How to Close the Books at Your Company in 10 Days (or Fewer)

By Eric Hall

Over the past 30 years, I have seen no fewer than six presidents go in and out of office, through booms and busts and everything in between, as an interim CFO. One constant, however, is that closing the books in a timely manner (monthly, quarterly or year-end) is still a problem for a lot of clients.  Even though we now have better accounting software, technologies, and apps (Bill.com, Expensify, Concur) as well as online banking to help us, it still seems to take longer to close the books at many companies than when we had 13-column spreadsheets and accounting systems running on mainframe computers.  I am not exaggerating!

In fact, the worst case I have seen was a quarter-end close that took over 80 days to complete (and this was within the last five years).  It’s true that this company was starting to close the books of the previous quarter only a few days before the current quarter ended.  Unacceptable? You bet!  The good thing is that with some changes we were able to get the close down to a respectable 10 days after only a few months of practice.

What is an Acceptable Timeframe for Closing the Books?

A question I get asked frequently is “what is an acceptable time to close the books?”  John Chambers, the former CEO of Cisco, used to brag that his company could close their books in 1 day after the end of a quarter.  This may not be possible for 99% of companies for many perfectly acceptable reasons.  My goal for my clients at FLG Partners is that they close the books in 3 days for non-quarter-end months and 5 days for a quarter-end month, including at the end of the fiscal year.

Why Does Closing the Books in a Timely Manner Matter?

While a 3-to-5-day turnaround on the month-end and quarter-end close may seem like an aggressive objective, all CFOs know that it is important to close the books as quickly as possible so that management can get the necessary information they need to run the company effectively and efficiently.  Financial statements are the GPS of a company.  Without timely or accurate financial statements management does not know how good or bad the company is doing. These metrics and data are more than just the Income Statement, Balance Sheet, and Statement of Cash Flows themselves.  They include the detailed financial statements and management reports generated during the close that are used to support the published financial summaries.

What Typically Delays the Close?

So, why are finance teams frequently so tardy when it comes to finalizing financial statements? From my experience, here are some of the most common excuses given:

• “We don’t like using estimates. We want to be 100% accurate. We’re waiting for all the data and information to come in.”
• “We don’t like doing accruals (and we don’t really understand them).”
• “We like to wait until the month/period ended to begin the close.”
• “The dog ate my general ledger.” (Ok, this one was just to see if you were paying attention!)

Some of these explanations might seem quite rational. After all, in finance in particular, we do want to be accurate with no mistakes. But any experienced CFO knows that accounting is never based on 100% accuracy.  Accounting uses estimates all the time.  Good accounting is based on best estimates applied on a consistent basis and according to GAAP rules.  GAAP rules for Fair Value Accounting, ASC606 (revenue accounting), ASC842 (lease accounting), ASC718 (stock-based compensation), and many other accounting principles all rely on estimates.

A good example of this is GAAP accounting being based on accruals.  As a CFO, your goal is to get these estimated accruals as close as possible to the actual results that are determined later.  That’s what accruals are for.  Past experience, rolling 12-month averages, and other methods can be used to fine-tune the accruals each month.  Just be sure to reverse out your accruals the following month when actuals come in so that you don’t overstate company results!

Accounting results at month-end and quarter-end should always be a fair representation based on historical trends, data, and experience.  Accrual accounting and prior period adjustments (if necessary) are the tools we can use to establish our estimates.  Auditors are our check and balance to ensure that we are applying our methods, rules, and practices on a consistent basis that allows for an accurate comparison of performance against prior periods.

How to Cut Your Month or Quarter End Financial Close to 10 Days (or fewer) 

So, what can you do to ensure that the books are closed on time? 

Tip #1: Start Early 

The closing process should start before the end of the month/quarter.  The latest I like to start is a week before the period ends.  Why? Let’s face it: many department managers get busy and forget about month end/quarter end.  I like to use the last week of the period to remind managers that they need to provide specific information about expenses, revenue, customers, vendors, and transactions that will occur during the period that may not reach accounting for booking.  A good example is asking managers what billings for the month will be for consultants they are using.  It’s a known fact that consultants don’t always get their invoices in on time.  That doesn’t mean expenses haven’t occurred.  They certainly have, and an estimate always needs to be accrued to recognize those expenses as part of the period’s financial activity.

Tip #2: Give Your Company Team the Right Tools

Closing the books is a team effort, and I’m not just talking about the Finance and FP&A teams. The whole company needs to understand their roles in making the close process timely, accurate and efficient. As the finance leader, your job is to educate, communicate and provide the tools for other teams to make this happen.

I recommend that you publish an Annual Accounting Calendar for each month showing the various deadlines for each team across the continuum, from initial data/transaction submission from department heads, publishing of preliminary financial statements and reports, required reviews with management and auditors, to the final financial statements themselves. Remember, you don’t need to do everything sequentially.  Parallel processing by many internal teams is key to closing on time. 

It is also a great idea to create, publish and review, company-wide, an Accounting Close Checklist showing all the elements/tasks required to close the books, responsibilities, deadlines, department interdependencies, etc.

Make sure that all executives, vice presidents, directors, and managers have a copy of the company’s Annual Accounting Calendar and Accounting Close Checklist.  Publish them early and update them often!  Remember, you need management’s buy-in and support for the leverage you need to get the information you require.

Tip #3: Set Policies to Help Streamline the Close Process

As CFO, you set the tone for how and when activity gets recorded from revenue recognition to expense management. You can speed-up the close process by developing and training your team with the right operational policies.

Establish cut-off dates for things like expense reporting and disclosure of purchases.  For example, “Expense reports received after the 25^th of the month will be processed in the following month.”  (Of course, this means that you will accrue for those amounts in the closing period, but the actual data entry and payments will occur in the next period.)

Tip #4: “Seize the Day” for the Close as the Finance/FP&A Leader 

There are other Finance Department initiatives which will greatly contribute to a shorter month-end/quarter-end close:

• Always reconcile cash on a daily or weekly basis to spot errors early and speed up the close. The Golden Rule of accounting is “Reconcile cash first and the rest will follow.”
• Use daily standups with your team at the start of each day to measure progress, identify roadblocks/issues, and obtain resources.
• Set up an accrual workbook or spreadsheet and start your accruals early. Again, don’t wait until the month/period has ended.  Accruals for rent and leases are examples where you can start early.
• Always debrief with your team after the close. You will undoubtedly find a few ways to further improve the accuracy of your estimates.  The accounting close is a process – rinse and repeat and your team will get better at it.

There are many benefits to you as a CFO from cutting down the time and effort it takes to close the books. First, the better you are at mastering the close process the easier and less stressful your life will be.  Secondly, you will also provide your management team, board, and investors with the timely and accurate information they need to optimize performance at your company. Lastly, they will sleep better knowing the financial organization is being run by a pro who knows what s/he is doing, and that is good for you.

If you would like to learn more about ways to speed up your accounting process internally, do reach out. My partners and I at FLG Partners stand ready to assist.  And do keep your dog away from your general ledger!