Speeding up the close: instead of grumbling about the significant time and resources required to comply with new regulatory demands, many companies see a golden opportunity for finance to lead the way to better decision-making.

The clock keeps ticking, as public companies with a January-December fiscal year--having already squeezed out 15 days from the former 90-day requirement for closing their full-year books--must trim another 15 days by December 2004 to meet Sarbanes-Oxley requirements. With deadlines looming, finance and technology staff are looking for ways to reduce time and speed up the process to meet the impending 60-day close deadline.

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While corporate finance departments scurry to accelerate their close process, analysts, investors and board audit committees are watching closely to see how fast and how well companies are able to report quarterly and annual results.

But, in a complex corporation, how fast can the close be without jeopardizing quality? Finance departments large and small are preoccupied with this question, while work proceeds at a feverish pace. Yet, there is a silver lining for all this effort. Faster financial results can lead to better decision-making, which, in turn, can lead to significant bottom line impact.

In fact, the speed and quality of the close has become a prime indicator for analysts and other company observers for gauging the health and accuracy of a company's financial position. "The ability to close quickly enables management to concentrate and respond on prior period results to keep a competitive edge," says Blythe J. McGarvie, a director of the Pepsi Bottling Group and Travelers Property Casualty Corp. and president of Leadership for International Finance. "A faster close gives directors more time to digest the numbers and better fulfill our fiduciary responsibilities," she adds. A former CFO, McGarvie believes that a swift close also reflects on the efficiency and effectiveness of management and the company.

For many, the ability of a company to close the books quickly is a measure of management's control of the business. Access to real-time financial results allows management to identify significant issues as they arise during the period, permitting them to make mid-course interventions as necessary. Likewise, management is better equipped to evaluate hard data and foresee trends, both positive and negative, and take advantage of opportunities that may be time-sensitive. In such cases, finance has become a true partner to business units, playing a more strategic role that directly impacts business results.

Such control is valued also by Wall Street, which rewards companies that are able to provide investors with accurate performance guidance. "All things being equal, if a company is able to release its financial information more quickly than other firms, this indicates management has invested time, energy and money into systems that are more efficient than their competitors," says Al Bryant, CFA, portfolio manager at Chicago-based Segall Bryant and Hamill. "This also implies that managers have more timely market data than their peers, which should allow them to respond more efficiently to changing markets."

Unfortunately, there are many examples where significant quarterly adjustments or restatements have had a punishing effect on share prices, as well as a negative perception of management and the board. Clearly, investors view earnings surprises as a significant factor in investment decisions, and they can be a major factor in comparing management's performance to that of their industry and sector peers.

Pressure Mounts for a Virtual Close

Heightened concern over internal controls and financial reporting, combined with an ongoing need to meet financial expectations, have created an intense environment for those charged with the responsibility. In fact, many feel that pressure is mounting toward a virtual close, much in the same way that commercial banks were compelled to move closer to same-day settlement more than 20 years ago.

But how urgent is it, and is it worth the investment? In a recent survey of finance executives in companies with revenue of $500 million and above, The Johnsson Group found fewer than one out of five survey respondents (17 percent) reported a fully automated close. More than half said that their close process is semi-automated, requiring some manual intervention; and a quarter replied that their systems need significant manual intervention. Such time-consuming activities distract finance executives and their staff from spending time on value-added activities that contribute to operating business results.

Accelerating the close should be viewed as an evolutionary process, rather than an urgent step to be taken all at once. Cisco Systems Inc. led the way, announcing in 2001 the completion of an eight-year, multi-pronged effort to reach its virtual close status. Progress along the functional-to-virtual pathway can serve as an indicator of how far the finance organization has transformed from scorekeeper to business partner (See Table A on this page.)

The survey revealed that two-thirds of the respondents close their books at the end of the quarter in 4 to 7 business days, which is considered average by today's standard. Another 16 percent are accomplishing the close in 1 to 3 days, moving closer to virtual status. On the other end of the spectrum, 21 percent of the companies reported needing more than 7 business days to complete the close process. For those in the average category, significant improvement is possible, and imminent.

There are signals that companies have made progress in certain areas. Forty-five percent of the responding companies are now able to view revenue information throughout a reporting period. Opportunities still exist, however, since only 10 percent have access to that information on a real-time basis. Few, however, have access to data beyond revenue; ongoing, timely access to operating income numbers is rare.

Companies must be prepared to confront some hurdles as they move to shorten the close, balancing quality and gaining transparency, as outlined in. Table B on the following page. Paramount to any effective change agenda are the corporate culture and the company's ability to accept change.

