systems X Checklist Excel Paper / Manual G/L A/R Rev Payroll Time Accounting Close Financial Reporting
- 26. Overview Accounting Close and Financial Reporting Timing Questions Q.) Do you have the time to improve the close? A.) You do not have the time NOT to improve the close. Improving saves time. Q.) When should you start? A.) Start it now, before its mandated by someone else! Goal of over 50% of audit committees
- 27. Overview Accounting Close and Financial Reporting Visualize the Close • Q. Why is the Close often referred to as the “Last Mile”? • Q. How and Why is the Close so unique? • A. Pictorial analysis of the problem.
- 30. Awaiting Prep Prep Review Addl Review Posting Closed Total Aug 0 0 0 0 N/A 481 481 Company C Sept Oct 0 0 0 0 0 0 0 0 N/A N/A 857 524 857 524 Nov 0 0 0 0 N/A 514 514 Dec 9 3 22 81 N/A 684 799
- 31. Overview: Accounting Close and Financial Reporting IOMA survey “Improving the Financial Close- 2010 ” CFOs & Managers asked to describe top priorities: 5. Assign responsibility for resolving discrepancies 4. Establish clear accountability for closing tasks in a closing schedule and enforce deadlines 3. Establish clear and regular close communication 2. Develop and monitor close performance metrics 1. Continuously improve closing processes
- 32. Establish clear accountability for closing tasks in a closing schedule and enforce deadlines Survey Needs Analysis of Complete Solution Approach Develop and monitor close performance metrics Focused Resources and Strategy Assign responsibility for resolving discrepancies Establish clear & regular close communication Best Practices Technology Methodology Continuously improve* closing processes
- 33. Methodology Lean Six-Sigma Four Basic Principles of Lean Six Sigma 1. End-User Focused 2. Improve Process 3. Teamwork Focused 4. Facts Based Reference: What Is Lean Six Sigma by Mike George, Dave Rowlands, and Bill Kastle
- 34. Methodology Lean Six-Sigma 1) End-User Focused Who are customers of the financial close process? What do they value? What do YOU value? QUALITY USER ◦ Accuracy / Completeness ◦ Visibility / Manageability ◦ Compliance / No surprises PREPARER Easier Better Less Stressful Optimized process yields “good” Speed
- 35. Methodology Lean Six-Sigma 2) Improve Process If I ask, “Why do we do things this way during the close?” “That’s the way we have always done it” which is based on historical constraints, not on efficiency. Make incremental process improvements, measure effectiveness [get data], continue iterations towards improvement objective. Continually improve by repeating optimization process to achieve increased sigma levels of quality
- 36. May 2012 September 2012 December 2012 Day 14 No Post Close Day 10 & Post Close Day 10 & Post Close Moving To Day 8 Close
- 37. Methodology Lean Six-Sigma 3) Teamwork Focused • Teamwork evolution: Individual Contributor Groups Teams Optimized Teams • Requirements for effective teamwork – See: – Decide: – Do: • Visibility to identify need Communication to process, determine & disseminate Manageability for effective execution Use teamwork to set goals, assign accountability, handle conflict, hold effective meetings, enable continuous learning, collaborate with other groups
- 38. Methodology Lean Six-Sigma 4) Facts Based Find “Relevant Measures” to set goals, measure progress and track effect of improvements Visible, useful, quantifications of discrete actionable results What is measured today? No measure will be perfect No one measure is a magic bullet The story is told by many measures considered together Customized, so must be based on your measures on your unique systems, processes, and people
- 41. Complete Solution Approach Focused Resources and Strategy Best Practices Technology Methodology
- 42. Best Practice: Fast Close to the MAX – Reporting Supply Chain View Gary Simon describes the “Reporting Supply Chain” as “all the events around the entire group reporting process especially the extremities of the process.” including “Fast Close to the MAX” by Gary Simon, 2007
- 43. Scenario 1: Find: Day 2 Effect: Minimal Error : Day 2 Analysis 2: the Close Find: Day 8 of Scenario Effect: Larger Day 2/3 review Number of Tasks Tasks Review Analytic Best Review Review ?? -3 0 ME 3 6 Close day 9
- 44. Best Practice: Customer Facing What are the optimization goals for efficiency and effectiveness? = Speed No1 Accuracy + Predictability + Manageability + Visibility + Accountability + Compliance + Increased analysis & Reduced cost Can you do them all? Yes! You MUST DO THEM ALL! Fast close is not necessarily efficient, but an efficient close is faster!
