Regardless of how sophisticated and technologically advanced a company’s operations are, you’ll always find its accounting team glued to their Excel spreadsheets and calculators – carefully entering and matching figures for hours.
And then comes the period-end chaos. Accountants stay after hours to ensure that the books are closed accurately and financial statements are prepared to be shared with stakeholders and auditors – yet, it’s always too late.
The moment they take a breather, it’s already time to do it all over again.
Financial close is an integral function of an organization. The financial statements created at the end of this grueling process can majorly affect the investor’s decisions or its shares (in case of a public firm). However, the process of financial closing is still largely traditional and becomes a road-block while making important financial decisions and managing cash.
In this guide, we’ll touch upon how accounting teams have been closing their books for decades and why there is a need for automation to help them elevate their processes to become the organization’s financial advisors they’ve always wanted to be.
Financial Closing a recurring process that every business’s accounting team undertakes at the end of every financial period (month, quarter or year) to verify and adjust the account balances to start a new accounting cycle.
The process starts with recording transactions as journal entries and end with preparing the financial reports for the period. These reports reflect the financial position of the organization for its board, investors, lenders, and shareholders.
People often use ‘financial close’ and ‘closing the books’ alternatively. However, closing the books is just the last step of the process.
Financial closing is done using 5 steps:
a. Recording transactions: Documenting all cash and funds that come in through customers along with comparing invoices with the recorded transactions to ensure that there no missing payments
b. Updating Account Receivables & Payable: Maintaining records of creditors and debtors, send prompt reminders to reduce debt, avoid duplicate payments, and overdue payments
c. Reconciling accounts: Matching existing records with bank statements, catch any discrepancies, and make adjust (if necessary to the journal entries)
d. Review inventory & fixed assets: Recording the payments made for your fixed assets and track inventory on a monthly basis
e. Organize & review financial statements: Reviewing documents like the general ledger (GL) and profit and loss statements to ensure a smooth audit
The steps mentioned above seem fairly straightforward, right? And yet, organizations find it difficult to close efficiently and on time in most cases. Since month-end financial close involves multiple tasks and stakeholders, it presents some complex challenges for the organization.
In most accounting teams, there are no fixed rules to follow while closing for a financial period. The entire financial close process is conducted simply on the basis of institutional memory rather than standard operating procedures (SOPs). As a result, this becomes a highly disorganized effort with multiple people doing things the way they think is best.
The lack of structure and defined protocols is further aggravated by the heavily manual way of doing things. Accountants and R2R analysts often:
These are just some (of many) instances where accountants and R2R analysts rely on their eyes and archaic communication systems to get the the job done. Result? The financial closing gets delayed by 7 to 10 working days and is still not accurate since the manual tasks leave a lot of room for errors.
Throughout the financial period (a month, quarter or year) the finance team waits until the end of the period for the information like:
Consequently, they cannot perform the close tasks until the very end of the period. Even if they attempt to consolidate the close information the CSV data will not be incrementally consumed. Hence, each CSV file retrieve will require:
While this effort might marginally shorten the month-end close timeline, it ends up being resource-heavy and leaves a lot of room for errors (owing to the manual data handling).
With the bulk of work pushed towards the end of the period, the team is never able to achieve day zero close.
Organizations majorly rely on their ERPs and CSV files to record transactions, reconcile them, find anomalies manually, fix them, and prepare financial reports. In some cases where the accounting team has recognized the need for automation, they end up investing in tools for a specific function like record transactions, account reconciliation or an enterprise accounting software.
While this may seem like a good solution, it’s a temporary one. Different members using different tools will first lead to lack of visibility in the team and secondly cause gaps in the data as information won’t flow seamlessly from one tool to another. As a result, some tasks might get automated but people end up doing more things manually to compensate for the inefficiencies.
Additionally, teams still use emails as their primary communication channel where they raise concerns about missing documents, assign GL accounts for R2R analysts to work on, follow up with the A/R and A/P managers for information, and more. This slows them down considerably and the management has no visibility into the financial close bottlenecks.
