The financial close: Top 5 challenges for midmarket companies
Financial close is a process long associated with tedious, error-prone tasks, underpinned by intense pressure to close the books as fast as humanly possible. And while crucial business decisions often hang in the balance, the financial statements and reports that they hinge on are only as good as their accuracy and reliability.
Today, midmarket companies face intense competition and must be able to pivot and adapt their business models at a rapid pace. Efficient and dependable financial close processes help bring confidence and speed to corporate planning and decision-making – and help investors and shareholders to recognise a good thing when they see it.
What is financial close?
Financial close refers to a recurring process of review and reconciliation, leading to the delivery of the financial statements and reports needed for a detailed view of the company’s fiscal situation. In other words, financial close is the sum of all the financial management activities that accounting teams undertake to “close the books” in a specific time period, such as a month, a quarter, or a fiscal year. The end goal of an accounting close is to deliver detailed and comprehensive reports, including:
- Balance sheet or statement of financial position
- Income statement or profit and loss statement
- Cash flow statement
What’s the difference between “financial close” and “closing the books”?
Even people who know the difference between these two terms, often use them somewhat interchangeably. Yet, from an operational point of view, there is a distinction between financial close and closing the books – and one that becomes increasingly important as midsize companies seek to better integrate their accounting processes into a single cloud system, like enterprise resource planning (ERP) software.
Here’s the definition of these key terms:
- Financial close is an umbrella term that refers to all the accounting processes that go into closing the books – including the act of actually closing the books. The result is the financial reports and statements that provide stakeholders and executives with an accurate account of the company’s fiscal situation. This occurs on a regular basis, which may be monthly, quarterly, annually, or other.
- Closing the books is the step in the financial close process when the general ledger or “the books” are reconciled and closed for the period. After this step, the financial reports are produced to show the company’s fiscal situation during that specific time.
Key steps in the financial close process
There are basically five steps in the financial close process: record, analyse, close, consolidate, and report. When the closing deadline is established, the balance of all the financial statements must be reconciled so the books can be closed and the process started again for the next fiscal period.
Record, analyse, consolidate
- Creating financial transactions involves recording assets, liabilities, equity, revenue, and expenses from across the business for that specific fiscal period.
- Performing financial accounting includes additional tasks such as account analysis and reconciliation, revenue recognition, calculating depreciation, and accrual accounting.
- Entity close is the point where you have stopped recording and reconciling transactions and are ready to reconcile and close the books.
- Corporate close occurs after the books are closed and includes additional steps needed for financial consolidation across divisions and legal entities including mapping to a common chart of accounts, for some translation to a common currency, intercompany eliminations, and calculation of investments. As midsized business grow, they will need to automate and integrate some of these activities and gain faster access to control and validation checks.
- Performing financial reporting is the last step in the financial close process. As reporting becomes more complex and demanding, finance teams are feeling the pressure to deliver faster, more flexible reports. Mobile device interfaces and powerful financial management systems are an ideal answer for running personalised, real-time reports anywhere, anytime.
Top 5 financial close challenges
Many midmarket companies are faced with increasingly complex global accounting challenges, yet they must rely on smaller teams to get things done. For them, it’s crucial to streamline and automate their accounting practices and meet these challenges head on.
Here are the top challenges for finance teams:
- Lack of structure and accounting SOPs: The financial close process is “accounting 101” for finance team leaders. In midmarket companies, this often means that a couple of senior people – who know the financial close process in detail – don’t feel the need to introduce more formal, granular standard operating procedures (SOPs). As businesses grow more complex, they need strong SOPs but it can be a challenge to get buy-in for more rigorous operational procedures, so any proposed new financial systems or solutions need to be able to quickly demonstrate benefit and ease of use.
- Time pressure in month-end closing: From the C-suite to the shareholders, important strategic decisions depend – even hang upon – the story the financial close reports have to tell. So, speed becomes the motivator. Sometimes that’s good when it results in greater efficiency and time management. But all too often it leads to questionable shortcuts or silos, where the fastest people get tasked with closing the books instead of taking the time to disseminate and automate those tasks across the entire team and help ensure a better understanding of standard financial close processes across the business.
- Inaccurate and late financial data: All it takes is inaccurate or incomplete data from one area of the business to disrupt the entire financial close. Every department produces invoices, expenses, and purchase orders yet in many companies – especially midmarket enterprises that have grown fast – there is a lack of procedural consistency around financial reporting. Frantic requests for things at the end of the month lead to frustration and mistakes. Many businesses are challenged by a lack of tools and solutions to support consistent and continuous accounting and departmental reporting – all month long.
