Financial close process: why it's broken and how to fix it
There’s something magical about the last few days of every financial period. No wait, not magical - miserable. Finance teams devote enormous time and energy to what should be a smooth operation.
And in virtually every workplace, it’s a stress fest.
It takes some businesses up to 10 days to complete closing each quarter.
As we’ll see, the biggest problem is inertia. There are better ways to approach closing, but most companies just stick with what they know.
In this post, we’ll show you how to make financial closing far more manageable. And most of all, faster. Let’s get into it.
What is the financial close process?
Financial close is the act of “closing the books” - recording every transaction as a journal entry, then reviewing all of these transactions to make sure that they’re approved and legitimate.
This includes the all-important income summary account. An accountant looks at all accounts holding revenue, income, and gains, then transfers the balance to the income summary account. They do the same for expense accounts and losses.
The goal is to enter each new accounting period with temporary account balances at zero. The balance is moved to permanent accounts, and you begin each period fresh.
Typically, closing takes place at the end of every month. But finance teams also need to close at the end of the quarter and each financial year.
When most people think of the closing process, they think of the time it takes. How quickly can we get through this?
Which is a shame. It’s never ideal when a core and essential responsibility becomes a chore. And because closing is essential in every business, finance teams are going through this drudgery everywhere.
The headaches: typical pains that come with monthly financial closing process
We don’t need to go into great detail here. For finance professionals, the toil of closing the books is all too real.
But ask any bookkeeper or financial controller what they hate most about closing, and you’re sure to get some mixture of the following:
Monotonous, manual data entry
Endless simple errors that cost everyone time
Missing receipts and other necessary documents
Unidentifiable payments (that really need to be identified)
Duplicated line items that could even be fraudulent
Predictable, basic questions from what feels like every member of staff.
These challenges affect the whole finance team, but especially those on the frontlines. And no matter how well-prepared you are, they seem to occur every single month.
The culprits: key issues with the classic close process
The answer can’t simply be because closing just sucks. It often does, but this is usually the symptom of some serious flaws along the way.
We’ve identified four specific areas where most financial closing strategies fall down.
1. The process isn’t defined at all
Does your company have a documented close process? If so, you’re lucky.
According to Deloitte, “the close process is often run by institutional memory rather than clear and specific protocols. Different people involved in the process “just know how things get done”— and have done it that way for years.”
And as we’ll see for number three on this list, that doesn’t only apply to the finance team. If everyone approaches close their own way, it’s only natural that errors occur and efficiency declines.
2. No access to real-time data
This is a huge issue for finance teams, especially in companies that deal with large numbers of expense reports. Too often, finance doesn’t actually know how much has been spent until they go through the monthly close process. Which makes undoing errors a mammoth task.
“The process requires data from all the departments and every aspect of the company’s functions. When that happens, the process becomes chaotic. Some managers submit the information on time and some don’t. Sometimes the information is submitted on time, but it is wrong or incomplete.”
To close the books for the month, finance teams need to chase up the right information from the right people, including lost receipts and other documents that may not be easy to find.
And if those people aren’t forthcoming, or don’t know what’s expected of them, that data can take a long time to reach you.
3. A lack of standardization across the business
While we’re talking data…another big issue stems from undefined processes and the number of people involved in company spending. When you have sales and marketing teams, product managers, and every other business unit sending things to finance, you end up with a wide variance in how information is presented.
Some employees may Slack you their completed expense claims; others put them in email attachments. Some use the correct forms; others just download whatever they can find online.
In other words, people love to do things their way. And that’s a problem if they actually need to be done the right way.
4. Inefficient automation
This assumes you employ automation in the first place. Because sadly, far too many finance teams still rely on manual work, and even use physical paper ledgers.
Just using any automation at all isn’t a complete solution. Because unless properly implemented, it can still lead to plenty of problems and manual fixes come closing time.
The main cause of which is bad data.
What this really means is that you can’t hope to automate closing if you’re also going to have manual, manipulatable steps earlier in the chain. If a team member can create their own expense reports, or if managers track online spending in different ways, you end up with information that can’t be automated in the same fashion.
So organizations need to create uniform processes that apply everywhere. And the earlier in the chain these become digital, the sooner automation can be involved.
The good news: it’s never too late to change your financial close process
If you’re intimately involved in the financial close process, all of the above will be painfully familiar. Most finance professionals have settled into the idea that this is just how it is.
You work hard to make small improvements, train your teammates as best you can, and take the small wins where you can get them.
But while it’s true that a bad carpenter blames their tools, a good jockey needs a great horse. World-class chefs need the best ingredients. Indiana Jones needs his hat.
For monthly closing to work well, you too need the right systems in place. Yes, that includes your own processes for managing expense accounts and everything else. But it also includes procedures and tools that make life easier (and less error-prone) throughout the business.
