Back in the Day…
Here is a story of what people used to do with Excel, back in the day… (here’s the full article)
Forgive me if I now divert into telling you a quick story about my time spent on the Microsoft Excel team way back in 1991. (Yes, I know you were not born yet, but I assure you that computers had been invented. Just hop up here on my knee and shut up.)
Everybody thought of Excel as a financial modeling application. It was used for creating calculation models with formulas and stuff. You would put in your assumptions and then calculate things like “if interest rates go up by 0.00001% next year, what percentage of Las Vegas homeowners will plunge into bankruptcy?” For example.
Round about 1993 a couple of us went on customer visits to see how people were using Excel.
We found a fellow whose entire job consisted of maintaining the “number of injuries this week” spreadsheet for a large, highly-regulated utility.
Once a week, he opened an Excel spreadsheet which listed ten facilities, containing the name of the facilities and the number 0, which indicated that were 0 injuries that week. (They never had injuries).
He typed the current date in the top of the spreadsheet, printed a copy, put it in a three-ring binder, and that was pretty much his whole, entire job. It was kind of sad. He took two lunch breaks a day. I would too, if that was my whole job.
Over the next two weeks we visited dozens of Excel customers, and did not see anyone using Excel to actually perform what you would call “calculations.” Almost all of them were using Excel because it was a convenient way to create a table.
It’s now twenty years later, and spreadsheets are a ubiquitous tool in our daily work, and they seem to breed and grow ever more complex all on their own. Yet we still treat them as if we’re just creating simple tables – no programming protocol, hardly any checks and balances, and very little standardization. The spreadsheets we create today are enormously more sophisticated, complex and critical to core finance processes, so we must treat them with more rigor as well.
I presented a research paper on this last year in the UK. I’ll be honest, it’s a little dry. Probably better to watch this short video instead.
Be Less Ambitious and Surprise Yourself
The New Year is a time for resolutions and hopeful transformations. But before setting super ambitious goals to overhaul the close process, consider this 2011 study of finance executives from 150 companies – probably echoing some of your own sentiments around the close process. General highlights:
- Finance professionals would like to close twice as quickly as they do now.
- The #1 factor that continues to make the close process a challenge is the abundance of manual activities and undocumented (or not standardized) processes.
- Finance professionals spend between 11% and 30% of their time on closing the books now. But, if they could close faster, efforts would be redirected to strategic planning and process improvement.
This is an incredible catch-22. As finance professionals, we want to speed up the mechanics of the close in order to win back time for strategic activities and process improvement. But without first dedicating the necessary resource and technology, the close process will forever remain unchanged.
I am a big believer of making a series of small improvements as opposed to one big ambitious change. For critical processes like the financial close, small ideas are not only much less risky, but they can be implemented quickly. On the other hand, so many expectations (and managers and vendors and project plans) ride on a big change that they can paralyze the team into inaction.
So for 2012, look for small ways to start building your own process improvement arsenal. Whether it’s setting up ACHs to reduce check processing or experimenting with new tools, you’ll soon find those small successes beginning to transform the close process.
If you need more inspiration, here it is — a stunning case study of how one company completely disrupted the retail industry through a mountain of individually small process improvements.
Christmas Card
I admire families that can get themselves cleaned up in time for professional pictures on Christmas cards. For me, there is never a moment when everyone’s hair is right. Plus, how do people keep track of addresses?
But I AM thinking of you. Merry Christmas.
BOM Featured in eHow.com! (…five months later)
The article referencing this blog went up a few months ago in eHow’s Money section, but I just came across it now. Hooray!
Change Resistent (and an Oops Moment)
I am in Santiago Chile, working to introduce our product to Latin America. Imagine how honored we were to be invited to present to one of the most well established and reputable Chilean companies in Santiago. Like go-getters, we did exhaustive research, presented a polished pitch to demonstrate how our capabilities can enhance their core competitive strategy, and even kept the PowerPoint slides to a minimum (so considerate). It wasn’t until after the presentation did we consider the fact that the other side may not speak English. We were right.
The term “resisting change” suffers a bad rap because it connotes a deliberate effort to fight back. But often times, a shift in our environment sneaks up on us (new technology, process restructuring, etc.) and we fail to “embrace change” simply because we haven’t noticed anything different yet. Perhaps simply learning to notice what’s different is the key to continuous process improvement in the workplace.
Now, what about me scouring the city’s grocery stores just so I can recreate my traditional Thanksgiving turkey in Santiago? Is that resisting change or embracing change?
Simplify
Let’s face it. Compliance activities can burden the Close, especially when the clock is ticking away. Approving journal entries, routing sign-offs and collecting documentation all add bulk to the financial reporting process and can slow us down. While we certainly don’t want to abandon internal controls all together, a critical evaluation of existing controls using the following strategies can help streamline your control set so that fewer resources are expended on the compliance effort during the Close.
