How Closing Financial Periods on Time Fosters Business Predictability
It’s the end of the month again. Actually, it’s already eight days past month-end, and you’re chasing different departments for the information you would need to close the financial period. Your team is scrambling to hunt down revenue that was supposed to be recognized this month. What happened to that revenue?
- Is it caught up in timesheets that haven’t been submitted?
- Is it hidden in sales opportunities that haven’t had their close dates moved out yet?
- If it won’t come in this month, can you expect that revenue in a future period or is it just gone?
Until you can answer these questions, you won’t be able to bill your customers or know with any accuracy what will happen in upcoming financial periods. If this sounds anything like what you have to go through at the close of the month, you’re not alone. Many finance and executive leaders in professional services firms know this script and would like to close out financial periods sooner, and with less stress.
There is no question that increasing the timeliness and accuracy of closing out financial periods directly impacts predictability, confidence, and ultimately, the sustainable growth of a business. As a finance leader, you must start by nailing down the behaviors that lead to revenue leakage.
Challenging the Unpredictable Behaviors that Lead to Delayed Period Close
One of the ways to reduce revenue leakage and improve the predictability and repeatability of financial period close is to proactively recognize the behaviors that lead to unpredictable performance — such as scoping, reactive resourcing, and the lack of a commercial focus in delivery. If these behaviors can be caught before they have a financial impact, leaders can more confidently and predictably close each month.
If you have to bring together information from several different places — whether from unwieldy spreadsheets or software applications that don’t talk to each other – that can also lead to unpredictability at month-end. Sometimes the information you require may not not even be there when you go to fetch it — timesheets include errors, or have not been completed, and expense claims are missing or ineligible. Finding and removing this kind of error can be a time-consuming manual task. If the information is there, oftentimes it is out of date, as it is not uncommon for projects that were expected to close to be delayed. The issue here is the revenue associated with these pushed projects are still being recognized in the current financial period.
These complexities tend to compound — after all, you can’t send out correct invoices until you have worked out what is due. Delays in billing contribute to cashflow problems. And if you spend too much of the next period wrangling the data from the last one, you have less time to look forward and to deal with what is on the road ahead.
Consistently closing each financial period creates a metronome for the business. It marks a regular cadence where data is collected, checked, acted on and put away. Getting the processes and technology in place to enable your people to do this consistently creates more predictability for your business. It means financial data can flow swiftly into strategy and planning. That allows people to make better-informed decisions sooner.
Key Challenges for Finance Teams
Finance teams are often challenged with scrambling to collect data after the month has already ended, and this issue is only further exacerbated because they don’t have the tools or processes that allow for a proactive approach. Unless this changes, closing the financial period at the end of the month is always going to be a nightmare. Below are five issues that need to be resolved to improve the outcome.
1. Data is siloed
When different departments look after their own data, and it is not automatically shared, there is inevitably going to be a lot of room for disagreement. There are too many sources of the truth. The monthly management meeting is likely to be taken up with agreeing a shared version of what actually happened in the period.
Often, in an effort to deal with this uncertainty and comply with rigorous accounting standards, the finance team form the habit of erring on the side of caution by pushing out revenue recognition, invoicing and so on. But these delays can end up costing the business even more time and money.
2. Information needs chasing at the end of the month
Organizations often default to having the finance team to scramble at the end of each month — simply because they know nothing different. Building a predictable and repeatable process around the close of each month requires effort from the entire organization — this is not something that finance can do on its own. All teams across the organization need to be committed, proactive, and aware of the importance of inputting financial data on-time, with accuracy, and in a collaborative manner. That’s the only way to build a predictable, repeatable, and timely period close.
Getting buy-in across all teams is particularly difficult when inputting financial data is manual and requires a great deal of concentrated effort to complete. When data input is manual and requires too much administrative overhead, individuals simply don’t have the time to chase up the data while tending to customers. If the process is streamlined and they understand how accurate financial data impacts the success of their customers, it becomes a more realistic, achievable, and prioritized exercise. If everything is left to the end of the month, the finance team then has to actively go out and gather the data before they can do their job.
3. Poor timesheet compliance
Timesheet compliance is a common issue in services businesses, mostly based on the fact that individuals don’t have a great understanding of just how important this action is to the predictability of the business as a whole. Filling out timesheets doesn’t feel like a priority compared to their daily responsibilities, they feel like they are being checked up on, and regard it as a box ticking exercise.
If this is the cultural attitude, even when the timesheets do get filled in, opportunities are missed to capture information that can be used operationally. For instance, it is key to the accuracy of the forecast going forward to understand how much work it will take to complete an ongoing project. Oftentimes, the initial prediction of the work and time required to close a project is not accurate and shifts as the project progresses. Capturing this shift using timesheets is essential in order to make proactive decisions sooner — increasing the accuracy of revenue recognition and future forecasts.
