Expert Advice for Medium and Midsize Businesses

3 Ideas to Make Your Financial Close More Efficient

Ken Judd
Chief Financial Officer
If you’ve ever been involved in a financial close, you’re probably aware that it can be a painful process—especially for a small-to-medium business (SMB).

What is it that makes the period close so painful? There are a number of reasons, which can be grouped into internal and external factors.

Externally, new accounting literature has imposed more complexity on financial statements and reporting. Changes in U.S. GAAP—especially new rules around revenue recognition and lease accounting—have accelerated the move away from simple cash reporting to increasingly more complex accrual and revenue deferrals.

Tax reporting issues can be equally complicated; every business must collect, submit and report sales tax, as well as filing state and local income taxes. If your SMB operates in more than one state, the challenge is that much more complicated. SMBs typically don’t have large finance staffs to deal with these issues.

Internally, there is often a lack of alignment between how financial statements are produced and how the business uses those statements. Take payroll processing, for example. If your business is set up on monthly reporting cycles, but you pay your staff bi-weekly, then payroll and the reporting period cut off on different dates. You end up having to account for accruals and reversals, which leads to more work for everyone.

On top of that, SMBs often capture data in their general ledgers that are never used for anything. My favorite example is around travel. Most CFOs want to see travel costs in totality. Yet SMBs continue to capture micro-level data for things like taxi fares, airline tickets, mileage reimbursement, offsite meals, and so on—data that is never used for any value-added purpose.  

Put it altogether, and it drags out and delays the time required to close the books. The overall impact on the business is that you’re not getting timely information to make the right decisions. It becomes harder to determine whether you’re on track with your business plan. And it puts a lot of stress on accounting teams, burning them out and creating high turnover, which can sometimes spread to other parts of the business.

With all of this in mind, here are three ideas to help make your financial close process more efficient.

1. Simplify Your Chart of Accounts

Look at your CoA and ask yourself, “Is it more complicated than it needs to be?” If there are accounts that the CFO, CEO and investors don’t care about, consolidate them. Don’t waste time reporting on income and expenses at a granular level when your stakeholders only care about the big picture.

Having said that, make sure there are controls in place to prevent fraudulent spend, misclassifications and mistakes. If you need to track travel expenses and enforce policies but don’t have the staff to do it, consider an ERP cloud application that uses workflow to enforce rules and capture receipts, automating the process without adding extra staff.

2. Clearly Define the Close Process, and Make It Repeatable

Is your financial close process clearly defined? Is it mapped out for everyone to follow on a consistent basis? Does everyone on the team understand their role in the process? I’m always amazed at how often finance teams scramble at the end of the period, relying on post-it notes, spreadsheets, emails, and hand-written instructions that they scribbled down when they first trained for the job.

The financial close should follow the same process, every time. Have a checklist, and share it with your entire finance team. Some tasks can be completed 10 days prior to close; others can’t be done until after the period ends. You can’t change the order in which steps are performed, but there are certain steps that you can do early. And you can often take out manual steps using cloud applications that automate the financial close as much as possible.

3. Align Reporting Cycles with Business Needs

Financial statements can’t be avoided, but they can often be timed to better meet the needs of the business. Many SMBs report on a quarterly basis (every 13 weeks)—which can make things more difficult, because the system cuts off entries at odd dates. Simply changing to a month-end close and paying your employees twice a month (instead of bi-weekly) can add a lot of efficiencies.

In addition, look at all the disparate systems that feed into the close process, and take out as much manual work as you can. For example, if you outsource payroll, can you integrate their system with your own financial system? Does project billing feed directly into your accounting system of record?

Look for an automatic flow of data to avoid manual re-entry and reconciliations. Some teams spend days (or even weeks) wrestling with spreadsheets to reconcile transactions—and spreadsheets are a notoriously unreliable way to run a business. A cloud application that automates account reconciliation can not only save your team time every month, but prevent potentially disastrous mistakes.

The financial close isn’t going away any time soon, but SMBs often make the process more complicated and less efficient than in needs to be. By following these three steps, you can reduce staff burnout, get accurate information faster, and use that information to make better decisions for your business.

Download the 2018 Gartner Magic Quadrant for Cloud Financial Close Solutions.


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Comments ( 1 )
  • Jean-Louis Richard Thursday, September 6, 2018
    Thanks for your explanations. You're absolutly right ! But (there's always a but)it's more complicate if you have to manage a ERP system: that means that you have to expense inventory (raw materials; finished goods …) and to take the exact picture of your WIP.I agree that your explanations are very good for a service co.
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