Companies that benchmark this key accounting function can realize savings of 5 percent to 20 percent. Here's how to measure process performance in terms of time, cost and quality.
A company's desire to achieve a sustainable, competitive advantage in today's marketplace frequently filters into every phase of its financial reporting process. One way for a financial manager to make a significant contribution to the organization is by reducing the cycle time for the monthly close through benchmarking.
The purpose of benchmarking is to use the best practices of other organizations to stimulate creative insight on how to improve your own processes. Benchmarking leads to best practices. Best practices leads to knowledge management. Knowledge management leads to leveraged knowledge, which, in turn, can be used to achieve the ultimate goal of enhancing your company's market position and bottom line. Consulting firms estimate a company can realize savings of anywhere from 5 percent to 20 percent by benchmarking the monthly close.
Tom Hertog, manager of benchmarking and best-practices development at Arthur Andersen & Co. in Chicago, uses a disciplined, systematic methodology to measure a company's performance in closing the books. Hertog begins by having those actually involved in closing the books map every step of the process on a flowchart. Many times, Hertog says, this initial step is approached by Controllers themselves who do not understand the specific activities involved.
Your next step is to determine specific performance measures, Hertog says. Three measures which are easily quantifiable are time, cost and quality. These three measures can also be used when you receive the results of your benchmarking effort in comparison or contrast to industry companies as part of a reengineering effort.
For example, among the key measures in closing the books is determining how many days it takes from the time the subsidiary modules are closed to the general ledger to actually produce a final, reviewed financial statement. The average company can take up to 14 days to complete the monthly close; the median is 5.1 days. Improvement can be made, regardless of where your company is on the time spectrum. Indeed, experts agree that cutting one day off your monthly cycle is easily done over a 12-month period.
We recommend in each individual initiative that the progress a company wishes to attain be realistic and derived from incremental improvements, Hertog says. Initially, it's like anything else — you're going to see a big improvement up front. In some companies, slicing two days off their closing cycle might represent a huge improvement. Other companies might set a goal that they must complete their monthly close in six days.
On the cost side, consulting firms analyze a company's head count to determine the equivalent number of full-time employees needed to close the books in a certain number of days. For example, does your company need 10 people to close the books in 10 days? Or does it use 100 people to close the books in two days?
Arthur Andersen uses a full-time equivalent head count as opposed to a staff head count because best-practices companies are adept at leveraging their financial resources and personnel. These best-practices companies may choose to roll people on to their closing function for those five to 10 days, then roll them back into financial analysis or some other activity.
Information Clean Up
The quality of information being processed while closing the books is critical in the benchmark process. Many consulting groups urge companies to focus on improved efficiency in the monthly close by analyzing the activities that are performed, for whom and for what value.
It's amazing what people find when they go through that activity, says Mark Krueger, vice president of The Hackett Group, an Ohio-based consulting firm. I know Controllers who can tell me what they're going to do three months from now on the third day of that cycle. But they don't necessarily know who is using that information and for what benefit.
In many cases, companies find it imperative to clean up their information to cut their cycle time. This can be accomplished in several ways, most notably by establishing standard accounting policies and a standard definition of terms. For example, it's important that the same costs are consistently used to make up the cost of goods sold. The goal is to make everyone involved in the process of closing the books work smarter, not harder, by eliminating those steps that have little or no value.
Once you've benchmarked your company's performance on the monthly close in terms of time, cost and quality, you should group these measures together and try to leverage the results. Let's say you determine that it takes your company 14 days to close the books, but your cost is lower than that of best-practices companies. That could be a positive, unless you're not staffing it appropriately. You might even find out that the number of adjusting entries you need to make is higher, reflecting poor quality. All three measurements are intertwined, making it possible to leverage improvement from each of them.
Jeffrey Liss, a best-practices consultant for San Francisco-based Gunn Partners, suggests that companies that are benchmarking the monthly close pause to question every step of their established process. You must continually ask, 'Do we really need to do this? Is there a law that's requiring us to do this? Is the CEO requiring us to do this? Or are we just doing this because we're accountants and this is the way we feel it should be done?' Liss says. The habits of general accountants are hard to break. They're all stuck in their debits and credits and balancing things to the penny. It's hard to get them to start thinking about using estimates for the monthly close.
Indeed, when it comes to benchmarking the monthly close, or any other financial reporting process, it is important that companies not underestimate the length of the change curve. The change in the organizational culture is something that can greatly hinder the full implementation of the entire benchmarking effort. That's why Arthur Andersen focuses on the very front end of the benchmark process through what it calls ABO — Awareness, Buy-In and Ownership.
- Awareness. You must create an awareness within the organization that something very important is about to happen, that the results of the benchmarking effort will benefit everyone in the organization. This is a fundamental way to get people involved.
- Buy-In. Management must take personal responsibility for leading the benchmarking initiative. Resources will be tasked to this effort. Organizational obstacles and barriers that hinder the effort will be removed.
- Ownership. Management must take ownership of the initiative through active involvement and direct participation. Management makes benchmarking and the best-practices effort a strategic imperative to existing business objectives, thus gaining support from the entire organization.
We often run into benchmarking efforts that have stalled or been put on the shelf because these three steps were not addressed up front, Hertog says. The ABO process will help remove some of those organizational barriers and obstacles, which are going to rear their head in any organization. When you have this type of buy-in and support up front, everyone understands, 'Hey, this is linked to our main initiative this year, which is to increase average revenue per account by 5 percent, and this is how this benchmarking effort will do that.' It's not a situation where you have certain managers feeling, 'Well, I'm sticking my head out and it might get chopped off if I don't perform.' This really gets into the whole team concept.
Some companies have refined the monthly close to an art by spending large sums on technology. But they tend to be the exception, not the rule.
Companies have a difficult time justifying a technology expense to improve the closing cycle, Liss said. I've worked with a $3 billion company that had a hard time spending $20,000 for edit capabilities because it's hard to show a dollar benefit. Systems and technology come much later in the reengineering process. There are all sorts of improvements you can make with process, policy and the human dimension.
Those companies that have decided to make large commitments to technological advancements are moving toward a cutting-edge process called continuous close, which eliminates the monthly close altogether. The organizations striving for a continuous close tend to have very standard products and a very formalized organizational structure. These companies have the technological capability to close their books on an overnight basis through full automation.
Even if you consider your company light-years away from being able to make a continuous close, a benchmarking effort can be the first step toward much-needed corporate improvement and, perhaps, even career advancement for benchmarking champions in the accounting department.