There have been advancements in technology, improvements in efficiency and a streamlining of processes yet, still, month-end closings continue to be hectic, and generally speaking, manually driven.
In a survey reported last year in The Fintech Times found that a majority of respondents reported low confidence in their month-end closing processes and found the reporting process complex, resource-heavy and time-consuming.
Many accountants can relate to, or have experienced, the anxiety associated with month-end closing. Without close attention to the process, a finance or accounting department can find itself in non-compliance with laws and regulations regarding financial reporting standards and, due to laws like the Sarbanes-Oxley (SOX) Act of 2002, the consequences can be financially significant and include jail time. Ensuring compliance starts with monthly reporting, hence the importance of month-end closing.
(Somewhat) Effective methods historically suggested for improving month-end processes
A feature published in the Journal of Accountancy, in recognition of the problems that businesses continue to face in month-end closing, makes several suggestions on how to manage month-end chaos.
Developing standard procedures and documenting them is the first and top of the best practices listed in the article. It is unsurprising because many finance departments within a business have their “way of doing things”, essentially methods and traditions that have been known to work over the years and have been passed from one generation of employees to another.
Because this way of doing things is so widespread and ingrained into some corporate cultures, it is even less surprising that the loss of any key members in the finance department throws a business into disarray when approaching month-end closing.
In fact, the Journal of Corporate Accounting & Finance estimates that a typical accounting department loses a quarter of its staff in a given year. Often, the staff lost have inherited, and take with them, the “tribal knowledge” of a business’ month-end closing process. This staff turnover is estimated to cost businesses an average of $32, 500 per employee lost in this department. So, predictably, developing and documenting standard procedures for the month-end process is front and centre among best practices to prevent loss of know-how in executing month-end processes and to reduce delays in finalizing results.
Other featured suggestions include cross-training and spreading out work. Cross-training involves ensuring that there are no roles that require skills or experience possessed by a single individual.
Spreading out work involves preparing journal entries and initiating accrual and impairment calculations in the middle of the month so as to reduce the pressure at the end of the month.
Technically, this would reduce the pressure at the end of the month but not quite reduce the work burden. It is still the same hours worked, if not more, just spread over a longer time or distributed to more individuals.
Realistically, it is likely to be more hours spent. It is natural for any professional to want to double-check work that they, themselves, did a week or two prior, as it is to revise work carried out by someone else. Finance professionals that are often tasked with managing the month-end close process are multi-skilled and could contribute a lot more to the business and activities that consume significant man-hours of their skills in a support role come at a significant opportunity cost.
An actual solution to reduce the burden of the month-end close processes involves reducing the hours spent by the finance department on these tedious processes while ensuring accuracy and compliance.
Automation: The key to unlocking the full potential of your finance department
Unlike the methods suggested in the previous section, automating the month-end close does not merely shift part the effort required to different periods of the month or to other individuals or departments. A successful manual month-end close process has many requirements including, as listed by the Journal of Accountancy:
- Coordination between all individuals and departments creating journal entries and other stakeholders,
- Verification of report attributes and limiting the possibilities of errors through the use of standardised templates and checklists
- Creation, documentation and maintenance of standard operating procedures, contingency plans and escalation routes.
It should be considered that this process will involve various departments since the information required encompasses the entire firm. Records from sales, supplier and customer accounts, inventory management, bank accounts, and asset management must be consolidated into a single report. It is often the case that a business is running some kind of software to help with account management. Common drawbacks associated with legacy software include a lack of compatibility with other software used in the firm, an inability to adjust to regulation changes, and a failure to consolidate all the data necessary to complete a month-end process.
Cloud-based or on-premise software, such as Multiview’s ERP solution, are capable of integrating and updating all the journal entry data required for month-end closing in a continuous process. This software is not just integrated throughout the business, it can be linked to external payments to suppliers and enable the management of accounts payable; similarly is possible with customer payments and accounts receivable. To understand the value of such a system and how it may save your finance department and business valuable time one only needs to reflect on exactly how much time is spent on month-end closing processes.
Month-end closing is primarily a cost-center process for a business. It does not create value for most stakeholders like clients or employees. It is primarily to comply with regulations and to generate reliable and comparable reports for investors. This creates neither a competitive advantage for the firm nor value for customers. However, it can be useful for informing strategic decisions for business leaders. In light of this, the faster this process is completed and the fewer man-hours spent on it, the better. Which is why, according to CFO magazine, business leaders would prefer to cut down month-end closing to no more than a couple of days. Yet a survey of 2,300 organisations found that the median time spent closing books is 6.4 days, with the bottom-performing 25% needing 10 or more days to complete the process. If this sounds familiar to your business, you will recognise that a major determinant of the time to process completion is data quality.
Erroneous, error-prone or unverified data reported from multiple sources can be effort-intensive to verify and consolidate. Mutliview’s ERP solution is a self-balancing intercompany transaction system that creates easily traceable and reliable data following the same standards throughout the entire system. Further, this information is continuously generated rather than periodically consolidated, enabling real-time performance and key performance indicator monitoring. As such, the core accounting functionality of the ERP will do the heavy lifting and automate almost the entire month-end process. The Fintech Times, which reported the loss of confidence in closing processes, agrees with this observation and highlights key areas to automate, which are closing and consolidation, reporting, budgeting and forecasting. Multiview ERP does all these functions.
Implementing an automated solution
Most businesses tend not to be as agile as they would prefer. Adopting new practices can be met with resistance to change, as senior and established personnel are accustomed to certain procedures. Some corporate cultures discourage risk-taking and implementing a new system would expose the driver of the change to failure and potential blame. The advantage of Multiview’s ERP is your business needs not make structural changes to determine if you will realise the reduction in month-end close process burden. If your business is not utilizing an automated system, your skilled employees are spending needless hours on a non-value creating activity.
In addition to automating journal entries and the general ledger, Multiview’s ERP provides business intelligence in real-time, budgeting, forecasting and other forms of data. Lastly, in an age when businesses of all sizes are threatened by hackers, utilizing outdated systems is a security issue. Instead of wasting time asking about the reliability of data and determining if financial reports are in compliance, this ERP platform will enable your finance department to ask the right questions and drive your business forward.
If your interested in learning more about how Multiview’s cloud ERP software can help your finance team reduce the burden of the month-end close processes, contact us today to schedule a free demo or get pricing information.