Month-end reporting requires substantial finance resources and is fraught with potential problems. Finding efficiencies and raising quality in this area are a constant challenge. There are two broad areas that can help – choosing the “right” information to report, and reducing the time and resources to produce it. This is an approach based on the two main tenets of the “lean” discipline, which are the purpose of a process is to fulfil customer demands and any task in the process not absolutely essential to meet those needs is waste that should be eliminated (or at least minimised).

These two tenets can be usefully applied to the month-end process, which provides information that the customers of finance use to make decisions.

One of the most salutary things a finance function can do is print out the reports it issues every month and send them to the usual recipients asking them to tick each page every time they look at it and to circle the information in which they are interested. You will be astounded by how much is never read. So you could stop issuing all reports until a request is received for a particular one. Again, you will be amazed by how many reports are produced unrequested. Producing reports that are not used is wasteful and should be minimised.

Finance’s problem is that users rarely know what they want. Probably the best way is to focus on what decisions are made, and then analyse what ‘facts and figures’ add value to such decisions, and when they are needed. True, this approach broadens the topic of month-end reporting out into all the management reporting that finance does. But for most organisations it is the right approach.

The development of different data systems and myriad ways of data gathering, has led to a proliferation of reporting – so the concept of “monthly management accounts” has been somewhat overtaken. It also seems that the increase in reporting is largely of operational, as opposed to financial, figures; and operational figures may well not be collected for, or relate to, a period of one month. Yet managers may need such figures for effective management and for monitoring of KPIs.

Management reporting can be analysed in the classic 2x2 matrix as shown in the diagram below; the dimensions being speed (fast/slow) and breadth (operational/financial). All management reporting falls within this space and the question is whether the optimal position in the box is changing from the slow/financial quadrant to the fast/operational quadrant.

There is a growth in reporting concentrated at the fast/operational position in the spectrum (a separate issue from the perennial speed/accuracy debate in producing monthly financial figures). The demand from finance’s reporting customers is for a linking of solid financial reporting with underlying operational data in a way that tells managers what has led to their financial result and which operational levers they must pull to change that result in future.

Putting the demand for management information into the 2x2 matrix will help the finance function identify where to concentrate its efforts, by showing which reports will truly satisfy customer demand.

There are five main ways of identifying and eliminating waste in month-end and management reporting:

If you produce flash results, your month-end process is full of waste. My first finance transformation project experience was with an organisation that made “flash is actual” its motivating mantra, and those flash results were ready on day three. It wanted to do it right first time, having realised that most of the activity after release of the flash results was directed at re-affirming previously issued information. When you see “re” you are seeing waste; re-do, re-work, re-analyse – all waste.

This company – a listed subsidiary – cut the number of days to issue the management report, did its own sub-consolidation and submitted the consolidation information within five days, where it had previously been 15. The project also improved the quality of the information and cut costs substantially. When we talked to the executive directors about the cost savings and return on investment, they said it was irrelevant; the benefit from being able to take action with reliable, on-time information was incalculable in their view.

Over the years considerable investment has been made in base systems; enterprise resource planning (ERP) or general ledger, fixed assets, payroll and revenue. These systems interface well with each other so further investment is unlikely to speed up the close.

However, as the diagram above illustrates, the challenge in the close centres on the other things that have to be done manually; inter-company adjustments, closing-off accounts payable, accruals, closing-off accounts receivable, inventory cut-off, time sheets and travel expenses. Much of the delay is caused by overly tight materiality levels. In most areas, with the probable exception of some accruals such as tax and intercompany accounts, the cut-off errors are never material and need to be rethought.

The effort to get things right first time, on time, should be focused on the few potentially material areas; other areas can be done after the month end. We are too inclined to ‘batch’ our work, so we only start the intercompany reconciliation after the month end. But, we could identify reconciling items from the first three weeks before, leaving only the last week to be done after the month end.

