The Fast Close, Soft Close, Virtual Close: Now Days, Not Weeks

Chapter 0: Overview

Course Objectives

During this course, you will

• Understand what is meant by a hard close, a soft (fast) close, and a virtual close.
• Identify factors that affect the quality and production of financial information.
• Develop a vision of the finance function when a soft (fast) close is implemented.
• Redesign finance functions using process improvement techniques.
• Benchmark a closing process improvement plan.

Introduction

In this information-intensive business environment, shifting strategic direction and gaining a competitive advantage hinges on having the latest information about your organization's strengths and weaknesses as quickly as possible. As a result, there never has been greater urgency to produce relevant, reliable, real-time, decision quality information that can be acted on before opportunities disappear. Organizations are scrambling for ways to accelerate their ability to collect and disseminate critical performance indicators to front-line managers.

The course gives you an understanding of the benefits of soft (fast) and virtual closing procedures and the skills to measure the resources consumed in and the duration of the components of the closing process. You will also learn how to identify improvement opportunities and select appropriate improvement strategies.

What Is a Fast Close?

First of all to distinguish terminology. A Fast Close is the process by which financial information is accumulated and reported – faster, better, cheaper. A Soft Close provides relevant information that management needs to drive future performance; the focus is on material accuracy. A Virtual Close is a continuous process which yields decision-specific information on demand. Companies today are quickly moving from the process efficiency achieved by the fast close to the higher levels of the soft and virtual close.

Companies around the globe are pushing their financial departments to add greater decision support and analytical value to the business. Financial staff, while ready and able to take on these new initiatives, rarely have the time, since they typically spend 80% or more of their efforts on activities such as closing the books and maintaining essential balancing control and reconciliation functions.

Many organizations follow a closing cycle that focuses on retrieving information from various systems, perfecting the information and submitting correcting entries, and, finally, massaging the information to produce the internal management book. The typical close cycle includes

• Systems interface (Work day 1).
• Receive A/P, accrual list, reclassifications, correcting entries (Work days 2-4).
• Prepare journal entries and reenter data from system (Through work day 6).
• Management team reviews (Work days 8-10).
• Monthly book issues (Work days 10-25).

Redesigned closing procedures (soft or virtual close) omit extensive data checking and information recycling, significantly reducing the effort in internal report production. This omission is possible through the use of three highly integrated improvement techniques: redesigning the close process, enabling the close with technology, and providing timely reconciliation and control enhancements.

The redesigned close cycle would include

• Systems interface (Work day 1).
• Prepare material journal entries using exceptions triggers (Work days 1-2).
• Management team reviews (Work day 2).
• Monthly book issues (Work days 3-5).

Redesigning the Closing Process

Many organizations find it difficult to shift internal financial culture (and management attention) away from perfecting the data and toward material accuracy. The concepts of rapid deployment and proof of redesign become key factors in attaining stakeholder buy-in. The following redesign elements are critical:

• Accruals are not made; outstanding invoices or expenses are input in the following month.
• A level of materiality is set for correcting journal entries; entries below the materiality amount are input in the following month.
• Estimates are used; large clerical efforts necessary to ensure numerical precision is replaced with emphasis on directional results and exception-based analysis triggers.
• Accounting for GAAP is made on a quarterly basis; only automated entries are booked. Depreciation expense, amortization, and other GAAP adjustments are not made in offquarter months.
• Corrections to subsystem data are made in the following period, as opposed to holding up the close.

