From chaos to confidence: Rethinking the financial close

How does a high-performing close add value?

Slow, manual, backward-looking processes prevent finance leaders from making meaningful contributions.

One global manufacturing client working with Grant Thornton was able to reduce its close from 10 days to four, automating 70% of its account reconciliations and eliminating 40% of its manual journal entries after fixing upstream issues.

Such changes reduce manual entries that can lead to errors. The improvements also give finance personnel more time to focus on timely analysis that adds value, rather than verifying that numbers in different spreadsheets match. An optimized close can also increase the entire value of the organization.

For any organization — PE-owned or otherwise — that’s looking for an exit, demonstrating an accurate, fast close process can significantly improve the purchase price. Buyers often discount late adjustments, weak documentation and inconsistent policy application, so an optimized close creates confidence in deal value and provides for seamless integration after a transaction.

“An efficient, consistent close inspires confidence in a buyer, and that’s reflected in the selling price,” said Grant Thornton Business Consulting Partner Mike Hennessey.

An effective close demonstrates that a finance function has the discipline and strategic focus to appropriately support a high-performing organization. Improving a close process that falls short of those goals requires:

• Strengthening the fundamental elements of accuracy, compliance and auditability
• A commitment to a strong control environment
• Standardization of data and repeatable processes
• Segregation of duties, especially for preparation and review
• Clear documentation that makes workflows auditable
• Elimination of non-value added work, such as unnecessary small-dollar reconciliations

An effective close focuses on three key factors: materiality, volatility and seasonality. Items that aren’t significant to the financial statements require little to no attention. If an item is both material and shows big swings (volatility) or follows a pattern at certain times of year (seasonality), it deserves extra attention. For example, retail stores expect sales and costs to jump during the holidays. If those numbers don’t increase as expected, the close process should flag this for further review.

What’s the process for improving the close?

When Hennessey works with a client to improve their close, his three-step approach includes:

1. Simplifying: Consolidating or integrating systems reduces workarounds, errors and time-consuming manual processes. Businesses with frequent M&A activity also need a process to integrate future acquisitions so new complexities aren’t introduced over time.
2. Optimizing: Strengthening data governance and eliminating unnecessary manual or duplicative processes improves the accuracy and timeliness of the close.
3. Automating: Financial close improvements typically use data analytics, robotic process automation (RPA) and low-code tools to accelerate workflows and approvals, embed controls and reduce manual errors. GenAI use cases in the close are limited but accelerating it and improving its accuracy enables better downstream AI use in forecasting and budgeting.

The same governance rules that apply to GenAI tools should be implemented for less sophisticated automation. Human-in-the-loop reviews, data lineage analysis, model validation, documentation and standardization — with defined intervention thresholds — must be implemented for technology throughout the organization, not just the close.

When automation is designed correctly, it improves transparency and traceability.

“Auditability is non-negotiable,” Pathak said. “CFOs must be confident that automation outputs are transparent and controlled.”

Finance leaders also need to drive adoption through the organization with change management that supports the improved close processes.

For many organizations, this means a change in mindset. One client in the entertainment industry sought Grant Thornton’s help to dramatically reduce its approximately 5,000 monthly manual journal entries, some of which had employees investigating immaterial variations.

Eliminating that inefficient environment by establishing defined thresholds improved the finance team’s capacity and opened the door for process improvement and automation.

Careful change management is needed to prepare finance staff to work with new processes and replace manual activities with automated workflows. Finance leaders need to prepare finance staff members to:

• Use new tools in compliance with appropriate governance guidelines
• Develop adaptability to adjust to continuing tech updates
• Understand the organization’s budget well enough to identify and analyze red flags

Closing challenges often arise when controllership teams ask questions about month-over-month or quarter-over-quarter changes that are already explained by the budget. If a new product is launched at the beginning of March, accounts receivable and cost of goods sold might spike in that month.

Based on the budget, those metrics don’t indicate an anomaly in the close.

“If you understand the seasonality and drivers of the budget, you can more quickly process entries and know whether something is reasonable,” Hennessey said.

How can outsourcing accelerate close optimization?

Close process improvement also creates an opportunity to incorporate outsourcing capabilities.

Outsourcing organizations often can efficiently implement process improvements and automation because finance activities such as the close are core to their business. Outsourcing partners possess the scale, resources and experience to facilitate a more accurate, faster close.

When using an outsourcing partner, organizations manage to the service-level agreement (SLA), which should require productivity improvements year-over-year. Cost savings then fund technology investments, and the interplay creates a beneficial, ongoing circle of reduced costs, improved technology and faster closing.

“When championed by a strategic leader, outsourcing can provide scalability, access to defined processes, and the benefit of technology investments that others have already made,” Pathak said.

Regardless of whether outsourcing is involved, the KPIs for measuring closing effectiveness include:

• Days to close
• Percentage of manual journal entries
• Number of late or post-close adjustments
• Reconciliation completeness
• Review-to-preparation ratio
• Hours spent on value-added analysis
• Variance predictability

Finance departments that see improvement in these KPIs increasingly provide their organizations with timely, enlightening data for better strategic decisions. This is increasingly important in the current business environment. Leaders who establish and maintain a tight close through this process can create more value and in turn achieve a higher valuation.

Forward-looking leaders also understand that continuing close improvement delivers stronger strategic vision through accurate, timely data.

“When close time is condensed, you shift from looking in the rearview mirror to looking through the windshield,” Hennessey said.