Continuous Accounting is gaining traction as a revolutionary way for finance organizations to reduce costs, pare the risks of accounting errors, and liberate accountants to provide value-added analyses.
By virtually closing the books at the pace of business, CFOs can access near real-time financial data to make informed capital allocation decisions that seize business momentum and evade market risks. Most importantly, CFOs can become the strategic advisors that CEOs need.
Companies that have implemented Continuous Accounting principles are in the early stages, but expectations are that these first movers will realize competitive gains from the superior ability to understand the current state of business ahead of market peers.
“If you align the accounting schedule smoothly with the rest of the business, you can see what’s going on across the company earlier than at the end of the accounting period,” says Suzanne Roelofs, senior manager in the IT advisory practice of EY (formerly Ernst & Young).
Most companies lack this capability. They continue to wait until the end of the month, quarter, or year to add up the numbers and extract business significance. In today’s 24/7 global business environment, such entrenched practices will put these organizations at a competitive disadvantage.
The converse is the case for companies that pursue Continuous Accounting, according to Jeff Hattendorf, co-founder and chief operating officer of business consulting firm Macrospect. “By aligning financial decisions with business performance, you’re able to better optimize the resources you have in the organization,” he says.
These are just some of the benefits of Continuous Accounting. Others include vastly improved data accuracy through process automation, greater efficiency, lower labor costs, and more engaged, productive, and less weary accountants. The latter is an important consideration for many accountants.
“Toward the close of the accounting period, the accountants are toiling under these short, high-pressure deadlines, with most of the work compressed into a five to 10-day window,” Hattendorf says. “The rest of the time, they’re recovering from the stress. Companies don’t get the best out of them, and they don’t get to do what they love most—understand what the numbers mean to help the CFO and other senior leaders confidently drive the business forward.”
The principles of modern accounting were developed in the horse-and-buggy days of the late 1800s. For much of the following century, this record-to-report model—an accounting cycle that starts with the booking of transactions and concludes with the publication of the financial statements—remained solidly in place. Today, the model is as antiquated as the typewriters that once tapped out the numbers.
In the last two decades, the forces of globalization, the Internet, digitized data, and wireless mobile applications have reshaped how business is conducted. Companies of all sizes sell products online and even on the ground in multiple geographic regions and markets. In this fast-paced global commercial marketplace, the traditional record-to-report process cannot keep pace.
“It’s like Bob Cratchit sitting at his desk with these big piles of paper, and he’s putting the journal entries into the ledgers, and then, at the end of the month, sees how the books line up,” says Hattendorf, referring to Ebenezer Scrooge’s overworked accountant in Charles Dickens’ novel A Christmas Carol.
Most finance organizations still cope with a rigid accounting system. Their accountants do basic bookkeeping until the end of the accounting period, at which point their noses are kept to the grindstone to close the books accurately and on time. Every company accountant will attest to the hardships of their period-end tasks, working long days into late evenings, and eating lunch and dinner at their desks. Exhausted to the point of burnout, they’re more likely to make errors at a time when data accuracy counts most.
CFOs also grumble about the outdated record-to-report process and the ridiculous rush to close the books. As trusted advisors to the CEO and the board of directors, the pressure is on finance directors to identify potential risks to the company’s strategic plan—which isn’t easy without clear visibility into current financial data.
The smart minds in financial planning and analysis similarly begrudge the unbending accounting calendar. They are forced to wait until the end of the month to do the crucial work of projecting the organization’s financial future, instead of building these forecasts on a day-to-day basis.
Continuous Accounting profoundly alters these experiences. Thanks to the automation of traditional accounting tasks like journal entries, variance analysis, account reconciliations, and intercompany transactions, the period-end tasks and controls that are traditionally performed at the end of the accounting cycle are executed as the days go by, in the cloud.
How does this work?
“Instead of bringing up all of the data in one batch process as before, the batch is split up into a series of smaller tasks that are scheduled early in the accounting period process and embedded in the accountants’ daily workflow,” explains Therese Tucker, BlackLine’s founder and CEO. “With the tasks broken down into smaller bits, the completion of these elements becomes routine. Accountants now have the means to virtually close the books on a daily basis, diminishing the strain they normally experience during the closing process.”
Best of all from a business standpoint, Continuous Accounting presents the opportunity for company leaders to make more insightful decisions. As Hattendorf puts it, “The organization knows where it stands financially at this moment in time, giving senior decision-makers much greater agility to quickly respond to this information.”
