Accounting & Tax

A Virtual Close: Easy as One, Two, Three?

Cisco's done it. So have Dell and Motorola. Here are three steps to move your firm to a virtual close for your accounting systems.
Jennifer CaplanMarch 8, 2001

Not all that long ago, the term “virtual close” was obscure jargon rolling off the tongues of Cisco Systems’ CFO Larry Carter and the folks at Motorola. Today, most large corporations have either initiated the journey toward a virtual close, or made it one of their top priorities.

O.K. So you’re not Cisco or Larry Carter. But you admire his accomplishments — and rightfully so. After all, on any given workday, Cisco can churn out consolidated financial statements and balance sheets and continually monitor critical business information.

For example, if a Cisco manager wants to analyze revenue and margins based on geography, line of business, product, and sales channel for the day, month, quarter, or year, she can do so within seconds. But getting there was no mean feat. It was a key reason why Carter won a CFO Excellence Award in October.

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“Since 1993, virtually all of our clients have been moving down that pathway, cutting anywhere between a third to a half of their close cycles” says Mark Kruger, managing director of Finance Solutions at management-consulting firm Answerthink.

Although closing cycles can take up to two weeks at some companies, the average cycle today is anywhere between six and eight days. For his part, Carter predicts that in three to five years, the one day close will be commonplace.

So, what exactly is a virtual close and how does it create value to justify the costs necessary to achieve it?

Cisco CEO John Chambers defined the term in a 1999 interview with USA Today as “the ability to close the financial books with a one-hour notice.” But it goes beyond consolidating financial statements quickly, and extends to giving executives and employees access to real- time information. According to Chambers, the virtual close lets managers “spot problems and opportunities at any time.”

This is not to say that most companies today don’t have the capacity to monitor their financial information regularly. It simply means that at many firms, the financial staff spends too much time on transactional activities such as allocations, recurring journal entries, and reconciliation of accounts at different levels of the organization in a slow, non-automated fashion, says Kruger. Given that most companies today close their books on a monthly basis, a problem can persist for weeks before it is identified and properly addressed.

“The faster managers can get to information, the better and more effective will be the actions that are taken as a result,” says Lawrence Maisel, principal at the Balanced Scorecard Collaborative. “For example, if sales are slowing in a particular geographical area, a company can better respond if it has access to information in real time.”

But although many CFOs recognize the benefits of a virtual close, they are daunted by the effort involved or are simply at a loss as to how to get there. And the fact that you’re not Cisco does not preclude you from being able to reduce your close time to five days or less.

“I see five days as a kind of a barrier,” says Steve Lukens, a partner with the financial management practice at PricewaterhouseCoopers. “You can get to five days without having to make huge sacrifices, but to get from five days to two or one is much more difficult.”

Cisco’s Chambers, has said that by 2010, the virtual close will be a common characteristic of most US companies, leaving those that stay behind at a significant competitive disadvantage. It took Cisco eight years to get its accounting systems up to snuff, but Chambers has said that it can take as little as four.

So, do the math. It’s now 2001. It could take your company as much as up to eight years to have all the processes and technologies in place to be able to achieve a virtual close, but if you don’t have one in place by 2010, your company could be at a serious competitive disadvantage.

Here are three steps companies can take to reach real time reporting according to PWC’s Lukens and Answerthink’s Kruger:

One. Focus more on top level closing, and eliminate unnecessary details. Companies include too much minutiae about allocating costs between cost centers, inter-company charges, and accruals at the end of every quarter, just so that each business unit manager can meet their budget and get their bonus, says Lukens. These details should be eliminated from the closing cycle.

“If you are going to do a virtual close you need to produce a top-line snapshot of where you are,” Lukens contends. “[Companies] should not hold up reporting top-line results to Wall Street and shareholders just because they are allocating every dinner charge to the right cost center, which is what companies have been doing for years.”

Two. Use technology and automated systems to eliminate interim closes after the preliminary close has been made. Underlying business transaction information that has been aggregated for the preliminary close should capture all the detail necessary to be able to translate those transactions into costs and revenues, so that they can be posted to the financial statements only once.

Three. Reduce the number of legal entities to be consolidated. According to Kruger, many companies have created a large number of “in name only” legal entities either for tax purposes or for reducing legal exposure, but in most instances they have very little transaction volume going through them.

“Every legal entity costs around $250,000 to $500,000 to maintain because people spend money to account and consolidate those transactions,” says Kruger.

After following these steps and eliminating non-value added activities, companies can cut the time required to close in half, says Lukens. “Then you’re down to the really difficult stuff.” That’s where the technology issues come in.

“To get to the one or two day close, you need to make some difficult calls around organization, data allocation, and enterprisewide systems,” Lukens says.

Finally, as Cisco’s Carter stresses, in order to achieve a virtual close there must be a significant leadership effort from senior management. Without it, a virtual close will never become a reality.

The Right Technology for a Virtual Close

Mark Kruger, managing director of Finance Solutions at management- consulting firm Answerthink, says there are five technological enablers that are indispensable.

One. As a first priority companies need to have a single, fully integrated financial application system. This enables all transaction accounting systems such as accounts payable, fixed assets, accounts receivable, and customer billing to feed directly into the general ledger.

Ideally, a company will use one version of an enterprise resource planning (ERP) system running in a central location, rather than across several systems at multiple sites. Cisco, for example uses Oracle as its sole ERP vendor, and all the companies it acquires must adopt Oracle’s Web-based applications to ensure uniformity across the entire organization.

“We find that even in the general ledger, companies have between 15 and 30 different applications installed for every $1 billion of revenue,” says Answerthink’s Kruger. “That makes it very difficult for them to close their books because they are closing on different systems and then transferring that information into a consolidated system.”

Two. Companies must have a fully automated consolidation tool that can take financial data from multiple subsidiary ledgers, and consolidate it to a corporate or business-unit level, permitting the automatic posting of eliminating entries, accrual entries, and allocations, says Kruger.

This allows information coming from different systems to be aggregated into one database.

For many companies, the consolidation process is held up by slow, manual entries across different departments that eliminate joint ventures and intra-company transactions. When consolidation tools are not automated and allocation velocity is slow, the closing cycle is unnecessarily extended, he says.

Three. Adopt a fully automated, single-entry, inter-company accounting system, which allows transactions to occur between two different legal entities owned by the same company. Because many companies today operate across legal entities, multiple countries, and different business units, at the end of each month, they must move costs, profits, and sales from one business unit or legal entity to another.

Four. Create a Web portal for delivery of standard reports so that when information is consolidated, it is reported on a Web site, and users of the information can view it on line, and make decisions on the same basis.

“Version control is a large issue for finance officials,” says Kruger. The most current version of the numbers is always on portal, which is particularly critical for large, multinational companies that operate in different countries across time zones.

Five. Link the Web portal to an Online Analytical Processing (OLAP) database that allow companies to conduct ad hoc queries and analysis of the data underlying their reports.

Taking these five steps won’t guarantee a successful project, but without them, the obstacles will be much greater.