One of the most effective ways of measuring a CFO’s effectiveness is the length of time it takes to close the books, according to a new study by Ventana Research. Organizations that close their monthly, quarterly or semiannual accounts within six days of the end of the period tend to display a higher level of efficiency than those who take longer.
“In my judgment, finance executives should regard a slow close as a negative key performance indicator pointing to less-than-effective management on their part,” wrote Robert Kugel, SVP & research director at Ventana, in a blog post
The study revealed that companies take longer to close today than they did in 2007, when Ventana completed similar research. Fully 47 percent of organizations were able to close their quarter or half-year period in six business days or less five years ago, compared to 38 percent today. Additionally, five years ago, 70 percent could complete their monthly close in six days, compared to only half today.
Further inspection revealed that this slowdown in the close process is somewhat deceiving; across the board, organizations do not appear to be taking more time. Rather, organizations that were fast closers five years ago are still fast closers today, but the ones who took more time back then are now taking even longer. Kugel noted that one key factor that has contributed to this is the paring of many finance department staffs in the Great Recession. “Companies that take more than a business week to close have too many manual processes, so with fewer hands to do the work, closing takes longer,” he wrote.
Kugel went on to explain that while few organizations (only 6 percent) use automation to manage their closing process, they tend to achieve better results than the ones that stick to the old manual methods. Fully 43 percent of the organizations that fully automate the process close their books in one to four business days, compared to 27 percent that are partially automated and 16 percent that have implemented little to no automation.
Another important factor, Kugel continued, is simply making the closing process a departmental priority. Finance departments that emphasize a faster closing are more likely to shorten their closes than those that do not. Additionally, performing post-close assessments to determine how well the department is performing, as well as simplifying financial reports and other things, can make a huge difference.
Kugel concluded that the pace of the closing process boils down to good management versus poor management. While there are many reasons why a finance department might take more than a business week to close, there really are no excuses—especially when some organizations are closing in less than four days. “When their departments get to the point of closing quickly, CFOs and controllers who are determined to get past a ‘we’ve always done it this way’ mentality in order to reduce time spent on purely mechanical tasks will be able to devote their resources to more analytical activities of greater value,” wrote Kugel.