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Hello,
Closing the books quickly and accurately each month is an essential element in operating an efficient and profitable business.
In today's newsletter, I share seven ideas for improving the speed and accuracy with which your organization gets this done.
I appreciate your comments. Just click "reply" to send them to me.
Regards,
Charlie Goodrich
Founder and Principal
Goodrich & Associates
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October 2014 Vol. 3 No. 10
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Closing the Monthly Books Quickly Matters: Here is How To Do It.
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Many years ago, in my first controller assignment, all operations closed their books (manually) by the end of the second day of the month. On the third day, at 8:00 AM, I would present and discuss the financials with local management and develop a forecast for the new month. The General Manager would review last month's results and the current month's forecast with his boss in the early afternoon. Meanwhile, and on that same third day, the ledger was consolidated via telex by noon. Detailed operating metrics were typed on an IBM Selectric and delivered to the corporate office by Day Five. This had been the standard procedure for at least the prior 20 years; I didn't know any different. And so imagine my surprise when I worked with future companies that measured closing time in weeks. Over the next 20 years, and thanks to my early education at this first controller assignment, part of what I did was help my employers - and later, my clients - shorten the time to close the books. But why is closing the books quickly so important? First, because results need to be communicated to internal parties, so that operating adjustments can be made in time to effect the current month. And second, because external parties, such as lenders and investors, need to know what happened and why. (For both groups, knowing why the results are what they are is as important as knowing what happened.) And so with that in mind, I offer seven suggestions which will help you close the books quickly and explain the results: - Lay out the critical path. This obvious but essential action is often neglected - efforts to shorten non-critical path items won't bear any fruit. This step focuses the accounting team on what is important and when it is important.
When I took on the financial leadership role for a car rental company's east coast division, the close for the largest accounting center took forever and the integrity of the numbers was poor. The burned-out controller had spent her accounting career as an internal auditor and struggled to get anything done. When I asked for the critical path steps to get the books closed, she gave me an exasperated stare.
So, I sat down with her team and we listed all of the steps needed to close the books, as well as which steps were dependent on prior steps. Then we listed when the data to begin each step became available. In short order, the critical path became apparent; soon after that, the time to close was measured in days instead of weeks.
- Understand that information flows "downhill" to the accounting department. Make sure information sources know what is needed, when it is needed and why. After all, you can't expect people to help if they are unaware that their assistance is necessary.
At the car rental company, during the week prior to close, I would "walk around" the organization in search of potential problems - anything from a key person who was on vacation to computer system issues. I made sure that all those involved understood their role in hastening the monthly close.
- Don't delay closing subsystems (such as accounts payable) in the name of catching every last straggling transaction. Instead, it's always better to close the subsystems early and accrue the straggling transactions.
At my first controller assignment, for example, accounts payable data entry was centralized for the company; all vouchered invoices were sent, via regular mail to Chicago. But we still got the books closed by the morning of Day Three, simply by having an early cut-off and then manually accruing the last invoices.
- Shorten the time in which general managers report and explain results upward in the enterprise. Begin by having the forum for doing so open to peers, so those that understand what happened in the prior month stand out from those that don't.
When I was in the food service distribution business, we shortened the time to explain results by having the general managers do so sooner in a group meeting. The books had been closed, but the analysis hadn't been done. When one general manager whom I directly supported was able to talk about his answers, his peers wanted to as well and asked for help.
- Use business driver-based metrics to analyze account variances. Many times, I have come into organizations where the closing of the books is delayed in order to research problems... problems in the eye of the internal bean counter who doesn't realize a given account is up or down because a correlated driver has changed as well.
In my first controller job, the drivers were well known and tracked with well-established systems. Surprisingly, when I moved to an equally old, big Food company, knowledge of the business drivers was scattered, as was their collection. In that company, I forecast and analyzed the numbers and other groups closed the books.
By looking at business drivers and the business processes, however, I often uncovered accounting mistakes and sales shenanigans. One month, for example, the key product line recorded record sales and blew away my forecast. I soon discovered that the month in question marked the end of a big internal sales contest - the company had its first 6-week accounting month on a 4-4-5 system. Apparently there had even been a computer problem with the sales system, one which delayed closing that system for an entire week!
- Incorporate a "closing style" process around the business driver-based metrics. The closing process is often held up when the non-accounting metrics have problems, causing a preliminary analysis of results to get bogged down. Incorporating a closing style process brings quality control to these numbers.
After we cleaned up much of the accounting mess in the car rental business, the next step was accurately collecting the business driver data. Until this was accomplished, the initial driver-based variance analysis of accounts suggested accounting problems, when in fact there were really "driver" problems.
- Reduce complexity where possible. For starters, keep non-accounting metrics out of the general ledger; this adds complexity and delays. Instead, put these metrics in your business and analytical reporting system.
In addition, seek to eliminate legal entities and streamline the chart of accounts (use a modern G/L system that uses a relational database structure for the chart of accounts).
Closing the books quickly and explaining the results is critical to both making timely management adjustments and keeping creditors and investors informed and happy. |
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Heard on the Street
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So what did all the economists get so wrong leading up to the Great Recession? Olivier Blanchard, Chief Economist for the International Monetary Fund and Robert M. Solow Professor of Economics at MIT, argues that economists did not appreciate how close the world economy can be to "dark corners," where the economy does not behave in a linear fashion and so mainstream linear models do not work, such as when nominal interest rates can't go below zero. Read Blanchard's thinking in his short, easy to understand, blog post. |
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| About Us |
Goodrich & Associates is a management consulting firm. We specialize in helping our business clients solve urgent financial problems. Our Founder and Principal, Charlie Goodrich, holds an MBA in Finance from the University of Chicago and a Bachelor's Degree in Economics from the University of Virginia, and has over 30 years experience in this area. To ensure that you continue to receive emails from us, please add charlie@goodrich-associates.com to your address book today. Goodrich & Associates respects your privacy. We do not sell, rent, or share your information with anybody. Copyright © 2014 Goodrich & Associates LLC. All rights reserved. For more on Goodrich & Associates and the services we offer, click here.Newsletter developed by Blue Penguin Development |
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