Demystifying the financial close – What is financial close checklist management?
1: The importance and challenges of the financial close
Accurate financial information is the backbone of good business decision making and that means it is critical for executives to have timely access to reliable financial data. The financial close process is fundamental to that financial visibility. It ensures the accuracy and timeliness of individual company’s numbers so they can be passed over to the group for consolidation and reporting and comply with regulatory reports – either internal or external.
A well-executed fast close has many valuable benefits, from improving organizational performance to propelling accounting executives from financial historians to trusted advisors. Research into the financial close conducted by analyst Hackett Group found that top performers close their ledgers earlier in the month and complete the process in less time than their peer group, helping them free up resources to conduct analysis and provide financial and other company executives with support for fact-based decision-making.
 Streamlining the Financial Close Process (Hackett Group, 2017)
And yet the financial close has long been a source of frustration and pain for finance departments, with potentially significant ramifications for the organization as a whole.
The challenge of extracting numbers from disparate systems and sources remains a major bone of contention for senior finance professionals. Around a quarter of respondents to research into financial reporting conducted last year by FSN said they spent too much time on data collection from multiple data sources. A similar proportion bemoaned the time spent cleaning and manipulating data. The research clearly highlighted the desire among financial professionals to spend more time on risk management, analysis and performance measurement activities.
Opportunity costs aside, a slow financial close is also more than likely an indicator that your processes are cumbersome. That typically means manual and labor-intensive, relying on use of multiple spreadsheets. The bottom line is that a slow close will increase general and administrative (G&A) expense. It could also be an indication of underlying inefficiencies across other financial processes – such as billing, cashflow and accounts payable.
The last few years has seen a growing focus on the “last mile” of the close. This includes the most externally visible management processes that finance executives perform after the monthly, quarterly or annual close to prepare for financial reporting and disclosure. In contrast, the early stages of the financial close – the “first mile” – which includes the capture of financial data and production of the preliminary trial balance and consolidations, have largely been neglected. And this is the case even though many of the problems that occur in the last mile are due to first mile issues. It is this first mile where there is the potential to make huge improvements in the efficiency, speed and accuracy of the entire record-to-report (R2R) process.
 The Future of Financial Reporting (FSN, 2018)
2. The 4 key pillars of the financial close process
The financial close in its broadest sense relates to the set of paths or workflows that must be completed in a timely manner to ensure the complete accuracy of financial reporting.
Typically condensed into a 10-day timeframe, the financial close happens every month, quarter and year to varying degrees of complexity. The financial close is the process of taking those individual entities, closing their books and rolling the numbers up to a group level where they can consolidate and produce group financial statements before the information is passed over to a reporting group for disclosure.
There are four main components of the close:
- Journal entry – The process of posting journals and validating them. What you enter must be approved and controlled.
- Intercompany – Intercompany trade can represent a lot of transactions and a huge amount of work for the finance team, but you need to eliminate it from the results. Reconcile and accrue into the next month. The ideal situation is where the reconciliation is zero.
- Close checklist – A checklist of all the processes that need to be executed along the R2R journey, typically varying from 300 to 1,200. They need to occur within a tight timeframe and there are lots of dependencies, working across geographies and timeframes – requiring sophisticated project management capabilities to manage that checklist.
- Balance sheet reconciliation – it used to be the auditor’s job to ensure the accounts are in order and identify discrepancies, but today it’s an essential part of an organization’s financial checks and balances.
For this article we will focus on financial close checklist management – what it is, its role in the close and how you can tackle the challenges related to it.
3. What is the role of financial close checklist management in the close?
At its simplest, everyone involved in the financial close process will have their own checklist of the activities they need to complete during period end. For example, tasks such as depreciating, reconciling or capitalizing assets. These activities are not always performed in a sequential order and can often be performed on different days of the close and potentially by different person or group. There are often clear dependencies which must be adhered to.
In many organizations, the close checklist remains a primitive affair. Individual tasks are often recorded in standalone spreadsheets and developed by individuals to suit their specific regional needs. These tasks are not visible to the wider finance function and can be completely disconnected from the underlying monthly closing process they are responsible for.
In larger organizations, and particularly global entities operating across multiple geographies and time zones, coordinating all the close activities across the enterprise at month-end soon becomes hugely complex and difficult to coordinate due to the sheer volume of tasks, the interdependency of those tasks and the tight deadlines at play. Delayed tasks are the cause of much frustration, bearing in mind the very real pressure for organizations to work to very tight timeframes to close the books.
4. The key elements of financial close checklist management
- Identify task dependencies
- Create timetables
- Define milestones
- Complete Tasks
- Update the calendar / schedule
- Provide required information
What’s often glossed over is just how time consuming it soon becomes to manage a close checklist, particularly when you take into account the multiple geographies and time zones across which many multinationals operate and the huge interdependencies across the entire financial close process.
