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Financial Closure: Going from Pain to Gain

February 16, 2017

The financial closure process is one of the most challenging tasks in the finance and accounts function. In 2016, the Institute of Management Accountants (IMA) conducted a survey of more than 750 financial executives in the U.S., asking them about the current status of their accounting processes, and if they are exploring automation as a solution. The survey revealed that around 41% of the respondents see the time required to compile data as the biggest constraint, while some 28% said they are highly dependent on spreadsheets for closing processes.

Financial Closure – A Tedious Exercise

What makes financial closure a challenging activity?

The answer to this is straightforward: financial closure is not an independent process, but the output of many inter-related and inter-dependent processes. If one process gets stuck, the cascading effect on subsequent processes stalls the entire exercise, delaying the final outcome. At a broad level, financial closure involves transaction processing, ledger closure, consolidation, and reporting. Each of these activities may have one or more loopholes attributed to either the people involved or the processes followed and systems used.

Let us examine why a companys finance function finds it difficult to close book reporting on time. The prime reason is the prevalence of disintegrated and inflexible systems across business and product lines. Moreover, different accounting practices followed by the various processing systems are another roadblock.

Chief financial officers (CFOs) across the world are therefore looking at simplifying, digitizing, and automating constituent processes and systems, as well as outsourcing non-value adding activities, to ensure timely and efficient closing and reporting cycles.

Establishing a Foolproof Financial Closure System

A well-knit and comprehensive approach to financial reporting requires:

  • Radical changes in the IT landscape to integrate siloed applications
  • Centralized accounting rule engine for consistent accounting processes across all product and business lines
  • Simplified and flexible chart of accounts to facilitate effective consolidation
  • A robust governance framework for the ledger closure process
  • Centralized, simplified, and automated reporting processes rendered on a common platform

Apart from these, organizations should focus on identifying inefficiencies in their people, systems, and processes, and institute measures to align these three aspects with each other. People responsible for the financial closure activity should identify the critical path of the entire cycle, and ensure seamless execution. Some activities in the financial closure cycle might have a greater bearing on the entire process. As per a survey, some 40% respondents feel that extensive internal reviews are time-consuming, 35% feel that the need to capture and consolidate data at more granular levels delays the closure process, and 20% feel that manual checking of errors is the reason for delays. Such bottlenecks should be identified beforehand, and addressed effectively. Last but not the least, improved and automated workflows will be of immense help in optimizing the closure process. With the elimination of manual intervention, the entire exercise can be made error-free and easily controllable.

By establishing a well-rounded financial reporting framework, finance organizations will surely be able to speed up their financial closure process. However, merely enhancing the pace of the process without improving governance, transparency, and data reliability, will not deliver the desired results. What we need is a balance between speedy closure and accuracy of financial statements. To achieve this, organizations must simplify existing processes by eliminating duplicate or redundant processes and identify areas for digitization and automation, say by using automated tools for consolidation, intercompany eliminations, and so on. They must also outsource non-value adding activities such as the tasks that are human-intensive and less critical to the management. Improving the financial closure process is not a one-time activity. It is a continuous process improvement where each subsequent closure cycle incorporates some best practices from the previous one, and moves a step ahead in driving the efficiency of the whole function.

Jyoti is a Functional Consultant with the Banking and Financial Services (BFS) business unit at Tata Consultancy Services (TCS). A qualified Chartered Accountant from the Institute of Chartered Accountants of India (ICAI), she has over nine years of experience in the IT industry, most of it being in the BFS and capital markets space. She provides consulting services for financial and regulatory reporting with regard to IFRS, FATCA, CRS, and FINREP, and is responsible for the conceptualization of finance transformation programs for TCS leading clients.