An efficient month-end close process increases discipline and structure, improves controls, and reduces risk. Streamlining this process also puts accurate financial information into leadership’s hands sooner – facilitating timely analyses and smarter decision-making.
Following are nine best practices for improving your month-end close.
- Set your goal for a three-day close. The norm for a hospital system to close its financial records is eight business days. Best-in-class systems typically take three to five days. Set interim goals to shave a day off the process each month or two and foster an expectation of continuous improvement.
- Immediately convene a five-person close-improvement team. Select five individuals based on their role in the close process to be permanent close-improvement team members. Communicate the creation of a formal close-improvement program to the entire accounting team, including those in payroll, accounts payable, and revenue accounting. Invite representatives from nonaccounting departments to provide relevant information. Build a project charter to describe your vision for an improved close process, delineate your final and interim goals, and designate all staff involved in close activities as program participants and ad hoc team members. Invite all team members to a “kickoff” event – a real event that is not merely a meeting summarizing the program but one that educates the participants in improvement objectives and techniques. For a case study during the kickoff event, find a small problem and improve upon it. Communicate progress and planned improvements on a quarterly basis.
- Conduct pre- and post-close team meetings. In pre-close meetings, discuss the close schedule and timeline, changes being implemented and issues to consider, and follow-up items from the previous month’s post-close meeting. In post-close meetings, review what worked and troubleshoot what did not, including actual versus scheduled journal entry (JE) completion dates and times. Review the status of assignments given to team members during the month. Discuss data and characteristics gathered during the process, including any nonvalue-added steps, risks, controls, and abnormalities from previous months.
- Create a Gantt chart of journal entries. The close process consists of numerous JEs. Some take very little time to prepare; others take days. Some data is available at the start of month-end close; other data is not available until the end.
Ask each accountant to select 10 JEs that require more time than the others, or JEs not completed until the last day or for which data arrives late. If someone has more than 10 problem entries, document them all. The point is to focus on all time-consuming and end-of-process entries.
Have each accountant create a Gantt chart of his or her selected JEs, with a starting point (when data is received) and an end point (when the JE is booked). Then combine the individual Gantt charts into a single chart. Shortening the close process involves reducing the time required to prepare entries, analyzing the results, and obtaining needed data sooner (preferably, on day one). The master Gantt chart will help reveal which entries should be focused on first.
- Prepare a detailed close schedule. Detailed schedules add discipline and structure to the close process. Build a schedule identifying the day of completion for each JE. Start with daily increments (for example, end of day one or end of day three). Update the schedule each month to address the changes implemented. After a few months, adjust the schedule into half-day increments (a.m. or p.m.). Finally, adjust the schedule into hourly increments. Record actual completion days and times, analyze variances, and discuss results in post-close meetings.
- Measure close characteristics. In addition to creating a Gantt chart, collect measures of process performance. Create two bar graphs: one reporting when JEs were posted to the general ledger (day one, day two, etc.), the other reporting the number of entries by each team member. Collect total lines posted, and sort this data by accountant. Add intelligence to JE numbers – for example, 100 series for cash, 200 series for fixed assets, 300 series for reclassifying entries. This will allow you to report the number of entries by type and when they are posted.
Create statistics according to JE dollar value, and summarize by number of entries under $1,000; $1,000 to $10,000; $10,000 to $100,000; and greater than $100,000.
Measures will be added and dropped as the improvement program progresses. For example, a company might have a problem with accrued payable as the last entry booked each month because the accountant takes two days to review invoices and book their accrual. By measuring the number of accrued invoices by dollar value, the company might discover that more than half of the review time is spent on invoices less than $100. By changing policy, the company could shave a day off month-end close.
- Focus on journal entries. As a general rule of thumb, focus first on improving the last posted entries – working from the back forward. Begin with entries posted on the last day. Look at the steps performed and when the data is received. Have your team list root causes for the delay. Does the team member not have time to start the entry until later even though the data is present, or does the data arrive late? Is the process inefficient? Ask “Why?” five times to help identify root causes. Then, when all of the last-day JEs are completed earlier in the close, move to the next day, and so on.
- Conduct a monthly improvement day. Formal methods to improve processes such as lean manufacturing might prompt the team to spend a week qualifying and quantifying a problem, identifying solutions, and implementing improvements. A modified, daylong version of this process one or two days after close, in which the team discusses the target JEs, maps JE subprocesses, reviews data, discusses potential root causes, and brainstorms solutions, can be helpful. The associated accountant(s) then should make the necessary changes, implement solutions, and apply the new processes in the next month’s cycle.
- Implement other improvement ideas. As a general process improvement rule, eliminate tasks or JEs where possible. When this is not feasible, consider automating, simplifying, or load balancing to reduce the time it takes to prepare JEs. For example:
- Monitor, review, and analyze transactions throughout the month to reduce time spent reviewing these transactions at month-end. Checking for large-balance patient accounts receivable accounts three or four days before month-end can save time recording revenue adjustments. Also, reconciling cash weekly accelerates an accountant’s ability to record cash at month-end.
- Raise the dollar limit for booking expense reclassification JEs to reduce time spent reviewing and recording immaterial transactions. A large number of hospitals do not have a policy for reclassifying JEs. Some will book a $5 or $10 reclassification from one cost center to another. Establishing a policy of no expense reclassifications under $250 or $500 can eliminate many immaterial JEs.
- Implement early cutoffs for specific systems to save time during the close. A good example is an early cutoff of fixed assets (the 29th of each month). This allows a head start on recording fixed asset changes; most months throughout the year still have 30 or 31 days of activity, and at year-end, cutoff can be extended to the actual last day of the year.