- 45. Current Progress Goal 1 Optimized Close Process Optimization The Close Process Benefits Initial Repeatable Defined Managed TAX Optimized Optimization SOX Optimization Optimization Audit Related Financial Challenges Goal 2 Leverage Learning to Similar Challenge s Benefits Initial Repeatable Defined Managed Other Challenge 1 Other Challenge 2 Optimized Optimization Optimization Any Other Challenges Goal 3 Optimize Any Challenge Goal 4 Silicon Valley Accountants © 2013
- 46. Complete Solution Approach Focused Resources and Strategy Best Practices Technology Methodology
- 47. Technology 1) What Solution Do We Need? Continuous Improvement Enablers • Workflow and collaboration • Document management • Automated metrics measurement • Visibility • Compliance evidence • Bridging multiple systems • Easy to deploy during Close period • Configurable to your Close process
- 48. Electronic Working Papers Alerts Due date Security Desktop procedures File Share Workflow Accounting notes Manager notes Linked Activities Prior period binders
- 49. Real-Time Status by Due Date
- 50. By User
- 51. By Activity Type
- 52. The Finish Line - All Done!
- 54. Publish Auditor PBC Schedules Electronic Signatures Electronic Support
- 55. Complete Close Optimization Solution Focused Resources and Strategy Best Practices Technology Methodology
- 56. Silicon Valley Accountants White Paper 2011 Preparing for an optimization project • Senior management commits to find a comprehensive solution with continuous improvement • Strategic plan and project management: consider deadlines, project approach (pilot, division, enterprise, etc.) • Prioritize change management • Deploy focused resources • Identify and adapt current and best practices • Evaluate existing technology • Adopt a culture of continuous improvement Reference: “Optimizing Financial Reporting in an increasingly Dynamic World” by Silicon Valley Accountants
- 57. Focused Strategy and Resources Planning Discovery Technology Selection Workflow and Measurement Training Configuration and Testing Month One Close Optimization Lessons Learned .
- 58. Focused Strategy and Resources Planning Timing (Schedule) Between Closes Incremental Continual Monthly Improvement Steps Goal: Do not disrupt the ongoing close People Unless internal resources available, outside help needed Goal- Positive implementation Manage expectations No initial reengineering Never slow the close
- 59. Sample Pilot Program Timeline Implementation/CRP Training Go-live Month 1 • August (3 days X 2 weeks) • Detailed discovery, training and conference room pilot • September (75% support during close period) • Assistance during close activities • October • Preparation & close activity; (75% support during close) Month 2 optimization • November • Analyze data, lessons learned, training (50% X 3 days) Month 3 optimization • December • Analyze data, process improvement, optimization ( 2 days) Month 4 optimization • January • Process improvement and optimization (25% X 2 days)
- 60. Preliminary Project Plan (Actual)
- 61. Focused Strategy and Resources Planning Discovery Technology Selection Workflow and Measurement Training Configuration and Testing Month One Close Optimization Lessons Learned .
