How organizations can streamline month-end close

By Liz Far, CPA for Journal of Accountancy

Companies have long sought ways to streamline processes so that accountants can spend less time collecting numbers and more time analyzing them for the organization's benefit. Many nimble organizations are finding those time savings in the month-end close.

Closing the books quickly gives them the opportunity to take corrective action as soon as possible. This results in efficiencies and, in turn, cost savings. It also frees up the accounting department to devote more time to providing management with better information.

"The sooner we get the books closed, the sooner we'll be able to do everything else," said Gary Stoker, CPA, CGMA, the CFO and treasurer of Roth Corp., a Denver distributor of high-end appliances.

Despite improvements in efficiency from modern accounting systems, the month-end close process still causes considerable stress. A recent survey by software provider FloQast reported that 88% of accounting and finance professionals were negatively impacted by the pressure to close quickly.

Obstacles preventing a faster close process abound. Among them are the complexity of accounting standards and tax regulations; difficulty obtaining information from outside the accounting department; and working across incompatible legacy software platforms. Understaffed accounting teams, meanwhile, face a lack of time to design and implement new processes. And let's not forget potential foot-dragging.

"Even though there's a lot of technology available, [some] people aren't willing to change how they're doing things," said Kathy Lockhart, CPA, CGMA, vice president and controller at Noodles & Co., a Broomfield, Colo.-based restaurant chain. "They are still using the same processes, and changing those is just the tip of the iceberg for improvements in the close process."

If management is comfortable with estimates, closing can be done quickly, perhaps in hours or days. But emphasizing speed over accuracy can compromise integrity.

Increasing speed and accuracy puts pressure on employees who may already be stressed. In the FloQast survey, 82% of accounting and finance professionals reported a negative personal impact from the close process. Finding the right balance between speed, accuracy, and employees' needs is key.

Here are some best practices to smooth the process:

Having well-documented procedures ranks at "11 on a scale of 10," Stoker said. Standard procedures — and checklists — are vital for speed and accuracy.

Adding some fluidity to procedures to allow adaptation to employees' personalities and to changing situations could help, Stoker said. "The order of prescribed closing procedures can be moved forward or backward depending on when information is available," he added.

In other situations, the accountant may need to apply professional judgment when determining which variances from budget or projections need to be investigated in a particular closing period. The significance of that closing period — whether it's month end, quarter end, or year end — affects which variances are acceptable.

At Lockhart's company, one process per month is broken into steps to find ways to improve the accuracy of estimates and to save time. "It might be a little bit painful as you're doing it, and it might cause more time, but in the long run it's going to save time," she said.

For example, one month Lockhart's team looked at the process for gathering data from food vendors, loading the data into the system, and analyzing the data at the end of the period. They found they could streamline the process by ensuring that the appropriate accounting code was being loaded in the invoice process from the vendor.

Another process examined booking and reconciling accruals each month. With 400 restaurants, the process was daunting. So they booked the budget amounts for each restaurant and created a "ghost" restaurant for the true-up entry. This meant they only had to watch one account to see where they were over or under, rather than 400 separate locations.

Besides looking at the individual steps in a process, Lockhart encourages her team to examine processes with the end in mind. "Here's what we want at the end. What could we do at the beginning to get us there?" A tweak to a report generated at the first step can simplify later steps or provide a more accurate final number.

Documented standard procedures and cross-training mean there's no holdup in the process if a key employee is out sick or if that employee leaves the company. Cross-training meant an end to the unwritten prohibition against vacations during the first seven days of the month at Stoker's company. "How do you reschedule weddings, where you have no control over an important event you need to attend?" he said.

Many routine journal entries can be prepared well in advance. Some accrual or impairment calculations can be started midperiod and fine-tuned at the end of the period. Once the process becomes routine, "people are so used to knowing what information is necessary, they're preparing in advance of the month end," Stoker said.

Frequent reconciliations of key accounts — such as cash — reduce the work needed to close the books.

In calculating accruals and estimates, keep materiality in mind. Finding a simple method for estimating accruals can save time if there's no material difference from the exact amount.

"If you can have everybody identify that they're a critical component in a bigger activity," that helps them take ownership of their part in getting the books done quickly, Stoker said. Getting information from those outside of accounting can often be the biggest impediment to a speedy close. So developing relationships outside the finance and accounting departments is critical.

Data integrity and speed improve as manual processes such as spreadsheets are replaced with automation. While spreadsheets are a useful tool, they can be prone to errors and have no means to track changes made to them.

The best path to an accurate and efficient close is for companies to follow the practices recommended for their software systems. Look to the system to see if it will solve the problem rather than just developing yet another spreadsheet. The extra effort required to become familiar with the advanced reporting capabilities of the company's software system and to learn how to create a report that provides the information will likely pay off in the long run.

With automation, manual data entry is no longer needed. Rather than eliminating data-entry positions, Lockhart recommended retraining these individuals to perform higher-level skills such as research or variance analysis. These higher-level skills lead to better job satisfaction, which is crucial in a tight job market.

While retraining can require considerable time and resources, this investment can pay off by retaining the knowledge of those employees in the company.

Even with automation, humans will still be needed to interpret and apply complex rules, so there will always be a need for accounting professionals, said Somya Munjal, CPA, founder and CEO at Youthful Savings and managing partner and founder of CPA for the People, which provides financial management and coaching, and business and tax consulting services. Youthful Savings is a separate entity that develops financial education tools and programs for students.

"The process requires humans to pay close attention," Munjal said. "There's nothing stopping that unless the rules change."