As finance teams continue to quickly adopt automation and AI tools to enhance financial planning and reporting, one expected outcome is improved performance on a key metric: cycle time in days to perform the annual closing process at the site level.
Research by the American Productivity and Quality Center shows 31% of organizations actively use AI for their record-to-report processes, while another 39% are in the early stages of adoption. These digital tools, which can generate report narratives, flag anomalies, analyze variances, accelerate inter-company reconciliation and auto-generate standard general ledger entries, give teams the power to speed up the closing process, largely avoiding the dreaded year-end scramble.
Some advanced enterprise resource planning systems also offer continuous close capabilities, allowing general ledger accounts to be reconciled throughout the month, quarter, and year. However, even small organizations without leading-edge ERPs can use generative AI tools for anomaly detection and assistance with report narratives, speeding up the annual closing process.
APQC finds that the fastest organizations (those in the 25th percentile) perform the annual close in 10 days or less. That’s nearly twice as fast as organizations at the midpoint in the data, and more than three times faster than organizations at the 75th percentile (see Figure 1). While these cycle times haven’t shifted much over the past few years, APQC expects to see them tick downward somewhat as more companies adopt modern financial tools.
Establish a baseline
To find out where your organization stands on this metric, benchmark within your industry and against relative to peers of a similar size and complexity. For example, organizations with less than $100 million in annual revenue have a median cycle time of 10 days; those with revenue between $1 billion and $5 billion have a median cycle time of 23 days.
Compliance deadlines and other context-specific factors play a role in establishing a target cycle time. A 15-day closing process, for example, may not leave enough time for some companies to review transactions after the cutoff period.
Perform pre-closing activities
Simplifying the year-end closing process starts with performing pre-close activities throughout the year in the run-up to the annual close. Below are five pre-closing activities that help to ensure a faster and smoother year-end close.
1. Create a game plan
One of the first and most important things accounting teams should do is to develop a game plan for the annual close process. Determine and communicate when certain close activities, such as the closing of different subledgers that feed into the unit-level general ledger, are going to be performed and by whom. Communication and delegation of activities must be clear, especially for leaders working within large, globally distributed organizations or those with multiple business units.
2. Increase collaboration
Involve all areas of the business in the yearly close. Collaborate with colleagues in the fulfillment centers, payroll department, HR, and other functional areas to ensure everyone is aware of how their work contributes to the organization’s goals, particularly as they relate to the yearly closing process.
Additionally, finance leaders should work with their counterparts at other sites to ensure any intercompany transactions are reviewed and reconciled, avoiding potential bottlenecks at closing time.
3. Use a checklist
Planning should include a checklist with all pre-closing, closing and post-closing activities. This checklist should be available to all members of the accounting team and anyone else who might be involved in the process, regardless of role. Having an established closing checklist improves visibility and increases the likelihood that the sequential steps required to complete the annual close are completed in a smooth and timely manner.
4. Perform monthly reconciliations
Reconciliations of challenging and complex accounts can require a great deal of time to work through. AI tools can help, but reconciliations on accounts related to liabilities and revenues still involve tracing transaction entries to source documents (sales contracts, invoices, statements of work, etc.), which adds time and complexity to the process. When continuous or daily reconciliations are not possible, monthly reconciliations help reduce the time required at year-end to ensure your accounts are accurate, allowing the team to move on to other closing tasks more quickly.
5. Scan for changes and stay up to date
Make sure the accounting team is leveraging the capabilities of the organization’s ERP system to the fullest extent. Explore newly released ERP modules and whether there might be cost-effective tools available that would reduce the amount of work related to the closing process.
In addition, look for anything that could cause an unexpected deviation in performance or require a lot of additional work. Do a quick check against any changes in accounting or tax regulations well before the year’s end — surprise compliance activities can significantly extend the year-end closing period.
Look ahead
While assembling the checklist and schedule, look at how long the closing process took last year and think about how you might shave two or three days off this year and each year moving forward. Reach out to colleagues and counterparts who might be able to help surface ideas for increasing efficiency in the closing process.
Most importantly, consider ways to leverage compliant technology tools available to the accounting team, or whether adding capabilities to existing ERP systems would reduce costs long-term.