Another survey finding was that half of the respondents noted concern about heavy reliance on one or just a few key individuals. This key person dependency apparently transcends the size of organization, since this issue was equally likely in both smaller departments (under 100) and larger departments (100 to 500). This apparently stems, in part, from prior reductions in force and a decreased emphasis on training, leaving companies with fewer finance "historians" who know the rationale behind the processes and have a deep understanding of the business.

A More Strategic Role for Finance

While the path points to a virtual close, the speed with which companies transform toward that goal will necessarily vary by company and industry. For many, the cost to implement the systems and technology that must be in place for a virtual close is just too large an investment for the immediate future.

However, many CFOs understand the need for such a transformation process. They are creating a roadmap to more closely align finance's contribution with the business strategy to increase their company's competitive edge. This change agenda goes well beyond meeting regulatory compliance. In fact, for these leading CFOs and top management, more informed decision-making is the main driver, with quality and reliability as top objectives.

Accelerating the close process, thus, is the right first step on the path toward finance transformation. World-class finance departments will reap benefits that affect their people, their processes and their systems, as described in Table B above.

A Pragmatic Approach

Accelerating and streamlining the close is a straightforward approach of reviewing process and organizational structure, technology and tools, creating maps, determining root cause relationships and establishing process ownership. The prioritization and allocation of resources to address this work often suffer as competing initiatives, strained work forces and just meeting the day-to-day tasks consume the organization. However, the CFO leaders who make finance department transformation a priority will see their own roles transformed, as well as that of their departments.

To begin, they can eliminate unnecessary steps through critical examination of processes; leverage existing and new information technology and tools; and improve communications within the work group and across the organization. Elevating the skill sets and capabilities of the finance organization remains the most critical success factor. This will enable the financial reporting process to evolve from a monthly event to a continuous process of collecting, analyzing, communicating and acting.

Clearly, CFOs attach considerable value to the role of the close process as the authoritative source of financial information and business results. However, as businesses seek a competitive edge, the close process provides an opportunity for the finance department to change the perspective on what the company traditionally has viewed as a mundane, late-night event for the finance staff. Now is the time to reposition the close process as an intangible asset for the organization. In turn, this enables proactive decision-making to reduce risk and capitalize on market opportunity.

Optimizing the close by integrating it into the daily routine is a crucial step toward moving into the business partner role that top management, regulators and investors both expect and deserve. This move may soon become a basic cost of doing business.

Table A Close Process Categories

Characteristics    Virtual              World-Class

Close Cycle        Less than one day    One to three days
Chart of Accounts  One                  Multiple but standard
Technology Used    One end-to-end ERP;  Multiple but few ERP
                   One general ledger   platforms
Reporting          Information "needs   Key information
                   and wants" met on a  "needs and wants"
                   real-time basis      met on a timely basis

Characteristics    Average                 Functional

Close Cycle        Four to seven days      Over eight days
Chart of Accounts  Multiple and partially  Multiple and not
                   standard                standard
Technology Used    Multiple ERP and        Multiple ERP and
                   general ledgers         general ledgers;
                                           some legacy
                                           software/hardware
Reporting          Key information         Most information
                   "needs" met on a        "needs" met slowly
                   timely basis

Source: The Johnsson Group

Table B Hurdles to Overcome and Resulting Benefits

People                     Processes                Technology

Reliance on one or a few   Require manual           Multiple ERP
key personnel              intervention             configurations;
                                                    disparate legacy
                                                    systems
Ineffective communication  Focused on function      Business units
and/or cultural            rather than drivers      cannot access
insensitivity                                       key reporting
Trained to abilities and   Time spent on            Information not
not to job                 non-value-added           available on demand
                           activities

People Benefits            Processes Benefits       Technology Benefits

Understanding of business  Limited manual           Use of fully
and relationship to        intervention             integrated ERP that
market events                                       meets globalization
                                                    needs
Leadership and improved    Emphasis on key          Self service/on-
communication              performance              demand reporting
                           indicators               mechanisms
Heightened business        Seamless communication   Online access to
acumen, analytical         through culture,         real-time relevant
skills, insight            language and time zones  data
Finance professionals who  More time spent on       Sharing of best
are more valuable to       value-added activities   practices across
entire company                                      business units

Source: The Johnsson Group

Gaye van den Hombergh ([e-mail]) is President and Managing Director and Laurie Streling, CPA ([e-mail]), is Senior Vice President of The Johnsson Group, a Chicago-based finance consulting firm.