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You’re worried about your close. And for good reason. Not only does it consume critical resources, if your close is lengthy and laborious it also diverts these resources from other important, much-needed activities.

On the other hand, perhaps your company’s close is working. You have good people and good processes in place. Yet even if you think your close is “good enough,” consider this: are you closing in under five days, each and every month?
 
You may have the right data and the right analysis, but if the close is taking you longer than five days, you most certainly have an opportunity to do things better—by fixing your processes, leveraging systems, or simply training your people to perform their close tasks more accurately and efficiently.

If your close takes longer than five days, you’re not alone. In fact, less than 10% of the high growth companies that Connor Group advises are able to close in under 10 days—at first. So what are companies with a close that takes less than five days doing differently?
 
1. They’ve defined what a quality, timely close means, down to the last detail.
2. They consistently practice the ART of the Close, each and every month.
 
“The three things that worry me most about the close are the lack of visibility into the process (what is being done, by whom, and when); lack of transparency into the results of that work (where do we have exposure on the balance sheet and who is responsible for tracking and resolving it); and the lack of financial analytics depth.”
–VP and corporate controller of a recently public, high growth company
 
What Does a Successful Close Look Like?
Getting to a better close starts with something so basic, so obvious, that it’s often overlooked: establishing what a successful close actually looks like. While everybody on your team knows what the close is, they likely don’t know what that means in detail.
 
In contrast, high functioning accounting departments employ a clear definition of the close, one that enables their teams to know exactly when a close can be considered successful. While every company is different, there are seven factors that should be the same for all high functioning, well performing accounting departments. These departments consider a successful close as one where the following tasks are completed:
 
1. All sub-ledger and sub-system transactions are posted, closed, and reconciled
2. All journals and month-end entries are posted
3. All key balance sheet and P&L accounts are analyzed and reconciled
4. The P&L and balance sheet analysis is completed
5. Management reviews are performed
6. The reporting package is completed and submitted (excludes financial reporting for public companies)
7. Tasks one through six are completed in under five business days
 
How Do You Create a Successful Close?
Higher functioning accounting departments not only define the close differently: they follow a system that helps them complete all seven steps every month. At Connor Group, we call this practicing the “ART of the Close.” The acronym stands for Accuracy, Reliability, and Timeliness. In practice, the ART of the Close ensures that
Accuracy:  processes and controls support transactions, balances, and data that are correct and complete;
Reliability:  structures exist to ensure processes and timelines are consistently executed;
Timeliness:  the close is completed in an efficient manner and within five days or less.
 
The ART of the Close: Improving Accuracy
Transcribed digits, broken cell formulas, and even simple fatigue during the frenzied close period put financial results at risk. Improving accuracy requires implementing processes and controls that support teams in getting the numbers right and feeling confident in what is produced.
A caveat: While the goal is to have a close that is both accurate and accelerated, in the beginning you may have to work on one ideal. When it comes to your closing your books, quality comes before timeliness in both the dictionary and the close!
 
Pay closer attention to reconciliations. Reconciliations can function as more than just a tie out to the trial balance, so pay attention to choosing and creating the correct type of reconciliation for account types. For example, based on the account type, should your reconciliation also include an agreement with third-party data? Should it be a listing of all items? Should it be a roll-forward?
 
Additionally, all items in the account need to be documented (what, when, amount, support, dates, etc.), understood, and where applicable, individually validated.
 
Finally, take a step back and ask “Do the balance and items in the account make sense?” For example, do you have debits in liability accounts? Do the items belong in this account? Take time to consider if the information presented makes sense, and if there is anything that stands out that requires a closer look.
 
Reduce monthly “detective” work around accruals. Do you have strong processes and controls on what expenses are expected to hit which accounts? Without them, your process will lack transparency around expenses incurred but not processed. The result? Hours of detective work dedicated to finding missing accruals.
 
Instead, start earlier to reduce or even eliminate those time-consuming, month-end investigations. Proactively reach out to departments and vendors whose costs are less predictable, review historic trends, insist on more detail when comparing budgets to plans, and keep an eye on invoices that come in after the close.
 
Analyze at the account summary level. Meaningful analysis at the account summary level can often highlight issues and errors. A few common and effective forms of analysis include period-over-period fluctuations, trend analysis, key metrics (gross margin analysis, average selling prices, average unit costs, days sales outstanding [DSO], etc.), comparative analysis (comparing related accounts to make sure their movements align), and predictive analysis (what the account is expected to be based on changes in drivers).
 
Make reviews meaningful. Reviews and other documentation produced during the close are often the first thing dropped when timelines are tight. Reviews are non-negotiable, and they must be performed consistently every month to ensure data integrity. Cursory reviews aren’t helpful in the short or long term, so make sure you understand what is being reviewed. To ensure reviews remain both a priority and offer meaningful feedback, reassign close tasks, if necessary, to ensure the right people with the right skills have the time to conduct appropriate examinations and secondary analysis.
 
In Part 2 of this article we will review Reliability and Timeliness.
Deepika Sandhu
Deepika is a Partner in Connor Group’s Financial Operations (FinOps) practice where she advises companies on preparing for an IPO, public company readiness, accounting systems and internal controls. Deepika has more than 16 years of direct industry, management consulting and Big-4 experience in business process improvement, financial operations, and organizational effectiveness. Deepika is an expert in finance function process optimization, finance transformation and performance management to improve performance, reduce inefficiencies and enhance the overall operations of the finance organization. She also has significant experience in risk consulting, helping clients to quantify and pro-actively mitigate risks and assessing companies overall internal control effectiveness.
Last modified on Friday, 20 July 2018
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