Financial Close Automation is the process of using AI and other tools to reduce the manual tasks involved in the financial close process like journal entries, month-end close checklists, finding anomalies, collaboration, and more.
Its major benefits include:
Since the financial close process requires completing tasks that have interdependency on various functions of the finance team like A/R and A/P, it’s integral that they have one place to assign tasks, raise red flags, and keep track of the progress. Financial close automation software offers one dashboard for the entire team or multiple departments to collaborate to speed up the process and get more visibility.
Given the heavily manual processes, the financial close process is prone to many errors. Whether its preparing and maintaining month-end close checklists or finding anomalies, financial close tasks add up to many man hours.
Financial close software brings automation to these repetitive, recurring tasks so that the accountants and Record-to-Report (R2R) analysts can focus on things that need their input and research. For example, an accountant might not be able to see a mismatch in a recurring transaction but the software will be able to to detect it immediately and leave it to him/her to investigate further.
After every month-end or year-end, the stakeholders patiently wait for the financial reports that tell them about the company’s performance and help them decisions for the future. When the finance team takes 7 to 10 days to show them these reports, it delays the financial decisions and affects the company’s face value.
Financial close software helps the team work on all close tasks throughout the month with real-time data so they don’t scramble through the end to finish tasks and produce financial reports.
The continuous discussion withing the industry about AI in finance will make you thing its just a buzzword. But it’s more than that. AI addresses the root of the financial close process issues and automates repetitive tasks that just need strategic human intervention.
Here are some use cases of AI in the financial close process:
Account analysis is done for an account, group of accounts, or even across an entire category of accounts. Its purpose is to make sure everything in the account is correct and complies with the appropriate accounting principles, be that GAAP (Generally Accepted Accounting Principles) or IFRS (International Financial Reporting Standards) during month end close process.
Accounts are analyzed differently depending on the account type – asset, liability, equity, income, expense, etc.
The traditional way of accounting analysis poses a risk of accuracy:
Since different account types need different methods of analysis, there is a need for flexibility that spreadsheets cannot provide. Even with all their formulas and detailed information, spreadsheets don’t have the ability to store all workpapers in one place.
So, what’s the solution?
Connected Workspaces provides a listing of month-end close process tasks – in other words, a monthly close binder!
Here each task contains the necessary task level information that includes:
With each task, you launch a system stored and maintained spreadsheet which provides the same flexibility as spreadsheets with additional system controls:
Connected workspaces utilize AI to provide flexibility for accurate account analysis with the efficiency of spreadsheets.
As discussed before, finance teams wait until the end of the month for all the necessary documents and bank information and hence, are unable to continuously close tasks throughout the month.
The second challenge is that data comes from different internal and external systems with different levels of granularity and needs to be normalized and matched. Some data comes in at a summary level, like information from the General Ledger. The summary ledger data is used to validate and match against the detailed transaction information from the different sub-ledgers, schedules, or listing of transactions used for accruals or for timing cutoffs, etc.
Real-time data updates the Excel workpapers incrementally on a daily basis so that processes like reconciliation and account analysis can be performed incrementally without worrying about data cut-off, duplication of transactions, and errors created from copying formulas to the new information.
With the help AI, financial close software builds data integration with the source systems including ERPs, banks, payroll systems, purchase order and procurement system, and more.
Even though 40-60% of all transactions happen at the month end, once you have access to real-time data you can create a schedule to pre-close accounts through the month rather than waiting for month end. Then, the “after” month end close process becomes incrementally verifying the new transactions during the month-end.
Research shows that 40% to 60% of the time accountants spend on the close process is looking for anomalies (errors and omissions) in transactions and account balances, which we also refer to as anomaly detection. Ideally, anomaly detection should be an everyday process, but many organizations do it after the month-end close process starts.
Accounting transactions are very pattern-based. For example, vendor invoices are typically charged to the same account segment/account combination, and revenue and write-offs are typically charged to a similar account segment/account combination.
An everyday process of looking at the patterns and identifying the outliers (anomalies) can enable them to get corrected before the month-end period starts, which will not only reduce the burden on finance teams during the close process but also improve the accuracy.
