What Is Continuous Close and Why Does It Matter?

The traditional monthly close has long been used by companies and some still do. But the problem with this approach is that by the end of the month, everything becomes so cramped up, making it error-prone and labour-intensive. Continuous close, on the other hand, makes things much easier for both the company and the employees.

What is continuous close?

The closing process, for long, is known to be hectic and time-consuming. Not anymore! Instead of closing the books at the end of each month, why not close two or three items every day. This is exactly what happens in continuous close. It is the process of breaking down period-end closing into day-to-day activities over an accounting period.

Read more: Why Should You Strive for an Efficient Financial Close

What are the benefits of continuous close?

1. On-demand closes

Gone are the days when accounts used to spend nights trying to close a pile of information. With continuous close, the work is broken up into smaller units making it easier and faster to officially close the books.

2. Empowering the workforce

When closing the books no longer results in hectic workload for the accounting and finance team, they now have the time to interact with other employees and enjoy a cup of coffee! Moreover, they can now take on a strategic role and are not just limited to closing the books.

Read more: Best Practices for Intercompany Accounting

3. Improved decision making

Having access to data at the required time is important for better and more informed decision making. These include access to critical financial data- basic KPIs like revenue, cash and days payables outstanding (DPO) and industry-specific stats. 

4. Fewer data errors

Data errors can occur even in companies that automate their accounting. Closing piles of information at the end of the month makes it difficult to check if it is correct and error-free. It also makes it difficult to spot fraudulent transactions from a group of information. On the other hand, reviewing and closing two or three books daily can make things much easier.

5. Easier compliance and auditing

Manual intervention in accounting processes can often lead to errors. Thus, talking up an automated accounting system can help reduce the risk of errors and allow auditors to see the source of files attached to the records and transactions.

6. End of sleepless nights for the accounting staff

Closing the books at the end of each month is every accountant’s nightmare. Those hours spent in the office with a pile of information! Using continuous close can lead to less staff burnout which in turn, saves money.

Case in point: Continuous close and the pandemic

COVID 19 has had a major impact on the way people work. The pandemic highlights the importance of having data at our fingertips. Companies are trying to keep up and the leaders are being forced to make decisions. An accurate forecast is necessary, and priorities changed.

Read more: The Basics of Enterprise Data Management 

For this case study, let us take a look at two companies - Company X and Company Y. 

Company X employs the continuous close model while company Y employs the traditional model. Both companies were doing quite well before the pandemic, even with two different models. But the wave of COVID 19 completely flipped the whole situation. Company X is able to access data on demand and makes immediate decisions. Even after moving to a remote working environment, company X still grows steadily despite the pandemic. 

Read more: 4 Deadly Sins of Financial Consolidation

While on the other hand, company Y finds it difficult to initiate the change post-COVID-19. One of the major disadvantages of the traditional model is the unavailability of data on demand. Since the accounts are closed at the end of each month, the reports received are usually late, affecting the overall decision making. With the lack of data and information, company Y is at a disadvantage with the pandemic.

As businesses struggle to remain relevant and minimise mistakes during the pandemic, adopting a continuous close model provides a solution that is hard to ignore. A smooth, continuous close process requires a joint force between finance and IT. Thus, bridging the gap between accounts and technology is critical for this transition. Not only will the continuous close process improve the work conditions of the finance professionals, but it will also enable them to access to make more strategic decisions at the right time!

Hard close versus Soft close

Apart from closing the books, HOW we close the books can have different results in an organisation. The process of how we do this can be classified into two methods: hard close and soft close.

Read more: It's Time to Replace Your Spreadsheet with Planning and Budgeting Software

Hard close is the process of ‘closing the books’ in which all transactions for the period, say, at the end of the month/ quarter/ year have already been processed and there will be no more financial activity for that period. Hard close is a time-consuming process. Once completed, financial data for the set period cannot be modified.

Soft close, also called pre-closing, on the other hand, allows you to re-open the financial data of a period when required. A company that practices continuous close should be able to perform soft close without any difficulty as they are continuously processing information. Moreover, when you use the soft close function, the reports perform a mock close each time which shows the correct fund balance amount.

Like what you have read? Subscribe to TRG Blog today for similar content straight to your inbox or check out our whitepaper below to learn how CFOs can leverage Cloud Computing for success.