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Understanding the Financial Close: Challenges, Impacts, and Solutions for Cash Management Professionals

understanding financial close

A financial close is vital to ensuring that a business has accurate financial data to make informed decisions.  While a financial close is an essential element of finance, it poses many challenges for businesses and can impact cash management and cash forecasting in significant ways.

This article explores the biggest challenges that businesses face in closing the books, the impact of a poor financial close on cash management, and how automation can help accelerate a financial close.   

What is the financial close?

While a “financial close” can have different meanings depending on the context in which it’s used, the financial close most commonly refers to the process of finalizing financial statements, records, and accounts at the end of a financial period, usually at the end of a month, quarter, or year. 

During the financial close, finance departments ensure that all transactions for that period have been accurately recorded, reconciled, and reported in the company’s financial statements.  A financial close process typically involves reconciling bank statements, reviewing and adjusting journal entries, and preparing financial reports, including the income statement, balance sheet, and cash flow statement.

Closing the books is unquestionably one of the most important finance and accounting tasks. 

What are the biggest financial close challenges?

The financial closing process is no small feat for most businesses.

  • Tight deadlines.  Finance teams must meet tight deadlines for the financial close or risk issues with financial reporting, decision-making, and regulatory compliance.  
  • Intercompany financial management.  Reconciling intercompany transactions can be complex and time-consuming for multinational companies with multiple subsidiaries. 
  • Complexity.  The more complex an organization’s financial structures, the harder it is to close the books.  Accounting for mergers and acquisitions, joint ventures, or adjustments to revenue recognition requires finance teams to have specialized accounting knowledge.
  • Poor communication and collaboration.  Spreadsheet-based processes make it hard for finance professionals to communicate and collaborate with different departments and stakeholders, especially when staff are geographically dispersed or work remotely.  Outdated or incompatible legacy systems make it even harder to coordinate the financial close.  
  • Inaccurate data.  A financial close is only as good as the data available to finance teams.  A single discrepancy in financial data can lead to inaccurate financial statements and rework.  Unfortunately, errors are inevitable when businesses rely on spreadsheet-based processes.  
  • Time-consuming processes.  It can take time for busy stakeholders to review financial and income statements.  And getting to the bottom of variances between actual and expected results can also be time-consuming, especially in businesses with complex operations.
  • Regulations.  Whether it’s GAPP, IFRS, or the Sarbanes-Oxley Act, businesses must adhere to accounting standards and regulatory requirements or risk legal and financial consequences.
  • Data security.  The sensitive financial information handled by finance teams has made them a tantalizing target for bad actors.  But it’s hard for businesses that rely on spreadsheet-based closing processes to safeguard sensitive information and protect against data breaches.

Together, these challenges can delay the process of closing the financial books.

The impact of delays in closing the books on cash management

Timely financial information is crucial for informed cash management decisions.  Delays in closing the books at the end of an accounting period can have big implications for a cash manager’s job. 

  • Inadequate visibility.  Delays in closing the books make it harder for cash managers to access the accurate and up-to-date financial data they need to make informed decisions.  Poor cash flow visibility can lead to misallocation of resources and inefficient cash management.     
  • Unnecessary borrowing.  When the closing is delayed, cash managers may feel forced to borrow more funds than initially planned because of uncertainty surrounding cash balances.
  • Missed investment opportunities.  A delayed financial close may prevent cash managers from spotting surplus cash that could be invested in short-term interest-bearing instruments.  Missed investment opportunities can result in lower investment income for the organization. 
  • Weak budget tracking.  Delays in closing the financial books can make it hard for cash managers to track performance against budgets, complicating cash flow forecasting.
  • Cash crunch.  Without the accurate reporting on a company’s cash position provided by a financial close, a cash manager may mistakenly believe the business has more cash available, potentially resulting in a cash crunch and an inability to meet short-term financial obligations. 
  • Late payments to suppliers.  Many businesses withhold payments to suppliers until the financial close is completed.  Delayed payments can strain relationships with strategic suppliers, result in late-payment penalties, and potentially disrupt supply chains. 
  • Lower investor confidence.  Delays in closing the books can erode the confidence that investors, creditors, and other stakeholders have in a business and its leadership.  Repeated delays can result in a lower credit rating and potentially affect a company’s cost of capital.  
  • Compliance issues.  Delays in closing the financial books can make it hard for a business to meet deadlines for regulatory filings and could potentially result in penalties or legacy issues.

No business can afford these types of cash management issues. 

That’s why more businesses are accelerating their financial closing process with automation.

How automation accelerates the financial close

Eliminating manual, repetitive tasks enables businesses to accelerate their financial closing process. 

Here’s how automation streamlines a financial close.

  • Data import.  Automated tools import data from bank statements, invoices, expense reports and other sources directly into the accounting system.  This eliminates the need for manual keying and reduces the risk of errors associated with manual input.  Automated reconciliation processes can quickly identify discrepancies and exceptions for further investigation.
  • Journal entries.  Accruals, depreciation, amortization, and other routine journal entries are automated based on predefined rules and schedules.  This ensures that all necessary entries are made accurately and consistently, and without the need for human operator intervention.
  • Exceptions management.  Reviewing every transaction for discrepancies and making back-and-forth emails and phone calls to sort out exceptions can bog down a financial close.  Automation flags and prioritizes exceptions or anomalies in financial data, allowing finance professionals to focus on resolving issues rather than manually reviewing every transaction. Some systems provide continuous monitoring of financial data, identifying potential issues or anomalies in real-time rather than waiting until the end of the financial reporting period.
  • Workflow routing.  Information and documents for the financial close process are digitally routed to the appropriate individual or department.  Workflow automation enables cash managers and other finance professionals to assign, track, and manage tasks electronically, ensuring that everyone involved in the process knows their responsibilities and deadlines.  And rules and logic can be created to handle routine tasks such as expense management.
  • Communication and collaboration.  Automated systems can automatically notify or alert stakeholders when milestones or tasks are completed or when exceptions are detected. 
  • Integration.  Automated tools integrate with a company’s enterprise resource planning (ERP) application, customer relationship management (CRM) system, treasury management platform, and other systems to ensure the seamless flow of data, without staff intervention.
  • Reconciliation.  Account reconciliation tools automatically match transactions, accounts, and balances across various financial systems and accounts in real-time.  And automated systems eliminate the need for manual reconciliation between subsidiaries or business units.   
  • Reporting and analytics.  Automated systems generate financial statements and reports on-demand or at predefined intervals.  Graphical dashboards display the real-time status of transactions and Key Performance Indicators (KPIs).  With smart insights available at their fingertips, cash managers no longer must wait for reports to be manually prepared.
  • Complete audit logging.  Automated systems log all actions taken on a transaction, providing transparency and accountability throughout the financial closing process.
  • Compliance.  Automation tools help ensure compliance by generating and archiving the documentation, reports, and supporting evidence required for audits and regulatory filings.

Automation reduces the time and effort required to complete the financial close, minimizes the risk of errors, and enhances the overall efficiency and accuracy of a company’s financial operations.

Importantly, automation provides timely insights to support cash management decisions.

Speed your financial close

Delays in the financial close can create big challenges for cash managers.  By automating routine tasks, businesses can close their financial books more efficiently and accurately, and cash managers can have the real-time visibility they need to make informed cash management decisions. 

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