- Reduce the total amount of work. Generally, more control points = more work. So in order to reduce the amount of work, consider reducing the number of controls. The key to doing so without compromising governance is to favor process level controls and discard transaction level controls. For example: Approving individual journal entries is a transaction level control. A possible process control replacement would be to approve a master journal entry listing. Often, one process control can replace multiple transaction level controls.
- Reduce the effort to execute each control. Steer clear of manual controls and opt for automation as much as possible, so that the work is not driven solely by brute force. That means redesigning controls to leverage new application features, or exploring a combination of system controls to replace a manual activity. As an added bonus, the more automated the control activity, the more data will be captured by the system. And that translates to readily available information for the auditors and less time wasted on data gathering and photocopying.
Enterprise technology and risk mitigation techniques are evolving faster than ever today, creating terrific opportunities for us to refine and fine tune critical business processes.
All close tasks are not created equal. Some activities can be started and completed in isolation, pretty much at any time during the close, such as the payroll accrual. Other activities, like the sub ledger close out, have a ripple effect on the entire close process. They are called critical path activities. When critical path activities fall behind, they delay a chain of subsequent activities. And when that happens, you can pretty much kiss your fast close good-bye. So it goes without saying, critical path activities must be treated with extra special attention.
Caring for critical path activities during the close is just like caring for a high maintenance girlfriend. The key is to create meaningful face time.
When I used to consult for Fortune 1000 companies, one idea I consistently suggested to clients was to hold a 15-min daily touch point during the close to address critical path issues. Daily group meetings may seem ludicrous in the heat of the close, when you’re already missing out on dinner with the family and a good night’s sleep.
(And you might add that it’s just what a consultant would recommend — more meetings!)
But here is the thing: Teams that are serious about a streamlined close know that they can lose hours at a time waiting for an important issue to be resolved over email. Emails are easy to fire out. Unfortunately, once they are in someone else’s inbox, they become one of many other competing priorities that the person may or may not get to right away. A few hours of dead time becomes significant when the close is measured in days and not weeks.
The trick of the daily 15-min touch point is to, well, keep it within 15 minutes and yet achieve results. Here is how you do it:
- Schedule late in the afternoon with about two hours left in the workday. Why? Productive meetings have action plans. But a good meeting also gives the impression that once those specific actions are completed, there is no more work to be done. So hold the meeting late in the afternoon after much of the daily work is done. Then, come up with action plans that the team can finish before everyone goes home.
- Only discuss activities on the critical path. Focus on two questions:
- Troubleshoot– How to salvage critical path activities that are falling behind on schedule and are delaying the team?
- Anticipate – What major activities are coming up in the next two days that may derail the close timeline? No need to go too far down the critical path. Remember, you’re reconvening tomorrow.
- Start on time. And don’t worry. The whole team will ensure it ends on time.
Everything else can be relegated to email.
Who Crushes Hardest on the Cloud: Business or IT?
The Cloud is like the cool kid in the cafeteria. You can’t get two words in without it coming up, and everyone wants to know what it will do next. These are the results of surveying more than 600 companies in 2010 in research led by the London School of Economics. To the business, cloud promises cost savings and speed in implementation. IT seems to agree, just a little less enthusiastically. This echos what I encounter in the field. The unwillingness to make a big upfront invest in systems and implementation is driving finance functions to eagerly explore and engage the cloud (with their IT groups trailing along, a little less eagerly). You can read the whole research here on Accenture’s website.
Where All the Small Things Are
According to Ventana Research, “cutting the time to complete the accounting cycle is rarely a matter of finding one or two bottlenecks…[I]t is almost always a matter of addressing a large number of small things, which in aggregate add up to days or weeks that can be saved.” And where do you find these small things that add up to a long drawn out close?
Why, in your close checklist!
Most close checklists contain all the activities to close the books. If you’d like good information to design a faster, tighter close, add these two data points after each task as part of your next close:
- The date and time the task was actually completed
Actual completion date and time let you isolate all the close tasks that are: 1) Completed late in the close 2) Completed after the scheduled date 3) Not completed. And this is a great starting point to start zoning in on the culprits that are delaying your close.
The Dark Side of Materiality
It’s tempting to let small variances age on the account reconciliation because they do not surpass the materiality threshold for write off. While that is certainly fine, writing them off regularly may actually prevent a delayed close process.
How?
Small variances build up over time and cross the threshold to become a material write off. Material items must be recorded in the close period. And because the accounting team cannot close the books until after the last journal entry is in the ledger, recording a material adjustment from reconciliations completed days or weeks after month end may actually prolong the close process. Small unreconciled variances, on the other hand, are immaterial. So, even after they are identified and proposed as write offs, they can be recorded in the subsequent accounting period, with no impact to the close timeline at hand.
Don’t let small unreconciled variances pile up. Even though they fall under the materiality threshold, write them off regularly in the subsequent accounting period.
Similarly, if the monthly close timeline habitually experiences delays, a good way to approach this problem is to review journal entry activity: Is there a preponderance of adjustments originating from reconciliations at the end of the close? Are there activities that can be completed earlier in the process?
