Over the past few years, there has been increasing interest in adopting real-time financial reporting processes. Organisations across various industries have recognised the potential benefits of continuous closes, such as enhanced decision-making, improved accuracy, and increased operational efficiency. So, why isn’t every organisation adopting continuous close by now?
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The growing popularity of continuous close
Continuous close, also known as real-time or continuous accounting, is an approach to financial reporting that aims to shorten the closing cycle and provide up-to-date financial information. It is the process of breaking down period-end closing into day-to-day activities over an accounting period.
In the previous post, we discussed the many benefits of continuous close, which also resulted in growing interest and recognition of continuous close as a beneficial approach to financial reporting.
A 2019 survey conducted by Ventana Research revealed that 45% of organisations had implemented or were planning to implement continuous accounting practices within the next 18 months. This indicates a growing interest in real-time financial reporting processes.
According to a 2020 report by BlackLine, a financial automation software provider, 56% of finance professionals believed that continuous accounting could deliver significant benefits to their organisations, such as improved decision-making, increased efficiency, and enhanced accuracy.
In a 2019 survey conducted by EY (Ernst & Young) of finance leaders across various industries, 63% of respondents believed that continuous close or real-time financial reporting would have a major impact on their organisations in the next five years.
The Institute of Management Accountants (IMA) highlighted in their 2020 whitepaper on continuous accounting that early adopters of continuous close reported benefits such as reduced closing cycle times, improved data accuracy, enhanced transparency, and better alignment of financial and operational data.
While continuous close offers several benefits, such as increased timeliness, improved accuracy, and enhanced decision-making capabilities, not all organisations can or are willing to adopt it.
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Reasons why not all organisations adopt continuous close
Overall, while continuous close offers significant advantages for many accounting departments, its desirability and feasibility can vary based on organisational size, industry requirements, resource availability, cultural factors, and cost-benefit considerations.
1. Organisational Size and Complexity
Smaller organisations with simpler accounting systems may find it easier to implement and benefit from continuous close compared to larger, more complex organisations with multiple business units and systems.
Smaller companies typically have fewer financial transactions, a simpler chart of accounts, and a smaller workforce. This simplicity allows for a more straightforward implementation of continuous close. The reduced volume of transactions makes it easier to process and reconcile financial data in real-time, enabling smaller accounting teams to manage the process effectively.
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In contrast, larger organisations often deal with higher transaction volumes, multiple business units or subsidiaries, and more complex financial systems. These factors can increase the complexity and challenges associated with implementing continuous close.
Large companies may have to integrate disparate accounting systems and data sources, consolidate financial information from various entities, and establish standardized processes across different departments or locations. Coordinating these efforts and ensuring data accuracy and integrity in real-time can be more difficult due to the scale and complexity involved.
Additionally, larger organisations may have more stringent reporting requirements and compliance obligations. These requirements can involve detailed financial disclosures, extensive internal controls, and audits, which may pose additional challenges for implementing continuous close. Meeting the regulatory deadlines and ensuring compliance while transitioning to a real-time reporting process may require significant planning, resources, and coordination.
2. Industry and Regulatory Requirements
Certain industries or regulatory bodies may have specific reporting requirements and timelines that make continuous close more or less feasible. For example, publicly traded companies are subject to strict reporting deadlines imposed by regulatory bodies, making continuous close more challenging to achieve.
Different industries have unique accounting practices, reporting standards, and compliance obligations. These factors can influence the feasibility and desirability of implementing continuous close within an accounting department. Regulatory bodies, such as the Financial Reporting Council (FRC) or the Financial Conduct Authority (FCA), often set specific reporting deadlines and guidelines that companies must adhere to.
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In industries where real-time financial reporting is crucial, such as banking or financial services, continuous close may be highly desirable. Timely and accurate financial information is vital for monitoring risks, managing liquidity, and complying with regulatory requirements. Implementing continuous close in such industries can provide immediate insights into financial performance, enable faster decision-making, and help maintain compliance with regulatory obligations.
However, in other industries where reporting requirements are less stringent or where traditional periodic reporting is more common, continuous close may not be as crucial. For example, companies in manufacturing or retail sectors may have longer reporting cycles and financial data may be analysed and reported on a monthly or quarterly basis. In such cases, the urgency for real-time reporting may be lower, making the implementation of continuous close less of a priority.
3. Resource Availability
Implementing continuous close requires dedicated resources, both in terms of technology infrastructure and skilled accounting personnel. Some organizations may not have the necessary resources to invest in the required technology or may lack the expertise to effectively implement continuous close.
From a technological perspective, continuous close often necessitates the use of advanced accounting systems, financial software, and automation tools. These tools help streamline data capture, reconciliation, and reporting processes, enabling the accounting department to operate in real-time.