- 62. Focused Strategy and Resources Lessons Learned Planning determines success • Over-plan – expect delay, distractions, and diversions • Build an adaptable plan • Never slow the close! Plan for much more than promised and extra training
- 63. Focused Strategy and Resources Lessons Learned Scope selection is key • Smaller faster wins = build momentum • Don’t start with hardest • Link the benefits Scope will creep, plan on it
- 64. Focused Strategy and Resources Lessons Learned Change management • Under-promise & Over-communicate • Nothing is easy This is a significant change to an established critical practice
- 65. Focused Strategy and Resources Lessons Learned Continuous improvement Adopt a mentality of continuous improvement Tesco Property actively and explicitly pursues improvements in its close. “We have monthly management meetings where we think about how we can do it better. Not just to get to a four-day close, but…how to make our information better.” “Accelerating the Financial Close” – CFO Research Services
- 66. Latest Article FEI Article September 2013 Download your copy today www.SVACPA.com
- 67. THANK YOU 67 © 2013 Proformative. Proprietary and confidential
- 68. Please join us at www.proformative.com to ask any additional questions you may have and to continue this conversation with your peers and the experts you heard from today. If you have questions about CPE Credit, please send an email to cpe@proformative.com
Editor's Notes
- I – surrounding the challenges of optimizing the Financial closeII-required to effectively optimize the close.III – Q & A - You can submit questions as we go along and we will address them after each section
- It really is a process performed by a team of people to meet a deadline – and then finish things off and complete documentation after the deadline.In what ways is it unique?
- First, consider the cost of producing and filing SEC Form 10-Q. The fastest companies—those that prepare and file their quarterly statements in 10 or fewer days—reside in the top quartile and spend relatively less money to perform financial reporting per $1,000 in revenue (Figure 4). Obviously, the slowest organizations—those that take more than 25 days to complete the quartertly cycle and comprise the bottom quartile—are at a disadvantage.A 10-Q is a comprehensive report of a company's performance that must be submitted quarterly by all public companies to the Securities and Exchange Commission. Its annual counterpart is SEC Form 10-K.The top quartile is the performance level above which 25% of all responses occur. The bottom quartile is the performance level above which 75% of all responses occur. The median is the middle value in a set of values that are arranged in ascending or descending order.First, consider the cost of producing and filing SEC Form 10-Q. The fastest companies—those that prepare and file their quarterly statements in 10 or fewer days—reside in the top quartile and spend relatively less money to perform financial reporting per $1,000 in revenue (Figure 4). Obviously, the slowest organizations—those that take more than 25 days to complete the quartertly cycle and comprise the bottom quartile—are at a disadvantage.A 10-Q is a comprehensive report of a company's performance that must be submitted quarterly by all public companies to the Securities and Exchange Commission. Its annual counterpart is SEC Form 10-K.The top quartile is the performance level above which 25% of all responses occur. The bottom quartile is the performance level above which 75% of all responses occur. The median is the middle value in a set of values that are arranged in ascending or descending order.
- It really is a process performed by a team of people to meet a deadline – and then finish things off and complete documentation after the deadline.In what ways is it unique?
- Changes frequently - So many moving parts, inputs to estimates, late transactions, varying adjustmentsCatcher of miscellaneous - Data comes from all over the company and geographic locations in so many forms - A diner has a better process management system than accounting departments have over the close – G/L accountants are the “short-order cooks” of the company – rapidly pulling together all the pieces to serve up a full menu of items to a eager, demanding lunch crowd.Not actively managed – Multiple inputs with many dependencies that usually is not controlled by just one person. Last mile – All the data comes together for final analysis, estimates, adjustments, application of accounting standards.Not a highly visible process, but the result is.Day 3 – “We’re doing okay, everybody’s busy, looks like we are on schedule.” But do you really know?
- Most companies are using spreadsheets, or Sharepoint, or something put together in Access, to manage the most complex accounting process.What technology do they use?What about timing of getting close processes improved? Next slide
- Jeff’s response to timing. Not January… not February… not March… not April (Q1)…late May and late June okay maybe…not July (Q2)… maybe late August or middle of September… not October (Q3), not November (budgeting)…not December – get ready for year end and budgeting.You do not have the time to NOT address this!