Identifying Errors and Omissions is a perfect use case for the AI process because accounting is very pattern based. Here are some reasons why:
a. Algorithms interpret patterns:AI uses computer algorithms that aim to mimic the human ability to learn, interpret patterns and make predictions. The key to identifying errors and omissions is “interpret patterns”. For identifying errors and omissions, “Machine learning” is a form of AI that uses data to train algorithms to recognize patterns and identify outliers/Anomalies.
b. Flagging errors:AI looks at the sequences and patterns of invoice numbers. If an Invoice falls out of pattern or comes in at a different time it could be a manual invoice and a duplicate billing, which will be immediately identified and flagged as an error/anomaly.
Rules tend to use “If/than/else” logic to find errors. On the other hand, algorithms apply different dimensionality, tolerances, and focus to identify outliers that translate into anomalies.
Now that we’ve discussed the benefits of financial close automation software and use acses AI in financial close, you might say “well, that’s easier said than done.” So, let’s get down to execution – see how you can go about implementing financial close automation in your organization.
Many organizations spend too much time with inefficient financial close processes. Many have not brought in an external services consultancy to evaluate processes againstmonth end close best practices, and this often hinders improvement. Often, these organizations have Microsoft Excel-laden processes that are inconsistent and provide little insight as to financial close bottlenecks.
Many financial management service providers focus on this area in what is marketed as “financial transformation” projects. They leverage technology for financial close (including reconciliations, close task management, financial consolidation, disclosure management) and can help you change from a point solution perspective to a more holistic approach.
Here are some Key Performance Indicators (KPIs) that you must set goals for while automating your financial close process:
a. Profit and Loss Exposure
The profit and loss accounting metric allows you to measure the risk and consequential impact that certain items will have on your business. Without this metric, you’ll miss a significant analysis that could create an opportunity for future financial close process improvement.
P/L Impact refers to the revenue and expenses that are potentially at stake when looking at the accounts needing to be reconciled. This number is then divided by the total number of items that need to be reconciled to get an average of the impact each reconciling item will have on the Profit & Loss Statement.
This metric essentially measures how much risk your company is open to at the moment and ideally it should be as low as possible.
b. Process Cost
This metric allows you to measure the cost of managing the entire financial close process in the larger context of organizational revenue. Two key benefits of automation in accounting include monitoring this metric and working to reduce the costs (both direct and indirect).
When looking at Process Cost, the higher the ratio, the better. Ideally, the cost of running the process should be small in comparison to the total revenue being generated.
c. Time to Close
Time to close is one of the most critical KPIs for finance and accounting to track by comparing the actual number of days it takes to close to the target period. Analyzing this KPI helps gain visibility into a part of the process that otherwise is not transparent.
Time to Close is usually calculated on both a monthly and annual basis. If this period is too long, it can lead to delayed reporting of financial information. Delays to the annual close can lead to poor-quality annual reports as a result of being rushed.
The ideal Time to Close is less than or equal to 1. If your Close Window (how long your close SHOULD take) is 5 days, and their Actual Days to Close (how long it actually took you to close) is 10, then the Time to Close would come out to be 2, meaning it’s taking you 2X as long as it should.
However, if your Close Window is 5 days and your Actual Days to Close is 4 days, then Time to Close would be 0.8, signaling a successful close time.
d. Close Quality
The Close Quality KPI relies on the numbers from the previous three metrics. Analyzing this metric gives an indication of the quality of the overall accounting process. The closing process can be prone to errors like typos and formula errors, especially when handled manually or with spreadsheets, so it’s essential to monitor the quality of the data.
When looking at Close Quality, we take all of those metrics into account by multiplying them against each other and then dividing 1 by that total number. See the example below.
Since the metrics being evaluated in the denominator are ones that should ideally be lower, having a higher output signifies a better Close Quality.
e. Issue Management
The issue management KPI identifies the ratio of issues that are raised in the close process to the total tasks being performed. A high ratio of issues raised should alert finance leadership to inefficiencies that could lead to lower-quality tasks.
