This is a guest post from Ventana Research, published by Fluence Technologies. It details how financial close and consolidation software can reduce risk and speed up the close process.
The Importance of Time to Close
An important measure of the effectiveness of a finance and accounting department is the time it takes to close the books. Finance department executives should take a fresh look at this decades-old topic to assess the benefits of a faster close to the entire organization, from turning early actionable insights into performance to providing a working environment for the accounting staff that can attract and retain the best talent. This reassessment is warranted due to the relatively recent availability of full-featured cloud-based software that is affordable to midsize companies and readily managed by their finance department.
Our recent Smart Close Dynamic Insights Research finds that organizations using the right technology complete their accounting close sooner than those that do not. Software that manages the consolidation process is essential: 67% of participants that say their software manages the process very well can close within six business days compared to 36% that do not. Dedicated consolidation software can enable an organization—not just very large corporations—to streamline and accelerate its close while reducing the risk of financial statement errors. Ventana Research asserts that by 2025, one-half of midsize and larger organizations will use close management software to speed their close and achieve greater control of the process.
Since the 1990s there has been a consensus that organizations should complete the process within one business week. Our research consistently finds that the main reasons why organizations want to shorten their close are to provide more time for analysis that identifies issues and opportunities and to provide accurate data to their organization sooner. These can include issues such as the root cause of a significant cost variance and opportunities like unexpected strength in a region or product line. Shortening time-to-close shortens the time-to-know. Modern consolidation software can enable the department to spend less time on unproductive work, so it has more time to focus on providing executives and managers broader and deeper analysis and insight into improving their performance. Reducing unproductive effort also helps create a working environment that can attract and retain the best accounting staff. Closing faster means the finance department can complete the financial and management accounting sooner, which gives the entire organization the necessary information to react to opportunities and challenges earlier and in so doing, become more agile and promote a bias for action.
Limited Progress Over Time
Ventana Research has been doing research quantifying the accounting close for the past two decades and we have found that there has been limited change over this period: our research found that 56% of participants close their month within six business days and just 40% complete the usually more rigorous quarterly process in that amount of time. Using the right information technology can be the key to closing faster without requiring additional staff and without sacrificing quality.
Our research repeatedly finds that there usually are multiple reasons why organizations take longer than one business week to close their books—if there was a single snap-your-fingers fix the issue would have disappeared. Typically, we find that there is a set of interwoven and often self-reinforcing issues related to people (including training and attitudes), process design and execution, the quality and availability of data as well as the software that is used in the process. One often overlooked opportunity to a faster close is using a dedicated consolidation application.
How Dedicated Consolidation Software Helps
Modern consolidation software is designed to accelerate the creation of consolidated financial statements by automating computations, streamlining processes, and reducing the need for checks and reconciliations, while increasing control and auditability. Using consolidation software to manage workflows ensures that best practices are baked in and hand-offs between staff and others are smooth. Our research found that 69% of organizations that used workflows for all or some of their processes were able to close their quarter within six business days, compared to 29% of those with limited or no process automation. Consolidation software ensures that detailed accounting work such as currency conversions and amortizations and allocations are handled accurately and consistently.
Corporations that have been or are expecting to make acquisitions will find that consolidation software can eliminate financial frictions that arise when maintaining multiple ERP systems is the best pragmatic option. It can make assessing different financing and capital structure options easier and accelerate their ability to see the impact on cash flows and the balance sheet, especially when evaluating the impact of different interest rate and currency exchange rate scenarios.
This type of application has been available since the 1980s but until recently was mainly adopted by larger enterprises because of cost considerations, and the need for IT department involvement to maintain on-premises software. However, within the past decade, cloud-based software with the same functionality and capabilities have made this type of software much more practical and accessible for a wider set of organizations. There are three simple diagnostics that any CFO or controller can apply to determine if consolidation software would improve their organization’s performance.
Three Simple Diagnostics
- 1. The time it takes to close the books
If it takes more than a business week, consolidation software should be a consideration as a part of a process to shorten the process.
- 2. Complexity
Are there two or more general ledgers? Are more than a handful of legal entities? Are there operations with multiple countries with multiple currencies? Does the ownership structure feature any complicated elements (including partnerships, joint ventures and crossholdings)?
If any of these factors are present, dedicated consolidation software could be helpful in shortening the time it takes to close while ensuring calculations and journal entries are accurate easily audited.
- 3. The number of spreadsheets staff accountants use to get around the limitations of their existing software
The consolidation capabilities of general ledger applications may have worked initially, but rapidly growing companies, those that now have operations in multiple countries or that have made more than a couple of acquisitions are likely to discover that the series of incremental workarounds now require a growing amount of staff time and diligence in ensuring the accounting is correct.
Ventana Research recommends that organizations that take longer than one business week to complete their close, as well as those that “finish” within one week but routinely continue to make adjustments and journal entries for another week or more, should investigate whether dedicated, modern consolidation software would improve their process.
About Ventana Research
Ventana Research is the most authoritative and respected benchmark business technology research and advisory services firm. We provide insight and expert guidance on mainstream and disruptive technologies through a unique set of research-based offerings including benchmark research and technology evaluation assessments, education workshops and our research and advisory services, Ventana On-Demand. Our unparalleled understanding of the role of technology in optimizing business processes and performance and our best practices guidance are rooted in our rigorous research-based benchmarking of people, processes, information, and technology across business and IT functions in every industry. This benchmark research plus our market coverage and in-depth knowledge of hundreds of technology providers mean we can deliver education and expertise to our clients to increase the value they derive from technology investments while reducing time, cost and risk.
Ventana Research provides the most comprehensive analyst and research coverage in the industry; business and IT professionals worldwide are members of our community and benefit from Ventana Research’s insights, as do highly regarded media and association partners around the globe. Our views and analyses are distributed daily through blogs and social media channels including Twitter, Facebook, and LinkedIn.
To learn how Ventana Research advances the maturity of organizations’ use of information and technology through benchmark research, education and advisory services, visit www.ventanaresearch.com.
This blog post was originally published on the Fluence Technologies blog.