Therese Tucker
My March 2 column on continuous accounting, “Stopping the Madcap Sprint to Close the Books,” apparently struck a chord, encouraging many readers to write thoughtful responses. Most wanted to know how continuous accounting “actually works.” This piece is my reply to these inquiries.
First a quick recap of my earlier column: Continuous accounting is a measured and balanced alternative to compressing a month’s (or more) worth of accounting tasks to close the books into a few days at the end of the month, quarter, or year. Rather, the work to perform such closing tasks is conducted incrementally by accountants during the month, quarter, and year.
The benefits include a reduction in the pile-up of accounting work and the stress this causes; lower risk of financial irregularities; and an earlier opportunity for financial planning & analysis to deliver the business forecast. CFO readers intrigued by these benefits wanted to know, as one wrote, “How does this actually work?”
To answer the question, let’s start with today’s inefficient workload procedures. As part of their bookkeeping, accountants in midsize and larger companies manually sift through thousands of spreadsheets generated by different systems. Without an automated system, it’s an uphill climb to methodically tick and tie the ledgers to confirm that every item is accounted for and properly connected to related items. This confirmation process is therefore pushed off to the end of the month, quarter, or year.
Another inefficiency derives from batch processing. When digital documents replaced paper-based accounting records, technological limitations caused the accounting work to be stored up during working hours and executed when computer systems were offline. As the volume of data expanded, the process took more time to run. Ultimately, the system was not ready to use when accountants required its use. Again, the solution was to push off the work.
What’s wrong here? Top-notch accounting talent is underutilized during non-peak periods and overworked during the peak period. To alleviate some of the workload, finance and accounting hires temp workers that eat up the budget.
These many inadequacies and the pains they inflicted — from burned-out accountants and pointless costs to an increased risk of errors, out-of-date results, and zero time for analysis — raise the obvious question: “What if we could account for the business at close at the speed of transactions?”
Well, the answer is, you can.
And Here’s How
The first thing to do is to rethink the internal paradigm of accounting, adjusting the mindset to consider the F&A process as one of continuous improvement. The goal is to optimize the accounting process one task at a time, then rinse and repeat. By building automation and accuracy into the accounting process, accountants are eliminating the time wasted performing redundant exercises and fixing errors. In this voyage, automated technology is a tool to achieve the ends; it is not the beginning of the journey.Great things are possible once a philosophy of continuous accounting is in place. Instead of bringing up all the data in one batch process as before, the batch is split up into a series of smaller tasks. Tasks are scheduled as early in the accounting process as possible and embedded within the everyday workflow of the accountants. By breaking the tasks into smaller pieces, the completion of these elements becomes routine, a process that takes its cue from agile software development. Tasks are automated where possible and standardized elsewhere.
The last step is to monitor the effectiveness of these process efficiency improvements through predictive analytics, measuring the time it takes to close the books, the total costs per full-time F&A employee, and the average number of days for an accountant to complete a selected assignment.
Continuous Accounting in Action
Sounds all well and good, but readers have asked for “actual examples.” Let’s apply the above steps to a particular F&A task — account reconciliations.The current state of many finance organizations is to perform the reconciliations at the end of the month, reducing the opportunity to conduct proactive analysis before then. The alternative is to split the batch process into smaller tasks, such as the daily reconciliation of key accounts. To perform this task earlier, scheduled end-of-month reconciliations are shifted to event-based reconciliations, i.e., as they occur. Automation is used to automatically reconcile the key accounts and match these transactions. Accountants are now in the position to investigate anomalies associated with these reconciliations throughout the month, minimizing the period-end rush.
Let’s apply continuous accounting to another routine F&A task — intercompany accounting, the process of balancing the accounts between two different company branches to bring the balances to zero in the general ledger. The current state in most F&A organizations is to wait until the books are closed and entries are booked by these different entities before performing the task. Since the time it takes to record the transactions varies by entity, there’s no time to react to possible discrepancies, culminating in a rushed review at the period-end.
By dividing the batch process into smaller tasks, intercompany transactions can be recorded and approved on each entity’s books in real-time throughout the period. The task no longer waits until the end of the month, quarter, or year, as it is embedded along with the proper controls into daily workflows for automatic approval. By automating this process, accountants are freed to focus on value-added services to the CFO.
As the reader can see, continuous accounting is a philosophical approach, not simply a technological one. Only by first analyzing the current state of F&A can a vastly more efficient future state be designed, followed by its development and continuous improvement.
Therese Tucker is CEO of financial automation software provider BlackLine.
Source: http://ww2.cfo.com/accounting/2016/05/putting-continuous-accounting-work/