Arguably, the most annoying waste during the month-end is the rework caused by errors. The richest listing of errors is in the adjusting journals; so each journal should be reviewed to identify if the root-cause of the journal is an error. If it is, then part of the continuous improvement of the close would be to eliminate the cause of the error. For example, in one organisation over a period of two years, every month’s error report identified that a minority of fixed asset additions, included in the fixed assets control account in the general ledger, had not been posted to the fixed assets register.

The error message stated that no identifying code was present, but on investigation, in every instance, the code was there. Therefore the fixed asset system had to be corrected using a manual journal.

The month-end close is a strange mixture of tasks that can be done at more or less any time and in any order and small groups of tasks that have to be done in sequence. As a result, it is virtually impossible to perform a critical path analysis for a close. Delaying the close by performing too may tests is not an option. We set a deadline for every submission and every task, knowing that some tasks will be delayed, so we don’t over-react when one is. This often leads to a general lack of observance of the timetable – and the inevitable late nights or even delays to the close. The only way to overcome this is to use the concept of just-in-time; ascertaining the latest that the task must be completed and therefore the latest that it should start.

Waste arises because we start a task but can’t complete it because of missing data and other items, so we have to defer it for a while before picking it up again. We then start again, hoping to finish it this time. The amount of time wasted re-starting the task is always under-estimated. The aim is ‘one-and-done’; do one thing at a time (in other words, don’t batch work) and do it to completion.

A key way to eliminate waste is to focus effort on what really matters. The tendency in designing processes is to try to cover every eventuality. Things start off reasonably simple but as the exceptions come along steps are added to cater for them and suddenly there is a complex, time-consuming process to go through.

However, a lean method called “runners, repeaters and strangers”, developed to simplify production planning, has great application in accounting processes. “Runners” are those simple transactions that make up the volume on an 80/20 basis in every process – 80% of the volume of transactions, but only 20% of the total cost. The “repeaters” are those things that happen often but not daily. And “strangers” are those things that are one-offs – they may be many in number, but each one of them a bit different from the others.

• Processes should be designed to handle runners;
• Repeaters should be redesigned to become runners – but if they can’t, should be handled as strangers; and
• Strangers should be handled outside the runner process and then inserted into it just before the end when all the difficult stuff has been done manually.

This approach works because runners are not burdened with the needless overhead of complex tasks and strangers get the focused attention of people skilled enough to deal with them and get them right first time.

It has become clear that investment in the close process has lagged behind investment in other areas. Finance and Management conducted a survey in summer 2012, which concluded that although ‘substantial’ investments [had been made in] their financial reporting systems and reporting processes, spreadsheets and email remain the dominant tools for managing reporting. So it is not surprising that the close consumes large resources and is the source of unwelcome surprises. The Finance and Management survey also found, rather less surprisingly, that the lack of investment had the effect of: “reducing productivity... causing missed internal deadlines... damaging finance’s reputation with board colleagues and creating knock-on effects for finance juniors”.

This lack of investment has been identified by software companies; both SAP and Oracle have modules that address this area, and many others have created products to assist.

• The reconciliation software company, Blackline, has a task management module that also could be used for this purpose.
• AFRM (Accelerated Financial Reporting Management) from Hyland Software’s OnBase content management solution was created specifically to manage and improve (using lean methods) the month-end close process; it can also be used for general task management outside the close, for example in budgeting or in merger and acquisition support.

AFRM is one of several ‘cloud-based’ software solutions that have several practical advantages, including:

• It can be implemented at the pace that suits each finance function’s resource constraints;
• Doesn’t require big IT involvement as the system is accessed via internet browsers; and
• Doesn’t carry up-front capital cost as its licences are per seat per annum.

Delivering a genuinely fit for purpose lean month-end process first requires finance to understand what the customers want and then use tried and tested methods that are appropriate, improving the quality of reports while reducing the time and resources spent, making it quicker, better and cheaper. Ultimately, lean improvement is based on facts. The best way to gather the facts, have a documented, repeatable, improvable process and better manage the close is to examine existing processes and generate genuine change.

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• Finance & Management Magazine, Issue 207, February 2013

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