For example, if 10 issues were raised during the close process and there were 100 total tasks, the Issue Management total would be 10%. A high number of issues indicates an ineffective close cycle with too many issues.
When it comes to choosing a vendor for financial close automation, there are some factors you need to consider that affect the scalability and efficiency of your process.
Here are factors that Gartner recommends you keep in mind when making an investment decision.
a. Ensure the Financial Consolidation/Reporting Solution Is Capable of Meeting Your Complexity and Global Regulatory Requirements
If you have simple consolidation requirements, you may not need a consolidation
solution. However, this can change if your organization is active with mergers and
acquisitions. A financial consolidation solution enables you to consolidate results at a summarized level, process interentity eliminations and joint venture booking, perform currency translations and create local regulatory reporting.
b. Determine How Financial Close Solutions Can Reduce the Need for Uniform Core Financial Solutions in a Multi-ERP Environment
Many organizations seek to reduce the number of general ledger/ERP
instances, sometimes moving to a single vendor and single instance approach. While this may be the correct approach for some, others may opt for an instance consolidation approach, moving to a two-tier solution. Many organizations may not need to consolidate instances at all, and may be able to bring summarized data together through a financial consolidation that solves all regulatory and tax requirements.
c. Plan for Incremental Targets to Reduce the Time Needed to Close Your Financials Through the Deployment of Technology
Many organizations take between eight and 10 business days to close their books. This includes closing out general ledgers, reconciliation, financial consolidation and
management/financial report production. Financial close suites and point solutions can reduce inefficiencies and shorten the time taken to close.
d. Use One Vendor for Reconciliation Management and Close Management
Most reconciliation management solutions leverage a proprietary business process
management engine for task management, workflow and approvals, which ensures
consistency in governance. With this capability, a Controller will be able to monitor close progress and determine where fixes need to be made as financial close bottlenecks pop up.
HighRadius’ Financial Close Automation Software helps organizations like yours achieve day zero close with end-to-end Finance Close automation through auto-data aggregation, automated workflows and close task management.
Let’s go though an overview of how a close cycle would typically look like when you use HighRadius.
On the left side are the various datasources of your company, such as your ERP, banks, and other sources that are involved in your transactions and their processes.
On the right side, you have your stakeholders, including internal teams like accounting and external parties like auditors.
HighRadius integrates seamlessly with all of your data sources to collect data and transactions, ranging from GL accounts to banking transactions and any other relevant data used for financial close. This data is automatically loaded and compiled to create a comprehensive data set.
The application uses a built-in workflow and the compiled auto data loads to generate a month-end close process checklist, which is then assigned to specific individuals for execution.
The system provides a collaborative workspace for review and approval, giving all stakeholders across the organization visibility into the status of the close tasks, dependencies, delays, and any necessary actions that need to be taken. Eventually, a comprehensive Journal entry is generated with all updated tasks.
Finally, we close the loop by posting the Journal entry back to the general ledger in your ERP. At the same time, we lock the task to prevent any further changes, creating a virtual binder for your records.
HighRadius offers unique AI-based capabilities that go beyond rule-based automation for financial close process improvement.
Task-specific worksheets: Allow users to complete closing tasks for each of the functional category by validating the completeness of transactions and accuracy of the amount booked.
Connected Workspaces – Faster completion of month-end close tasks: Allow R2R Analysts to share their work papers for each GL account task category for review and approval. Allow users to provide inputs to complete tasks.
Real-time visibility of tasks progress to stakeholders: Provides visibility to all stakeholders across the organization on the status of tasks, dependencies, delays, and any action that needs to be taken.
Automated Journal entry posting to ERP: Ability to record transactions in the application which will be automatically posted into the ERP aligned to the compliance and audit requirements.
Detailed close project plan: Create detailed month-end close process plans with specific close tasks that can be assigned to various R2R analysts to perform closing activities for all functional categories including Accounts Payable, Accounts Receivable and Fixed Assets.
AI-Powered Anomalies Detection: Provides a list of potential anomalies that helps in addressing issues proactively rather than waiting until month end for adjustments.