Despite the advantages of Continuous Accounting, businesses have been slow to adopt the necessary changes to achieve this state.
“We’re still where we were five years ago, with all talk and little action,” says Robert Kugel, a former McKinsey & Company consultant, and presently senior vice president and research director at Ventana Research. “We’re just beginning to see a few companies break free to manage the accounting and finance function in a more strategic fashion. But we have yet to experience a mass movement.”
Hyatt Hotels is among the early movers. “We’re now at the point where my team can see where we are in the closing process every morning, giving us much tighter controls,” says Travis Curl, general ledger analyst at Hyatt Hotels. “Our reconciliations are nearly 70% automated today, and we’re continually looking for ways to automate other tasks to eliminate more time in our closing process.”
Although other companies are taking their time in making the decision to introduce Continuous Accounting, they’re increasingly aware of its benefits and are talking to their audit firms about them.
Customers Are Curious
“Our clients are asking us about our experiences with other clients that are implementing Continuous Accounting,” says Roelofs from EY. “They’ve seen studies indicating that the organizational costs of finance can decline by as much as 40 percent with automated accounting processes. And they’re aware that they can also obtain considerable improvements in productivity.” Nevertheless, Roelofs agrees that the pick-up rate has been modest.
Why the fence sitting?
“The problem in many businesses is their IT infrastructure, which is comprised of lots of different systems,” Hattendorf says. “To have the most current financial data at your fingertips, companies need to automate different accounting tasks and then integrate them. This requires process reengineering, which is a tough proposition for many businesses, particularly if they believe there’s nothing wrong with current processes.”
He provided an example drawn from a recent discussion he had on automation with the CFO of a large multinational company. “The CFO said there was no need to change, as he was satisfied with the organization’s current ways of accessing information,” he says.
“I didn’t want to argue with him, but it made no sense to me. Why would a CFO not want to know where the business stood today, rather than wait for these insights at month end? Wouldn’t the CFO want to be able to go to the head of operations or sales and say, `There’s something wrong in the numbers. Stop what you’re doing and let’s fix the problem right now.’”
Hattendorf adds, “If I were a CFO, I certainly would want to know where my sales are today, where my collections are today, and what my payables are, so that I could manage the cash in my business, manage the projections that I’ve made, and manage our ability to perform against these projections on a day-to-day basis.”
In time, all the interviewees agree that a juncture will be breached where more companies than not have implemented Continuous Accounting. “The idea that you can have your numbers from today’s business activities to manage the business as it is happening is just too powerful to ignore,” says Kugel. “The alternative is the status quo—trying to course correct the car down the highway by looking backward.”
Needing A Champion
So what will it take to get your company to run its business with such forward-looking acumen? The first step is for the CFO or other high-ranking finance executives like the head of accounting to champion the need for change to senior executive management and board of directors.
“Winning over senior executive leadership requires a knowledgeable marketing and sales effort to demonstrate the merits of Continuous Accounting,” says Kugel. “Clearly point out that by automating accountant workflows, their activities can be spread across the accounting period instead of compressed at the end. This results in higher productivity, less need to hire temps at closing time, and clearer visibility into the numbers to make more informed and nimble business decisions. Then explain that these various benefits will offset the cost of the automated tools.”
Once the board and senior management green light the investment in Continuous Accounting, Hattendorf says the next steps are to automate and integrate manual accounting and finance processes, and then redistribute the closing tasks over the accounting period. “To have visibility into data on a near real-time basis, you need to achieve process automation first, then data integration and task redistribution,” he explains.
The latter step is often the most difficult, since many people are not inclined to change how they have traditionally performed a function. “One way to address this impediment is to get HR involved, to prepare and train employees to become participants in the transformation effort,” he advises.
An Ongoing Journey
Companies in the thick of making this transformation are pleased they did. Curl says Hyatt Hotels’ senior leaders finally have the visibility throughout the month to see where each hotel stands at a particular point in the financial close. “We can quickly see which ones might be having issues and do something about it,” he says.
Hyatt Hotels now closes its books in two days, “Which is a huge leap from where we used to be,” Curl adds. He chalks up this success, in part, to an enhanced ability to discern and investigate anomalies associated with the reconciliations throughout the month, as opposed to waiting for these variances to appear at the end of the period.
Obviously, these are clear competitive advantages for all businesses. Companies determined to mull Continuous Accounting instead of taking action now may pay a price for waiting. In business, sooner is always better.