The objective of a chief financial officer (CFO) in the role of "steward" is to protect and preserve the assets of the organization. This is the dimension most CFOs feel is their core strength and, frankly speaking, their comfort zone. A strong stewardship forms an essential foundation from which the CFO can develop the other dimensions of the role. However, the risk lies in spending too much time as a Steward and a de facto financial controller at the expense of other responsibilities. A CFO is often challenged by a work environment reflecting underutilized technology and disparate systems, manual financial processes and a poor control culture determined by a "freewheeling" management. This is a situation that CEOs and boards of directors should not allow to develop. Granted the scale of an organization and volume of transactions will factor into the situation but organizations of sufficient size and growth rates would do well to place a reliable financial controller under the guidance of the CFO to preclude this risk.
One of the most valuable contributions a CFO can make to an organization is by leading a faster monthly financial closing process. So much of a CFO's time can be spent playing catch up with the books that they do not have the opportunity to give full attention to the other dimensions within their role. Key challenges to an efficient monthly closing process include business models becoming more complex and the close process not keeping pace as well as insufficient infrastructure and a high reliance on manual controls. These factors often make the monthly close process more complicated, expensive, and time-consuming. They also increase the risk and consequences of failure.
Some CFOs don't know if they are doing the right things during the close and all too often they run out of time and end up doing only cursory reviews and analysis before signing off on the results. This not only defeats the purpose of the close (which is to provide investors and managers with accurate and timely information about the business), it also exposes the company to an unacceptable amount of risk. Problems with the closing process often lead to swift criticism from constituents.
To get on top of their closing process, CFOs need to make the process faster and more efficient while at the same time aggressively managing risk. Specific benefits include:
• Fewer mistakes.
• Reporting providing a more accurate reflection of performance, boosting investor confidence and reducing the risk of restatements.
• Increased transparency - Managers, investors, and analysts have a clear view of business performance to inform their decisions.
• Improved timeliness - Information is provided on time to support key decisions and reporting requirements.
Although the CFO's ultimate goal is to improve both the risk and time dimensions of the closing process, they shouldn't try to do everything at once. The key is to understand the high-risk areas-activities that are the most likely to cause significant problems-and focus attention there. These areas could occur anywhere in the process. Although every CFO has different areas they need to focus on, there are a number of leading practices and guiding principles that apply to most situations.
• Shift non-critical activities to outside of the close. The close should be treated as prime time. To speed up the process and reduce risk, non-essential activities should be moved out of the close process. A hard look will likely reveal numerous activities that could actually be taken care of before the end of the period. Activities should be carried out throughout the month whenever possible, instead of cramming everything into the close period. For example, performing reconciliations and fixing inconsistent journal entries should be done throughout the period. Catching and resolving problems before the end of the period allows the CFO to focus more attention on doing the final reconciliation. Sure, there are some things that simply can't be done until the period ends, such as closing out and reconciling sub-ledgers, analyzing reserves, or performing eliminations; however, everything else should be challenged to see if it can be done in advance.
• Fix problems upstream. Close problems tend to propagate downstream. Fixing them at the source can help the CFO avoid a lot of last minute headaches.
• Create a separate work stream for management reporting. Management reporting and financial reporting are both important and need to be consistent; however, some management reporting activities are not as time-critical and should not be on the critical path for a successful close. Put non-essential management reporting and other internally focused reporting activities on a separate track. In some cases, these separate activities can be done in parallel - but they shouldn't cause a bottleneck in the close process.
• Set clear policies and procedures for the close. Most organizations have clear accounting policies, but that isn't the same as having clear policies and procedures for the close process. For example, information providers outside of accounting and finance need to be told exactly what information to submit, when to submit it, and what format to use. Similarly, for closing processes that involve multiple businesses and geographies, establishing common cut-off procedures for expense accrual can help reduce delays at month-end also.
• Establish a close leader. Most organizations wouldn't even think about executing a major project
without a project management structure in place. Yet that's exactly what many organizations do with their close process. Closing and consolidating the books is a major project that involves many different parts of the organization, requires countless hours of manpower, is high risk, and occurs every month. Often, dozens of people are running around trying to get everything done, sometimes with little or no coordination. The solution? Assign a leader to oversee the entire process, and establish rigorous project plans and other project management tools to keep things on track and avoid unpleasant surprises.
(James Babb is CFO program leader at Deloitte in the Middle East.)