The solution: automated spend management
Closing is the final step in what should be an integrated, holistic approach to company spending. As we saw above, if the information you receive is poorly presented and full of errors, closing becomes a chore. But if that data is in the right format and sent to the right people - on time - close can actually be pretty smooth.
Which means that, if you want to fix the closing process, you have to fix spending.
And to do that, you need a system that reverses our four key problems (outlined above). A good spend management platform provides:
Clearly defined processes
Standardized spending and expense management
What makes these tools different? Let’s use another common pain as an analogy:
We all have electronics that weren’t really built to connect with one another. (Or in some cases, were designed specifically not to. Apple, meet Android) So we patch them together with dongles and adaptors, and make things work just enough to carry on.
It’s the same for company spending. Expense reports (public enemy number one at Spendesk) don’t exist because they’re the best way for businesses to spend money. They’re a workaround because employees sometimes need to buy things and there aren’t enough company cards to go around.
And company cards aren't great either. They get shared around the office, and you never really know who’s bought what. Which means you have to dedicate hours of closing time to identifying payments.
You can tweak the finance team’s efforts and optimize processes as much as possible. But as long as you’re stuck with PDF or Excel expense claims (or worse - paper!), and traditional company credit cards, close will always take longer than it should.
How spend management systems work
“Spend management system” is really just another way of saying “centralizing payments.” Make all your company’s payments through one platform, and you’ll find a host of advantages:
A single source of truth for all company spending data
Real-time visibility over what’s being spent
One standardized process used by the entire company
Spending policies built in, so no unapproved purchases
No data entry for finance teams
So what does that look like? Spend management systems have a few key parts:
1. Physical expense cards to pay in person
As we said above, company credit cards just don’t cut it anymore. And one of the biggest reasons is that not everyone can have one. Not even close to everyone.
Prepaid expense cards let businesses give out “company cards” with no risk. Every card is personalized with its own spending limits, every payment is tracked, and companies can require managerial approval before anything is spent.
At monthly close time, finance teams always know exactly who has spent what, who approved it, and can line payments up automatically with the right team budget.
2. Virtual cards for online payments
Most companies spend online with their aforementioned credit cards. But these payments only add to the uncertainty about who’s actually buying things.
Virtual cards let employees request funds from anywhere using only a computer. Rather than sharing secret credit card details, the employee makes a request through their spend management system, a manager approves it, and the employee get unique card details to use once or multiple times.
Again, this helps finance teams because they know which specific employee makes payments. It’s also easy to cancel or adjust payments if necessary.
But the best part is that employees upload every receipt themselves into the system. So you don’t need to search through email inboxes or log into 30 different tools just to get receipts at the end of the month. They’re all in one place.
3. Automated expense reports
Here’s something that both finance team and other staff can agree on: expense reports are terrible. There’s so much data entry and double-handling, and the simplest error can add hours to close time.
Good spend platforms let you digitize and automate the expense process. As we saw above, bad data can block automation and make finance teams crazy. And for expenses, the best way to ensure good data is to make claims at the time of purchase.
Instead of waiting until the end of the month and filing 10 expense claims at once, employees can simply enter a purchase into their mobile app the moment they make it. They then take a photo of their receipt, and there’s nothing more to worry about.
Note: Good expense management tools even verify that the amount on the receipt matches the amount claimed - instantly. This virtually eliminates all errors before they’ve even been made.
The other big benefit of this for finance teams is that company spending is always up to date. You can see how much teams spend the second they pay for something, rather than having to wait until expense reports are processed. Which from a strategic perspective is huge!
4. Digitized invoice processing
Another problem that can affect closing is the way that businesses deal with invoices. In a lot of cases, this is very ad hoc.
By paying invoices is obviously another way that companies spend. And it makes no sense to keep this process totally separate from other company payments.
Spend management platforms also let you process and pay invoices in just the same way that you make any other payment. The invoice is received by a staff member, who logs it and seeks approval just like they would for an expense claim or virtual card payment.
The finance team can check and pay this request, and all the necessary information is right there in the same tool. So at closing, there’s only one place you need to look.
5. Exports to accounting tools
So far, it should be clear that spend management systems can make the closing process a whole lot smoother. But there’s still a potential problem to address.
It’s no good putting all this data in one place if it then has to be copied over to spreadsheets and accounting tools. That data entry is another tedious task and can easily lead to human error.
Thankfully these tools let you export data to be directly imported into accounting tools. Some even integrate with tools like Xero so the export is done for you.
The financial closing process shouldn’t be the pits
Too many finance teams have accepted their fate at the end of the month. Closing is always going to be a chore, and at least once it’s done, it’s done. Until next month.
But technology has come a long way. Most of the worst parts about closing - the data entry, chasing down receipts - are now totally unnecessary.
We can do better. In fact, we already have.
Don’t let marketing and sales teams have all the good tools and toys. Take back the end of the month with a good spend management tool like Spendesk.
More information on some of the concepts discussed above.