- Last Mile: Coined in communications industry; refers to the last mile of line going to and into the house – when laying cable TV and phone lines can put down the infrastructure, but the most complex and unique segments are those going into and throughout the house, takes the longest to get this done.Close is the “Last Mile” of the reporting process, because every company’s close and process are also unique. No one size fits all here. Let’s look at why.
- Gabe Z. Indeed everything should be made as simple as possible, iPod simple, but the close process is typically not simple, it has to manage an entire accounting environment!
- Gabe Z. Indeed everything should be made as simple as possible, iPod simple, but the close process is typically not simple, it has to manage an entire accounting environment!
- SuccessFactors
- What are accounting executives and managers most concerned about in this complex accounting environment? Here are their top five priorities for improving the financial close.5. Who owns detecting and correcting mistakes?4. Are all closing activities defined and assigned?3. How do we talk, making sure that we collaborate, team together to address common issues, and coordinate all the related activities?How do we measure what we do – how do we get the data? Not just work from the gut or feelings.1. Are we able to continuously improve closing processes? How can we?
- Four principles we can apply to optimizing the close.
- What do you believe the greatest value of an optimized close is. Accuracy and completeness and speed?Is being able to see where the close is at any given time period to be able to actively manage it also important?What’s the difference between good speed and speed? No errors, no surprises, getting it right. That requires continual optimization.
- How can we not just improve but optimize the process?Making small, effective changes, then measuring and monitoring helps us move the process in the right, positive direction.Build a mindset and culture of continually improving first moves to an optimized state and then keeps it optimized over time.
- Lean Six Sigma relies on moving along the teamwork continuum scale. When individuals in groups progress to not just teams, but optimized teams, then improvement can increase with the collaborative culture.When the team can see what issues exist and where improvement can happen, and then can collaborate to reach a better direction, then they can work together to ensure positive change occurs. The team can better actively manage the process while in progress.A number of benefits result from this focus, even extending to better collaboration with other related functions.
- What is the data that will give feedback on progress? For example, could include total completion time of a task (efficiency) or number of post-close adjustments (effectiveness).What tells the story and considers your unique environment? What measures will give meaningful insight, allow you to track progress, and illuminate potential improvements?
- Good performance overall, with the exception of several activities that were being done after the close (4/19+)
- Excellent performance to dateHow do we continue to load balance?
- Gary Simon talks about viewing the entire reporting cycle as the “Reporting Supply Chain.” From an improvement perspective it’s important to understand how activities at various stages can impact other close activities. Let’s look at some key practices to consider.
- Increase the confidence in the numbers and the process.Important to keep all in the mix. All are expected by your customers of the close.
- Our experience shows that here are the key enablers to getting to a highly efficient and effective continuous optimization process. Each of these brings gains.
- We are not questioning the use of Excel to help with analysis in the close process, but rather the use of Excel to manage the close process.
- We are not questioning the use of Excel to help with analysis in the close process, but rather the use of Excel to manage the close process.
- This is good typical project management – but with consideration of characteristics of the closeUnderstand and set expectations for management, explaining the constraints so appropriate time and resources are approved.Suggest a pilot program and phased roll-out in larger organizations. Get the model right and reduce stress on the accounting teams.
- Be nice if a company could pull experienced accountants off the team to be dedicated to do the implementation. But how many companies really have that many people in the close to do that? So timing and alignment with the accounting calendar is critical.We recommend a series of incremental improvement steps built upon an ongoing culture of continuous improvement.Who should be on the team?
- Have a plan. Plan for changes. Things will happen. You must have prime objectives: Never slow close, initially do what is done today, plan for unexpected
- T – Drawing
- This is important. Don’t under-estimate. Seek help if you need it.The whole nature of optimization is a constantly moving end target. Be flexible but focused.
- IOMA says Number 1Game changer to take this approach. Less stress, less risk, adaptable, target keeps changing.Works with time you have, fits you better.