Closing cycle time is usually expressed as the number of days between the end of an accounting period and the release of financial statements. It is a key metric for many companies because it measures the health of a company’s business processes, and because a quick closing enables a company to get on with business as usual without avoidable delays. It also makes it easier to track down discrepancies or anomalies in reconciliations when there is less time between the end of a period and the final close.
Closing cycle time is closely related to another important metric—financial reporting person days. This metric is the total number of hours spent by everyone involved to create financial reports, divided by eight. It, too, measures the health of business processes and can help avoid unnecessary steps or overly complex procedures.
The two metrics greatly affect each other. Adding more people to the process may shorten the overall time but can lead to a wasteful and inefficient use of labor.
How to Use These Metrics to Balance Your Closing Process
Start with a good baseline measurement of both metrics. QAD offers several ways to obtain the necessary information, including QAD Business Intelligence (BI), Operational Metrics or through browses or reports. Once you know where you stand, you can take action to improve either or both metrics.
The next step is to document your business processes. Then, look for redundant steps or steps that don’t add value. For example, many companies find that they run reports during the closing process that nobody uses. The origin of this step may be antiquated, but the team keeps on faithfully following the process, wasting time and resources, albeit with good intentions. This is an example of “low hanging fruit” that may pay big dividends in streamlining the closing process.
If you run multiple companies or divisions within your QAD ERP solution, you may find that it pays to adopt shared services. Rather than having a dedicated accounts receivable team for each company, consider the feasibility of consolidating. QAD Financials are designed to quickly and easily manage multiple companies and shared financial services, even when companies or divisions don’t have common currencies, cost structures or charts of accounts. Rather than wait for each division to close before starting corporate level closing, you may find this helps to eliminate some time.
Consider some of the “lean” practices your company may use on the shop floor when you examine your business processes. For example, ask “why?” at every step, and make sure that each step provides value to the customer whom, in this case, are shareholders and executives.
Best Practices for Improving the Closing Cycle
It never hurts to document your business processes. As you work on the process documentation, you will be amazed at the difference in understanding people have about how the process works in real life or why certain steps are performed.
QAD provides customizable process maps that make documenting your processes simple. Once completed, the maps can be used as training tools for new employees, refreshers for seldom required activities.
Process maps can also serve as the basis for a continuous improvement program for the closing process. You can revisit the process periodically to make sure the map still reflects reality accurately, and to ensure that no unnecessary steps have crept back in.
Which Metric to Choose?
When looking for the best way to measure the closing cycle, it may be tempting to just choose elapsed closing cycle days, but focusing on this single metric may hide waste and inefficiency. By the same token, focusing on keeping the required labor low may extend the closing cycle too long. It is best to use both metrics, each one acting as a check on the other to ensure the process stays in balance.
What challenges are you finding most difficult when it comes to measuring closing cycle time, or financial reporting person days? Let us know in the comments section below.