- Silos and poor financial data integration: Along with inaccurate and delayed departmental data, finance teams also struggle with siloed and disparate reporting systems across the business, often with different metadata or data structures for the names and numbers of accounts, names and number of products, customers, divisions, and so on. This means that accountants not only have to reconcile and make sense of disparate information, they also often must resort to manual, error-prone processes to ensure the data is in a consistent structure.
- Lack of automated accounting: As midmarket companies grow, so does the complexity of their books, not to mention the need to enforce increasingly challenging corporate security and the minutiae of governance standards. Clinging to processes that are already in place, many businesses attempt to bolt on these additional items as manually performed tasks. Not only does this raise the risk of error, it also limits scalability and data integration. Without the power of artificial intelligence (AI)-powered ERP business management systems, midmarket business will reach a critical accountancy mass, beyond which they can no longer grow using manual processes.
Best practices for a smoother financial reporting and accounting close
The reports and insights delivered by the financial close process are some of the most crucial to the growth and operation of your business – yet due to their complexity and detail, they are often among the most dreaded of corporate activities. But by standardising procedures, developing good communication strategies, and leveraging powerful accounting software solutions, businesses can develop make the process a whole lot easier and much more efficient.
- Identify inefficiencies and error-prone accounting processes. While digitalising and modernizing their accounting practices, many of the best midmarket businesses build a task force of representatives from across the departments. The finance team gives them a set of risks and issues to look for and these findings are then conglomerated and assessed to get a good sense of where there are opportunities for improvement.
This process typically unearths bottlenecks and delays, but also calls attention to the myriad activities that are still being done on stand-alone, manual spreadsheets. This process sets the stage for the development of SOPs and the rollout of more connected and automated accounting tools.
- Develop good change management practices to create and roll out SOPs. While the accounting team is ultimately held responsible for a smooth financial close, they are dependent upon every department to get this done – from C-suite acquisition costs to sales team lunch expenses. If departments are expected to deliver with speed and accuracy, then it is incumbent upon the company to ensure that everyone across the business is singing from the same song sheet.
In the best midmarket businesses, this often starts with a good change management strategy to help communicate the importance of standardising tasks and cementing protocols for who owns what, and when and how they need to complete and submit their financial tasks. And as SOPs are created and rolled out, this is the ideal time to introduce and support the use of smart financial management tools, such as an ERP solution.
- Implement and support a continuous accounting process. “Continuous accounting” just means that instead of all the departments running around in a panic on the 29th of every month, workflows are established to spread financial close tasks out more evenly throughout the reporting period.
The use of automated finance tools can help greatly to streamline this process with things like mobile apps and templates – all via the cloud to gather and integrate daily cross-departmental data in real time. This helps to avoid the month-end panic and also empowers teams to spot (and fix) errors early. Finally, when books are kept current, businesses can perform a “soft close” at any period during the month, to avoid shocks or spot opportunities.
- Automate and digitalise the financial close. With an AI-powered ERP that provides cloud-based financial solutions, midmarket businesses can reallocate valuable time. Instead of spending hours performing manual tasks and making sense of messy data, finance teams can devote more time to strategic and skilled activities that help their companies grow and pivot quickly in the rapidly changing market.
Cloud systems deliver real-time dashboards that allow executives to customise reports and get deep insights any time during the month – from their device, desk, or wherever. It also gives the accounting team open access to information across the business, using tools that automatically integrate and standardise disparate data sets and give them a command base from whence to aggregate and analyse data from across the business.
- Get together after every financial close. This is particularly important for midmarket businesses that are growing and rapidly shifting their business models – especially when they are attempting to implement and cement new digital tools and SOPs. All the procedural challenges and epiphanies that went on during the last close will never be fresher in the team’s mind than a day or two after it’s done.
Many businesses take advantage of this momentary post-close breather to set up regular financial close debriefing meetings where teams can go off-site, maybe have a meal, and take a moment to analyse and share their ideas for improving and streamlining the process.
Get started with financial close software
Legend has it that while visiting NASA, President Kennedy came upon a janitor working into the evening. When Kennedy asked him why he was there so late, the man replied, “Because I’m helping to put a man on the moon.” While that old story may seem a little bit corny today, its message nonetheless remains extremely powerful.
To be agile and resilient in today’s fast-paced and competitive global markets, midsized businesses must strive to instill – across all their teams – a sense of common purpose and an understanding of the company’s objectives. And that cannot easily happen amidst internal silos, inefficient processes, and error-prone manual workflows. Financial digital transformation doesn’t have to happen overnight. Getting started with the best cloud financial closing tools may be easier than you think. Reach out to your software vendor to learn more about options and solutions that are customised for your unique business needs.
Simplify your financial close
Explore how a cloud ERP can help improve your accounting and finance processes.
SAP Insights Newsletter
Gain key insights by subscribing to our newsletter.