5. The common pitfalls and challenges of financial close checklist management
The financial close is essentially a chain of events where everyone in the finance team has a part to play. Coordinating all the close activities across the organization at month-end is extremely difficult due to the sheer volume of tasks and tight deadlines. In a global organization, the complexity of those interdependencies soon becomes a real headache to manage, particularly when you add disparate geographies and timeframes into the mix.
The completion of one task needs to trigger the next but delays and bottlenecks at any point along the checklist is the source of much frustration. For team members operating in isolation, it is very easy to lose track of where you are in the process, particularly if people aren’t aware of the relationship between tasks. Without an umbrella view of activities and an intelligent means to orchestrate their completion, it is extremely difficult for organizations to see where they are in the financial close process.
The knock-on effect of aspects of the financial close not being completed in the right order can be catastrophic. For example, before you can depreciate an asset it must be reconciled and you must ensure that all asset based projects are capitalized otherwise you could depreciate the wrong amount and the impact on your P&L could be significant.
Manual approaches to checklist management are time-consuming, inefficient and fail to provide a single audit trail of activities, at a time when more than half of finance professionals believe they spend too much time on transaction processing, according to a study by FSN Research.
No financial controller wants to miss the financial close deadline, because period trial balances must go into the group close where the figures are used by the markets and investors. And yet with so many cogs in the wheels, identifying the source of a bottleneck in your financial close process is at best laborious and a worst almost impossible, bearing in mind the geographic spread of tasks, the number of people involved and the lack of visibility.
 The Future of Financial Reporting (FSN, 2018)
6. How can finance teams tackle the challenges of financial close checklist management?
Remove the manual burden
You can remove unnecessary manual activities by automating the financial close checklist. Any task can be scheduled on a given time/date or, more importantly, can be triggered by dependencies, avoiding the need to manually and constantly monitor tasks or individuals responsible for those tasks. This can have a huge impact on reducing the length of time it takes you to close the books.
Automated coordination and orchestration streamlines the hundreds of month end tasks across your entire organization. Integrated workflows ensure that tasks are completed in the correct order and in the most efficient timeframes, by removing the need for managers to waste time chasing up the completion of tasks. Employees previously occupied with keeping data moving are now freed to perform higher-value tasks, such as reviewing reports and complex exceptions.
Having all close activities, including reconciliations, journals and intercompany, combined into a single automated environment means users can collaborate more easily and resources can be deployed more efficiently. The result is productivity gains, cost savings, reduced cycle times and an accelerated close.
Gain visibility of the entire close checklist management process
KPI monitoring gives an overview of the close checklist status and highlights potential bottlenecks in real time and in a very visual way. Dashboards and alerts allow you to manage the progress of close tasks in real time and give finance professionals an overview of tasks that haven’t been started or completed.
This visibility allows team leaders to review bottlenecks by task, individual, cost center and entity.
Role-specific overviews of your close checklist management – from group controller down – put you in control of the process and allow you to set the parameters for the granularity of detail they need to see. Giving different levels of management a snapshot of the status of regions in real time allows you to preempt problems before they occur and highlights the impact of any overdue activities on the overall close timetable so people at the highest levels can make sure they can be dealt with accordingly.
Build confidence and control with an audit trail
Eliminate endless standalone spreadsheets typically used by individuals to manage the close checklist by using an automated system that gives you one version of the truth and an audit trail of which financial close activities have been completed, when they were completed and by whom. Workflows give employees ownership of each activity and lay bare the interdependencies of their tasks.
Having a single company-wide process ensures you adhere to best practice and gives all finance stakeholders across the enterprise immediate visibility of issues, tasks and bottlenecks that need escalation and remediation.
A full audit trail that tracks the entire close checklist process from end to end allows organizations to flag up recurring bottlenecks. This can help you benchmark your performance, address underlying issues and facilitate post close reviews, and subsequently streamline the close checklist management process, to encourage continuous process improvement to further accelerate the close.
Being able to preempt any late tasks and having full visibility over the elements that are likely to have an impact on the deadline is critical. Gaining that company-wide visibility without automation relies on trawling through close checklists manually, which is neither efficient nor failsafe.
Manage close checklist risk
Being able to orchestrate and monitor hundreds of period-end tasks as part of an interdependent series of activities is a fundamental part of your internal controls. Maintain the integrity of roles and access with role-based security aligned with your underlying applications. Automated systems also make it easy to assign and reassign tasks to backup personnel for each required role and responsibility within the close. At the same time, you can attach and store procedures and policy documents in task list items, which are immediately available to the individuals performing these tasks.
Dashboard capabilities provide visibility to authorized users to track their period close status and progress by criteria including company, region, area and close milestones.