Autonomous accounting is HighRadius’ AI-based record-to-report solution that enables faster month-end close and accurate, automated account reconciliation.
It offers configurable matching rules and algorithms to identify and resolve variances in general ledger accounts and makes the financial data SOX-compliant and audit-ready.
a. AI and ML-driven automation: HighRadius leverages Artificial Intelligence (AI) and Machine Learning (ML) to automate the accounts reconciliation process. The platform uses AI and ML algorithms to analyze large volumes of financial data and identify anomalies, improving the accuracy and effectiveness of the reconciliation process.
b. End-to-end automation: HighRadius offers end-to-end automation of the accounts reconciliation process, from data extraction and transformation to matching and exception handling. This helps to reduce manual effort and improve efficiency. It also offers a financial close and anomaly detection solutions.
c. Integrated receivables platform: HighRadius offers an integrated receivables platform that includes end-to-end order-to-cash solutions, such as credit management, cash application, deductions management, e-invoicing and payments software, and collections management software, providing a comprehensive solution for organizations’ financial management needs.
d. Customer-centric approach: HighRadius strongly emphasizes customer service, offering dedicated customer success managers and a support team that is available 24/7 to assist customers with any issues or questions.
Building a strong business case with potential ROI figures and tangible and intangible benefits is critical to get the necessary approvals for the investment. Below are some reasons why building a strong business case is important.
a. Justification: A business case provides justification for the investment of resources, time, and money into a particular project or initiative. It helps to ensure that the project aligns with the organization’s goals and objectives and provides a positive return on investment.
b. Clarity: A business case provides clarity on the project’s scope, objectives, and expected outcomes. It outlines the risks and benefits associated with the project and provides a clear plan for how the project will be executed.
c. Communication: A business case provides a clear and concise way to communicate the project’s value and importance to stakeholders, including senior management, investors, and employees. It helps to ensure that everyone is on the same page and understands the project’s purpose and goals.
d. Accountability: A business case helps to establish accountability for the project’s success or failure. It sets clear expectations for project performance and provides a framework for measuring and evaluating the project’s outcomes.
e. Decision-making: A business case provides decision-makers with the information they need to make informed decisions about the project. It helps to ensure that decisions are based on data and analysis rather than guesswork or intuition.
In summary, building a business case is necessary to ensure that organizations invest their financial and non-financial resources in the right projects that align with their goals and objectives and deliver the expected value.
a. Executive Summary: this section should provide a brief overview of the business case for implementing automated financial close management software, including the objectives, benefits, and costs.
b. Problem Statement: This section should describe the current challenges and issues with the organization’s financial close process, such as manual processes, errors, or delay in closing.
c. Objectives: This section should outline the objectives of implementing automated financial close software, such as improving efficiency, accuracy, compliance, or cost savings.
d. Benefits: This section should describe the benefits of implementing automated financial close software, such as reduced manual effort, increased accuracy, improved compliance, faster month-end close, or cost savings.
e. Costs: This section should outline the costs of implementing automated financial close management software, including software licensing, implementation costs, training, and ongoing maintenance costs.
f. Return on Investment (ROI): This section should describe the expected ROI of implementing automated financial close management software, including the estimated cost savings, productivity gains, or other financial benefits.
g. Implementation Plan: This section should outline the implementation plan for automated financial close management software, including month-end close timelines, resources, and milestones.
h. Risks and Mitigation Strategies: This section should identify potential risks and challenges associated with implementing automated financial close management software and describe the mitigation strategies to address these risks.
i. Conclusion: This section should summarize the key points of the business case and make a recommendation for or against implementing financial close management software.
Overall, a business case for implementing automated financial close software should provide a clear and compelling argument for why the organization should invest in this technology, outlining the benefits, costs, and risks associated with implementation. By presenting a well-researched and comprehensive business case, decision-makers can make informed decisions about whether to proceed with implementation.
Check out these videos to see different components of HighRadius’ Financial Close Software in action.
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Colleen Zdrojewski
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