Finance Research Reveals No Progress to a Shorter Close

We conducted our recent Smart Close Dynamic Insights Research in part to assess to what extent the substantial disruptions of the pandemic have impacted the accounting close. When office lockdowns began in the first quarter of 2020, many finance departments were challenged by having to do their quarterly close remotely without their normal face-to-face interactions. In the United States, the Securities and Exchange Commission was so concerned that corporations would be unable to meet their filing deadlines that they gave registrants carte blanche to extend their filing if necessary. As it turned out, only a relative handful did, and all but one of those was based in China; but for many, that first calendar close required a heroic effort. Since then, organizations have made concerted efforts to adopt and use technology to enable them to operate resiliently under any conditions. Our research finds that while organizations have to some extent adapted to operating a more remote working environment, progress toward a faster close has been elusive. The research also confirms that organizations that use technology effectively to automate processes are better able to complete their close sooner.

For the past two decades, Ventana Research has focused on the close process because it is a key measure of a finance and accounting department’s effectiveness, and almost all midsize and larger companies regularly complete their accounting close. There has been general agreement since at least the 1990s that companies should be able to perform this task within one business week. Our research on the accounting close has consistently shown that companies with very similar characteristics (measured in terms of revenue, number of employees, location and industry) vary considerably in the number of days it takes them to complete their accounting cycle. The lack of connection between the structural conditions of a corporation and the time it takes to close the books suggests that the obstacles to a faster close are not innate but the result of poor process design and execution, insufficient automation of the process as well as choices made by finance executives. One of those choices is deciding — for whatever reason — not to close sooner.

Since 2020, there has been a great deal of discussion about the technology organizations have employed to digitally transform finance processes and overcome the obstacles caused by the lack of in-person contact in their work environments. Our research suggests that while departments have been able to adapt to remote working conditions, this has not had any impact on shortening the close.

The key finding of the research indicates that although accounting departments were able to rise to the challenge of disruptions, any digital transformation that occurred did not as yet result in improving how quickly they were able to perform their monthly close. The research reveals that 59% of participants are now able to complete their monthly close within six business days compared to the 60% that we recorded in our Office of Finance Benchmark Research in 2019, a statistically insignificant difference. At the same time, the research also shows a smaller percentage of organizations are able to complete their quarterly close within six business days: 40% in 2022 versus 49% in 2019, although this statistic is in line with the previous finding in 2014. The quarterly close is more rigorous and requires a broader set of processes, and it is likely that many departments that depend on manual processes found their close takes longer when people are not working in face-to-face conditions.

The reasons for wanting to close sooner have not changed. We asked participants to select the most important motivation to accelerate their process from a list of four options. Having more time for analysis and auditing before publishing financial statements was the most frequently selected (37%), followed by releasing financial information as soon as possible (33%), and communicating management information out as soon as possible (27%), while only 2% selected reducing the time and money spent on the process. The focus is squarely on effectiveness, not efficiency. These findings are consistent with past research.

Our research suggests the timeliness with which the (rest of the) company receives information needs greater attention from finance executives. While 29% of the participants said that all or almost all of the information the department provides to the entire organization is available when needed, two-thirds (67%) characterized it as somewhat timely, and 4% said it is not very timely. Financial statement accuracy is the ultimate objective of the department. For that reason, both the consistency and quality of the data used to prepare those statements are important. The research reveals that 12% of participants described these as significant issues in preparing financial reports, while 24% said they were somewhat significant. One-half (49%) noted that they did not have a significant effect and 10% found they had none. One of the more important recent advances in IT is its ability to control the quality of data used in accounting by fully automating its movements between systems to ensure its fidelity without needing time-consuming checks and reconciliations. Using technology for this purpose is part of the doctrine of continuous accounting.

Our research has consistently found that there is a connection between the degree to which automation is used in the close and the ability to complete the work sooner. For example, 72% of those that automate most or all of their reconciliations (39% of the total) are able to close their quarter within six business days, compared to only 25% that apply some or no automation to their reconciliation processes. Similarly, 69% of those using workflows in the process said they are able to close their quarter within six business days compared to 29% that employ a limited amount of automation. Such automation pays off in part because it reduces time lost by ensuring that steps are completed on schedule or hand-offs between steps are not delayed. By way of confirmation, only 14% of participants that automate all or almost all of their workflows report that waiting for others to complete their work is an issue versus 33% that automate many or only some, and 40% that employ workflows for few or none of their processes. Yet, despite their positive impact, only 15% of organizations currently use workflows extensively.

Ventana Research advocates a management approach for the finance and accounting department that we call Continuous Accounting which emphasizes the importance of fostering a continuous improvement culture to overcome inertia and set a pattern of implementing change that improves performance. We assert that by 2025, two-thirds of organizations will have applied continuous accounting principles to close their monthly books within one business week, up from one-half today. Departments that have shortened their close often cite their ability to deal with all of the little things that delay the process as the main reason for their success. In this vein, we asked participants if they have a process in place to address factors that may be lengthening the close. Nearly one-half (44%) of participants said they have a monthly or quarterly review session, which our research suggests is the most effective way to achieve a shorter close. Another 38% said they discuss and address major issues as they arise, which we have found is a less effective approach. Only 18% responded that they do not do a review.

The results of this latest Smart Close Dynamic Insights Research indicate that organizations have made little progress in the decades-long quest to close sooner. The findings confirm the value of a faster close to the entire organization because it results in improved analysis and more timely information that enables executives and managers to make more informed decisions sooner. The data also suggest that technology can play an important role in accelerating the process, as those that use close automation, workflows and software to automate reconciliations are much more likely to close sooner than those that do not. I recommend that financial executives, especially controllers, who are committed to enabling their finance organization to play a more strategic role in their company, should focus on ways to streamline their close process, especially those where the close takes more than one business week. Specifically, they should consider how technology can help them achieve better results. I am optimistic that the digitization aimed at enabling the department to be resilient will also be applied to the objective of shortening the close.

Regards,

Robert Kugel