Why shortening of forecasting and reporting cycle times matter
Annie Duke, World Champion Poker Player and author of the National Bestseller “Thinking in Bets,” came up with an equation that can’t be any more correct: “The quality of our lives = the sum of decision quality (bets) + luck.” Decision making has always been a critical focus for leaders. The quality and timeliness of decisions are under a spotlight, especially given the rapid speed the world has changed in the past 20 years, and the uncertainty change has brought. The COVID-19 pandemic is not a driver. Instead, it can be seen as an accelerator for action items related to data speed and accuracy that have been on CFO agendas for years.
The topics of data quality and data management tools and techniques are not new. It is often said, “garbage in, garbage out,” and it is well known that a good filter on data will improve decision making. However, in finance, with all the principles, rules, regulations, and reporting requirements in place, the CFO focus tends to be more on timeliness than quality. Not that quality doesn’t matter, but cycle time is a more significant pain point. It takes many companies over four months in an annual planning cycle and, on average, two or more weeks to close their books, analyze the numbers and report them every month. The cycle continues, and little is done to break it. The COVID-19 pandemic has forced attention to the finance process as the 2020 financial plans that were built in 2019 are now obsolete.
CFO attention is rapidly shifting back to 2 areas:
- Shortening the forecasting cycle
- Shortening the month-close and reporting cycle
These topics are not new. Well renowned organizations such as the AICPA, APQC, and AFP have nicely covered the issues and shared best practices. We want to focus on the new skills that Finance professionals need to learn, and how you can take advantage of a negative thing, such as a slowing business or disruptions due to COVID-19, to ramp up your teams’ skills and drive improvements in this area. We will still summarize 20-page documents in just a few bullets for the sake of comprehensiveness.
According to the AFP guide on how to shorten the budget or annual planning cycle, the best performers in this area did four things:
- Set up top-down targets instead of relying totally on a bottom-up approach
- A strategic planning process that drives the target setting
- Moved away from unnecessary levels of detail, reducing complexity
- Utilized technology to help integrate the process, improving transparency, and cross-function collaboration
The AICPA closing cycle best practices suggest five practices that help shorten your month-end closing and reporting cycle, also referred to as fast close:
- Redefine the elements of the closing cycle by eliminating non-value add activities and deferring some actions to the quarterly or annual financial close.
- Eliminate interim cycle focusing on the gross changes from month to month.
- Collapse the level of detail.
- Raise the materiality level in inter-company cross-country consolidations, and
- Separate and integrate systems, specifically the integration of the functions of the closing process.
Put abruptly like this, these best practices may sound like a lot, but, in reality, it all comes down to everyday practices and methods first put in place by software development and manufacturing companies, which then were adopted by the finance profession. There is no doubt, with the advances in technology and the fast-changing and unpredictable environment in the business world, finance professionals and practitioners need to learn new skills, both soft and hard. I want to focus on lean and agile and how the CFO office can adopt these methods.
Lean should focus on identifying what adds value and what does not, in your process: identifying and eliminating waste, including waiting time, and creating a continuous and smooth flow to streamline your cycle time.
Agile, on the other hand, should be about adaptability and flexibility. Your process should be designed to be simple, adaptable to change, and flexible in accommodating changes. After all, static budgets are becoming a thing of the past, and business planning is more like shooting a moving target. Things do change, and your budget should, too.
Both are very intuitive and not hard to learn skills, with much affordable good quality training available. If you have idle time in your team, introduce them to these techniques; sooner or later, they will pay off.
Last but not least, our consultants have helped many clients navigate through cycle time reduction projects. One thing we noticed that works perfectly in any change-intensive project: try to bring a neutral outsider to help lead the project. Resistance to change is a real thing, and, with all the uncertainty around us, people will link, even if unjustified, with job losses. An expert outsider, together with a good change management communication plan, can ease the pressure and ensure project success.
We are ready to help
The current business environment requires change. DLC’s dedicated team of consulting professionals is here to help you navigate this dynamic landscape from revamping your business strategy to executing essential finance and cash management initiatives. Check out our full suite of services here. Ready for a solution? Need some guidance? Let’s have a conversation.