The Fast Close, Part 4 (#19)

In this episode, we discuss how the centralization of the accounting function can be used to enhance the closing process.

In the first three episodes in this series, I talked about how to shift closing work into the preceding month.  This massively reduces the amount of work you have to complete on closing day, and it’s the best single way to speed up the close.  However, there are plenty of other closing techniques.  In this podcast, I’ll cover the use of accounting centralization to increase your closing speed even more.

The Problem with Multiple Divisions

If you want to achieve a fast close and you have multiple divisions with their own accounting staffs, then you’re already going to have a hard time.  This is because the corporate accounting staff has to wait for the division staffs to complete their close, and then load those results into the corporate accounting system, and then fix any errors caused by the other divisions.  At this point, you’re lucky if only a week has gone by – and the corporate accounting staff hasn’t even started its closing process yet.

And furthermore, if there’s no interface between the accounting systems used by the outlying groups and the corporate accounting staff, then the company must either manually re-enter the closing data submitted by each division – or it has to purchase a mapping software package that automates the process.  Even it you automate this mapping chore, someone needs to monitor it to make sure that the divisions don’t change their account structures without telling anyone.

To make matters even worse, each division may have its own set of procedures and chart of accounts, each of which are little bit different from everyone else’s.  Because of this, some groups process transactions in different ways, which can result in more errors, and also possibly transactions being recorded in different accounts.

And to make matters even worse, you now have queue times and wait times at the local divisions for closing activities, which are piled on top of the queue times and wait times of the corporate accounting staff.

If you’ve inherited this kind of a system, there are no easy solutions.  You could try to impose exactly the same chart of accounts and procedures on every division.  But – each one will think that their approach is better, and fight you over this kind of standardization.  In addition, once you get everyone standardized, the common accounts and procedures gradually start to change all over again, so you have to go through the same standardization mess a few years later.

The Need to Centralize Accounting Functions

The much better long-term solution is to centralize all accounting functions – and I mean every last one of them – in a single location.  By doing so, you now have complete control over the chart of accounts and the procedures used to process transactions.  And you can eliminate all of those duplicate queue times and wait times.  And better yet, you can concentrate all of the accounting staff and managers in one place, where they’re much easier to manage.  Along the same lines, you can also pick the best of this reduced group of managers to assist in the closing process, which results in fewer errors and a faster close.

To expand on that last point, let’s say you have five divisions, and the accounting department of each division assigns three people to the closing process, plus you have five more people at corporate headquarters.  That means you have twenty people getting their hands on the closing process.  And that is twenty people who can make a mistake, or be out sick for a few days, or otherwise occupied – all of which either causes errors in the financials or delays the close.  Now, let’s say you centralize all of the accounting in one place.  This means you may have to add one or two people to the closing team at corporate headquarters, which brings your total up to maybe seven.  That’s still just a third of the amount you had before, and that smaller group will be much easier to manage.

Another advantage of centralization is that all accounting transactions are now stored in a single accounting database, so if the closing staff locates what appears to be an error, they can research it and fix it themselves.  This is much faster than passing an inquiry back to the accounting department of the division where the error originated, so that they can research it whenever they have some spare time.

If you centralize accounting, it may also be possible to take advantage of workflow software. 

This is software that tracks the status of work within the accounting area, so you can see exactly who is working on a closing activity, and this obviously makes for tighter management of the process.  On the other hand, if accounting is spread out in many divisions with many different systems, you almost certainly will not be able to install a company-wide workflow management system.

Problems with Accounting Centralization

The main problem with accounting centralization is the massive systems upheaval you go through when all transaction flows shift away from the divisions and into a single location.  Now, you can go for the high-risk approach and do a complete switchover on a single date.  This presents the risk of a major system meltdown and all kinds of issues with not paying suppliers, not applying cash receipts, and certainly not issuing financials any faster.  As an alternative, you might want to consider using a gradual centralization where you roll out one process at a time.  This could mean centralizing payroll first, and then the payables process, then cash application, and so on.  By doing so, any meltdowns will be much smaller meltdowns, and your conversion team will learn from its mistakes as it goes along.

Additional Thoughts

Now, how does centralization apply if you only have a single accounting location to begin with?  You can still use it, because now you focus on reducing the number of people involved in the closing process.  As a general rule, having fewer people involved results in a faster close, because you eliminate the risk that work will not be done or completed improperly due to miscommunications.  This does not mean that all closing work should be shrunk down to the point where just one person handles everything.  Instead, there will be an optimum number of employees who should be involved, and you can usually tell when you reach that point, because shrinking the headcount below this level actually results in a lengthening of the close.

As a final note, consider the need for centralization when you acquire other companies.  This is a great opportunity to shift all of the accounting departments of the acquirees straight into your centralized accounting function.  An acquired company expects changes to be made when they are bought, so fulfill their expectations and do the deed right away.  If you wait until later to centralize, then it becomes politically more difficult to make the change.

I think that gives you a reasonable overview of how centralization impacts the fast close.

Related Courses

Closing the Books

The Soft Close

The Year-end Close