Why Accelerated Financial Closing - a Perspective
What is the objective of financial close and reporting? - The very objective of financial closing and reporting the results to external and internal stakeholders is to get insights of the company's performance during a period and bring that to the knowledge of Investors, regulators, management and other stakeholders in the organization.
If this is the objective of financial closing and reporting, why there is a need to accelerate closing process? Can this bring in tangible benefits to the organization?
Financial closing and reporting is not a new jargon and it is happening from times of immemorial. Now-a-days accelerating the closing and reporting process is gaining more importance. What could be the benefits by achieving faster close?
Major benefits for an organization due to accelerated close will be:
Sooner the close, sooner the organization can act:
If the financial information is available sooner, the management can act quickly based on the information available to bring in changes to its objectives, targets, short term and long term plans. Unless the 'adequate and complete' information is available on time, the decision making of the management will get delayed which would considerably affect the performance and growth of any organization. Companies would be at a competitive disadvantage if the management does not receive complete, accurate, and timely reporting data to act upon
Consider company A & B (in similar industry) having a regular close and reporting cycle of 30 & 8 working days respectively. Both the companies are producing a particular product line which is getting slowly outdated and hence the revenue from that product line is getting lower and lower. Since, company B is closing and reporting faster, it spotted the revenue dip in that particular line of product and observed that the product is going obsolete and hence reduced the demand forecast and consequently the production.
Company A, as a result of the time it takes to close and report, never adjusted its forecast for the product and hence resulted in excess production resulting in loss from that line of product.
This is a very basic example of how the timely reporting of financials (whether internal or external) would assist management to get more time on analysis which can drive better informed decisions"
Please note - Top Performers provides results to senior management much faster, in 5 working days (i.e. 3 days to close and 2 days to report) (Source - Hackett)
More time to analyze the data than time spent on data collection and preparation of reports:
In majority of the companies / organization, the finance resources spent their significant time in data collection, collation and consolidation and hence no time is available for disposal for those resources to do any meaningful analysis of the financial data reported. If the period closing timelines are shorter, it gives more time for the management to analyze the data and hence more insights will be available to the factors driving the numbers reported.
Please note - The payback from the systems integration is evident in the high degree of automation: Top Performers automate 90% of journal entries (Source - Hackett)
Finance resources can be redeployed:
If the finance resources can do a faster close, the same resources can be re-deployed for other value added activities performed by separate teams of the organization. By closing and reporting faster, financial personnel can also partner with operations in making strategic decisions including mergers, acquisitions, process re-engineering etc. This will also ensure that the organization will minimize its size and cost of overall finance function.
Please note: Account-to-Report process cost for Top Performers is 52% lower than for the Peer Group, reflecting the Top Performer Group's more efficient and effective leverage of sustainable Best Practices (Source - Hackett)
Eliminates inefficiencies in downstream processes:
When an organization is constantly reducing its closing and reporting cycle, it will start identifying the inefficiencies in all the downstream processes such as Procure to pay, Order to cash etc. This will ensure that all the downstream processes become efficient and effective to support faster closing and reporting.
Please note - "Top performer has 8.5 FTEs per Billion dollar revenue in Account to Report function"
Improve stakeholder's confidence:
Faster reporting will also instill, improve and re-enforce shareholder's confidence in the organization. Closing quickly and efficiently gives the market more comfort with the reported numbers. Closing faster reduces uncertainty in the market, which will be appreciated and supported by the investors.
It has to be noted that Infosys is one of very few companies who reports their results to the market faster than their peers in the industry
Complex reporting requirements:
Increased complexities in reporting and more and more disclosure requirement for the purpose of transparency makes it imperative for the companies to have a system which could be as dynamic as the changes in reporting requirements and assists in faster and timely period closing & reporting.
Reader should also read this in conjunction with the Thought leadership article on Transformation in the Finance Department, where it indicates the maturity levels of Record to Report processes, which will also drive accelerated closing and reporting.
Inviting comments from the readers of this blog..........
Accelerated closing and reporting - How to get there? - Coming soon............