Over the past two decades, the subject of fast financial closing has done the rounds a number of times in the accounting press and media. The fad comes and goes, but one has to ask the question, what is all the fuss about?
In this blog, I have taken the definition of fast financial closing to mean the time it takes to complete the regular management of accounts/statements, not the end of the financial year accounts we complete for the auditors, HMRC and shareholders/owners. The comments relating to the latter are different.
Let me begin by saying that of course we need the management accounts promptly, but to enter a race, with the view to claiming some kind of victory if you manage to have them available faster this month than you achieved the month before, seems to me to be missing the point.
Let's first ask what is the most important factor about financial statements of any kind? Everyone knows the answer: they must be accurate!
If, as a result of earlier and earlier production, the accounts sacrifice accuracy, then, in my opinion, most managers would rather wait a few days for the information. All accountants will know that when producing regular management accounts, an element of calculated guesswork is involved, and that's not to mention that assurances are needed about the accounting controls being completed before the accounts go to press. In most cases, the faster you produce the reports, the more guesswork will be required, and therefore the less accurate they will be.
There has also been research into the amount of time that accountants devote to the analysis of data they produce as distinct from the time spent in producing it and it doesn't make good reading; I lost count years ago of the number of times I had to ask our accountant at board meetings to explain why a particular cost was far above its budget to be told that he didn't know, but he would investigate it. Sometimes I waited weeks for an answer. Isn't accuracy and having an explanation for anomalies and variances more important than having the information a few days earlier?
Finally, the fact remains that even if accurate management accounts with full explanations were available at one minute past midnight following the end of the accounting period, they are still HISTORY. They contain nothing that you can go back and change. Try instead to focus more time and effort into producing accurate month-by-month forecasts. Introduce these into seasonally adjusted trends in your management accounts and you will have advance warning of what is going to happen rather than what has happened. This way, action can be taken to improve results much earlier than waiting for the next month’s management accounts, however quickly you produce them. You will be surprised at how accurate such a trend can be over the earlier months of the forecast. You may even be persuaded that "Only Trends Matter".