In the CFO Magazine’s 2018 Metric of the Month article, APQC’s CFO Perry D. Wiggins shares how top performing finance organizations are dramatically faster on the cycle time to monthly close. They are achieving these gains by better data governance, common data definitions, and standardized charts of accounts. They standardize the monthly close and move tasks to optimal times.
There are many reasons to close the books faster which include elimination of systems inconsistencies that must be manually reconciled, quicker validation of results, and freeing up time to create higher quality reports.
But there is one benefit of faster closes that is often claimed to which I take exception. That is the claim that faster closing provides operating personnel with faster information for decision making. This claim is overreaching since operating people seldom wait until period end to get feedback on their management actions. Operations shifted to real-time (daily or weekly at the latest) feedback on their actions and the market’s reaction. Waiting until sometime after period-end is simply too late.
If a finance team wants to truly be responsive in supporting its internal business customers, they will shift to continuous feedback systems. Using a driver-based marketing and sales model, they could track contacts made with existing and potential customers. The customers’ reaction to your firm’s marketing offers provides feedback into your prediction model which calculates the timing of expected sales. The actual results being generated would also be used to update the predictive algorithms.
Expense models are even more predictable as they are typically based on commitments to spend the money rather than a specific sales outcome. The expense classification would merely need to be validated to make sure that the actual properly reflects what had happened. This enables finance to take on greater strategic roles in planning process improvements, expanding capacity, and growing revenues.
An even greater advantage of shifting to continuous monitoring is that it facilitates a more visual view of your business. Instead of revenue being a single number or a growing thermometer chart, finance can use a line chart to present a real-time picture of revenues growing upward throughout the month. This could be compared to lines showing previous periods or the forecasted period to readily see if the month is on track. There is no waiting on month-end as daily updates convey the current position and whether the previous day gained or lost ground.
On the expense side, organizations can easily track expenditures versus expected time frames. To do this finance organizations should add the outputs of what these expenditures produced. The product of these two would be the ongoing cost-per-output of each of the service organizations. If the expenses are higher because greater outputs have been required, your organization is at least maintaining productivity. But if you see your required outputs dropping, your teams need to immediately find ways to start shifting resources to other areas where they are needed. Seeing these things in real time (rather than waiting on monthly financials) is what creates a world class competitor.
Three steps organizations can take right away to get started with continuous monitoring are:
- Start tracking revenues with a line graph by daily posting the previous day’s revenue.
- Determine what physical measures to track to predict your expense numbers. (For instance, track headcount filled.)
- Have management begin to understand what levers can be pulled when profitability is falling short.
Time is running short. The future is almost here. Interested in this topic? LinkedIn, and give APQC a call.