The redesign themes provide focus for implementing the close process. And these themes enable hands-on involvement of key staff in building the new process. The process improvement plan should

• Assess current processes – Gather data on the people, process, and technology of the current close cycle. Calculate the mix of entries (accruals, correcting entries, etc.) to evaluate the materiality standards currently applied.
• Recommend improvements and construct a detailed closing calendar – Involve key stakeholders in developing change ideas. Stakeholders may include process owners and management, those who provide or receive information to the process, and external auditors.
• Utilize a rapid deployment pilot – Communicate broadly to all stakeholders that the pilot will test redesign themes. A pilot enables hands-on ownership of the revised cycle. Rapid pilot deployment and iterative redesign is more efficient than traditional models of conceptual requirements-design-documentation.
• Modify the redesign process – Based on pilot results, complete a series of iterative enhancements to the close process as appropriate.
• Finalize documentation – Prepare and distribute revised process and procedure documentation.

Enabling the Close with Technology

Most financial staffs spend a great deal of time answering the same questions or gathering the same data over and over for each month-end close. In addition, they spend countless hours running lengthy queries to

• Extract statistical data that support financial results.
• Re-enter, import, and format data into spreadsheets for presentation and monthly report packages.

An on-line analytical processing tool dramatically reduces the time and effort spent on these activities. Staff attention can be shifted from duplicative efforts and reviewing past performance to supporting a future-focused decision support financial organization.

Providing Timely Reconciliation Control Enhancements

Many organizations spend as much as one third of their staff time performing account analysis and account reconciliation activities. Delays or untimely completion of these critical activities may lead to material reporting errors or close-process delays. Process improvement should be organized around the following key redesign themes:

• Establish account review cycles based on risk classification criteria – Low-risk accounts may be reviewed semiannually, while high risk accounts should be reviewed monthly.
• Ensure that adequate controls are in place – Make sure that control systems are updated for new information sources or business changes.
• Use automation tools – User-friendly tools automate manually intensive reconciliation activities while improving the integrity of reconciliation results in significantly less time.

Telecommunications Company

• Experienced a 30% reduction in close cycle time while concurrently reducing general accounting staff by almost 50%.
• Developed a detailed close calendar.
• Developed materiality standards.
• Reduced the type and volume of manual journal adjustments.
• Eliminated data validation and reentry.
• Implemented on-line analytical tools.
• Improved procedures for and automated certain high-risk reconciliation.

Course Content

This course presents a full range of best practices, some sophisticated and some very simple, but all of which have been employed successfully in various combinations. Some approaches may require changes that your organization is not prepared to make at this time. The course will provide you with a tool kit from which you may select those tools most appropriate to your circumstances.

Chapter One identifies the stakeholders to the finance function and the upstream and downstream customers of financial information. The focus is on defining information needs and information gaps, and on developing an initial list of the elements of the close process that need to change.

Chapter Two redefines the close cycle. The discussion addresses the paradigm shift from data to information, from accuracy to relevance, and from an historical perspective to a future orientation.

Chapter Three uses leading edge process improvement tools to develop a finance redesign plan. Work flow analysis, value re-engineering, process mapping, half life, etc., are applied to feeder systems of the close process.

Chapter Four analyzes specific categories of the closing cycle in order to develop a closing cycle calendar, and to remove the roadblocks to process improvement. The discussion focuses on integrations of systems: accounts payable, inventory, accounts receivable, payroll, expense reporting, accruals, and estimates

Chapter Five discusses the human side of process redesign. A change management plan is developed that addresses the life cycle of change, personality and change, resistance to change, and creates a new finance competency model.

Chapter Six describes the close package to be prepared for stakeholders: reports, key statistics, profitability analysis, cash flows, and units of measure, forecasts, CFO comments, issues that need to be addressed, and user feedback.

Chapter Seven presents tools and techniques to facilitate the redesigned finance function. The discussion will include best practice uses of hardware, software, and the Internet. Those tools will be integrated with other financial management tools such as activity-based costing/management, balanced scorecard, and outsourcing.

Chapter Eight provides benchmark standards for the redesigned close cycle. Analyzing current peer data, plans for implementing and monitoring the close process improvements are developed.

For self study participants only, the CPE Standards require the inclusion of review questions that provide periodic learning feedback. Please go to the review section at the end of the course to access the review questions for this chapter.