The High Cost of Month-end Closing

I found this blog post by Tim Richardson from GrowthPath in Melbourne extremely thought provoking and an excellent, although simple analysis of the opporutnity costs involved with extending the monthly close process for a smallish enterprise.

The high cost of month-end closing

The time taken to close the books each month is more expensive than you may realise. Each of the 20 working days in a month is 5% of available time. Month-end closing is an almost zero-added value activity. Apart from that, each day of delay simply makes the output even more historical and out-of-date. A month-end close which takes five days consumes 25% of the monthly capacity of the people involved, for little to show.

So it’s no wonder that good CFOs hate the time spent closing.

One approach to solve the problem is ‘virtual closing’, or a rolling close. CFO Magazine has an article this month (November 2011), asking “Whatever happened to the virtual close?” (Link)

The opportunity cost of closing: some rough figures

In my experience with typical software in use by SMEs, a close should be done in two to three days. The cost of taking longer? That’s based on what else the team could be doing.

The finance team should be able to add value by increasing margin, for example. We start this back-of-the-envelope calculation with some reasonable guesses. Let’s take an example where closing takes five days of four people at $7K per month, in a business with turnover of $3m a month. Let’s assume if we brought closing down to two days, those people could be assigned to assist in margin improvement projects bringing 0.5% extra margin a month.

Under those assumptions, the opportunity cost of the five day close is $15K a month.

Another way is to ask what the added value of the finance team is. The wage bill under the assumptions above is $4200. What’s a decent estimate of added-value? If this $36m business makes 5% profit after tax, that’s $1.8m. If such a business was a wholesaler, the wage bill is probably about the same ($1.8m). The average employee generates $2 of after-tax value for each dollar of gross wage. So the opportunity cost of the 5 day close is about $8000 a month. Considering that range, faster closing is certainly interesting.

In the worst case, the people working on closing don’t add any value at all, so we downsize the finance team and take the saving as a pure wage-bill saving. However, if you’re the leader of the finance team, this conclusion is admitting that your people (under your leadership) don’t add value. Either the people are in the wrong job, or you are.

What to do?

There is no doubt that a focus on automation and innovation in month end closing will speed up the process. It’s also clear that if you are investing in a new finance system, a faster month-end close should be part of the business case. I have a manufacturing background so I apply ideas of continual improvement to the closing process (although my strong interest in automation helps; look for macros, custom queries and better intefaces to save time in closing). Above all, I’m guided by the belief that closing is an essential but low-value process, and a belief that finance teams can bring much more to the business than basic book-keeping.

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John Vaughan

John Vaughan is a highly experienced Accountant and Consultant. He has experience in the pharmaceutical, FMCG, distribution, professional services, manufacturing and financial service industries. With over 25 years of commercial experience and 20 years working with the Cognos products, he...

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