However, implementing and maintaining such technology can be costly, especially for organisations with limited financial resources or existing legacy systems that require significant upgrades or replacements.
Additionally, continuous close requires a team of accounting professionals with the knowledge and expertise to handle real-time accounting tasks. These professionals should be familiar with the principles and practices of continuous close, as well as the technologies and software employed in the process. Depending on the size and complexity of the organisation, this may involve hiring new staff or providing training to existing personnel.
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In some cases, organisations may face challenges in finding and retaining skilled accounting professionals with experience in continuous close. The demand for such expertise may exceed the available talent pool, making it more difficult to build a capable team.
Moreover, the transition from traditional periodic closing processes to continuous close may require a change in mindset and work approach for the accounting team, which can add an additional layer of complexity.
The availability of resources, both in terms of technology infrastructure and skilled accounting personnel, is a critical consideration when determining the desirability and feasibility of continuous close for an accounting department.
Organisations must assess their financial capabilities, evaluate the costs and benefits of implementing continuous close, and ensure they have the necessary resources to support the transition effectively.
4. Cultural Factors
The acceptance and adoption of continuous close can also depend on the organisational culture. Some accounting departments may be more open to change and willing to embrace new approaches, while others may be more resistant to change and prefer traditional closing processes.
Organisational culture plays a significant role in shaping the attitudes and behaviours of employees, including those in the accounting department. The culture of an organisation can influence how open or resistant individuals are to adopting new processes and technologies, such as continuous close.
In accounting departments with a culture of innovation, agility, and a willingness to embrace change, the adoption of continuous close is likely to be more desirable. These departments are characterised by employees who are open to new ideas, proactive in seeking improvements, and comfortable with leveraging technology to enhance their work processes.
In such cultures, the transition to continuous close is often smoother as there is an inherent readiness to explore and implement innovative approaches.
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However, in accounting departments with a more traditional or risk-averse culture, there may be resistance to change and a preference for familiar and established closing processes. Employees may hesitate to embrace real-time reporting and perceive continuous close as disruptive or unnecessary. Overcoming cultural barriers and addressing resistance to change can be a significant challenge in such environments.
The successful adoption of continuous close in a culturally diverse organisation requires effective change management strategies. This includes clear communication about the benefits of continuous close, training and education to address any knowledge gaps, and involve employees in the decision-making and implementation process.
Building a culture of openness, collaboration, and continuous improvement can help overcome resistance and foster a positive environment for adopting continuous close.
It is important for accounting departments to assess and understand their organisational culture when considering the desirability of continuous close. Recognising and addressing cultural factors, and nurturing a culture that supports innovation and change, can significantly influence the successful implementation and acceptance of continuous close within the accounting department.
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5. Cost-Benefit Analysis
Each accounting department needs to weigh the potential benefits of continuous close against the costs and challenges associated with its implementation. It is essential to assess whether the anticipated gains in efficiency, accuracy, and decision-making outweigh the investment required to implement and maintain a continuous close process.
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Implementing continuous close involves costs, both in terms of financial investment and resource allocation. These costs can include the purchase and implementation of new technology systems, training and re-skilling of staff, potential disruptions during the transition phase, and ongoing maintenance and support expenses.
To determine the desirability of continuous close, accounting departments must conduct a thorough cost-benefit analysis. This analysis involves quantifying the potential benefits of continuous closes, such as improved timeliness of financial reporting, enhanced accuracy and reliability of financial information, faster decision-making capabilities, and increased operational efficiency.
Accounting departments should also consider the specific pain points and challenges they currently face in their closing processes. Continuous close may offer solutions to these challenges, such as reducing the time and effort spent on manual data entry, improving data reconciliation, or enabling better visibility into financial performance in real-time.
On the cost side, accounting departments must evaluate the expenses associated with implementing continuous close. This includes the initial investment in technology infrastructure, software licenses, and potential consulting services required for implementation. Ongoing costs, such as system maintenance, upgrades, and training, should also be taken into account.
A thorough cost-benefit analysis helps accounting departments assess whether the potential benefits of continuous close justify the costs involved. It provides a clear understanding of the return on investment and allows for informed decision-making. In some cases, the benefits may outweigh the costs, making continuous close highly desirable. However, if the costs outweigh the anticipated benefits or the expected return on investment is not substantial, the desirability of continuous close may be lower.
Furthermore, the cost-benefit analysis should be revisited periodically, considering factors such as evolving technology, changing industry requirements, and internal organisational changes. It helps accounting departments re-evaluate the desirability and ongoing feasibility of continuous close, ensuring that it remains aligned with the organisation's strategic goals and financial capabilities.
In summary, conducting a comprehensive cost-benefit analysis is crucial to determine the desirability of continuous close for an accounting department. It enables a realistic assessment of the potential benefits and costs, ensuring that the implementation of continuous close aligns with the organisation's financial resources and strategic objectives.
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