4. Periods are left open for too long
If collecting the information required for period close is long and arduous it can sometimes mean that it is completed after the month has ended. Some companies keep past period data open for weeks or months and then go in and adjust numbers whenever they track down missing bits of data.
That approach can work if the numbers are only used for historical accounting processes. But it makes it very difficult to flow the information into the operational data that is used to run the company. If revenue from three months ago is suddenly reduced it is likely to impact everything else in the system, including targets and forecasts. It makes it harder to take a forward-looking approach.
5. Revenue leaks are hard to spot in time
One of the main reasons for closing month-end is to reconcile the revenue forecast for the period with the reality. Professional services businesses often suffer from revenue leakage and reducing this loss can be a powerful tool in improving profitability.
Revenue leakage is often fueled by unpredictable behaviors surrounding scoping, resourcing, and failing to account for the financial implications associated with shifts during the delivery phase. Failing to recognize — and proactively remedy — these unpredictable behaviors mean that leaks cannot be traced until after the month has already closed.
It is often only the painstaking process of getting all of this information together that reveals that the actual revenue due is different from what was predicted. Sometimes the position could be better than anticipated — a happy surprise — but if the forecast had been correct, that extra revenue could have been invested. Conversely, if the process shows that revenue has leaked, it is too late to stop that from happening.
How to Solve
They key to a smooth, accurate, and predictable period close lies in recognizing the behaviors and processes that are not proactive or repeatable in nature. One way to help resolve such behaviors is by having the right tools in place — tools that show teams the importance of inputting accurate and punctual data — and how failing to do so has major implications on the organization as a whole. Using spreadsheets or trying to maintain home-grown systems is not an adequate solution for a mid-size or large business.
Implementing a PSA solution offers a basis for ensuring that the finance team can access the data they need to close periods in a predictable way. Here are some of the ways it can be used to deal with the issues above.
1. Create one source of the truth
Implementing a PSA solution that is linked to the CRM gives the finance team visibility of the sales pipeline and of the resourcing plan. Flowing everything into one system gives the opportunity to create one source of the truth. PSA nudges individuals when there are errors in the data entered into the system, increasing the accuracy of information, and fostering a greater sense of trust.
When people from different departments adopt this practice of using the same data stream, it is a basis for having an agreed, up-to-date record of what has been sold and delivered, and at what cost. That gives a strong basis for the finance team to do their part.
Standard finance dashboards — one source of truth for financial data across the entire company — can be automatically updated based on real-time performance data. That means less time is spent aggregating, and more time analyzing and making strategic business decisions.
2. Share responsibility across the organization
It is much easier for the finance team to move in and swiftly close the month if financial data is handled on a daily or weekly basis. This sets the pace for proactive and timely close. Using a PSA enables everyone across the business to see what they have to do to keep the period close motor running.
For example, project managers can stay on top of managing the operational aspects of the project, being proactive about chasing timesheets and expenses and understanding planned, remaining, actual, and invoiceable hours — rather than waiting to be chased by finance at the end of a period. This all means that closing the month is less onerous and can happen smoothly.
3. Automate and streamline time capture
A PSA which is designed to improve the consultant experience will deliver the potential to change the conversation around time capture. PSA can provide predictive timesheets that automatically suggest entries based on typical, projected, or expected hours. This makes the entire timesheet process easier, with the PSA solution nudging users when it is time to update or confirm their information before it is overdue. PSA allows consultants to update timesheets and expenses across all devices, making it a simple and painless process that can be done even on your mobile device.
A good PSA can also keep inaccurate information out of the system, for example by not accepting ineligible expense claims. Additionally, it can enable consultants to indicate where the time prediction is unrealistic. When individuals understand that their information is being used to update forecasts and to make future proposal templates more accurate, they start to see time capture as more than a box-ticking exercise but an important part of their role.
4. Don’t reopen closed periods
If financial data is being used to inform future planning it is important that the periods are closed and put away. That enables this process to be the metronome that underpins the business. All departments collaborate in it and everyone understands that closed has to mean closed. Important pieces of data which turn up after the date can be applied to the current period but not to the past one.
When implementing an automated system, it is important to understand that going back into the past and changing one number — although it may seem small — can affect all of the other numbers in the system.
5. Focus on identifying revenue leakage
Implementing a PSA solution which creates visibility of the project commercials and raises a red flag when they go off track means that revenue leakage is identified as soon as it starts to occur. That gives everyone the best chance of working together to plug the hole.
When actual revenue changes, if the forecast is updated automatically then there are fewer surprises, whether nice or nasty at the end of the month. This makes the process of closing each month much easier — and it also drives a forward looking perspective that improves business performance.
Closing financial periods predictably, within a couple of days of the actual end of month, is great for the business in several ways. It creates that reliable rhythm which brings every department across the organization together. Everyone knows that they are required to participate in this process, that it is considered an important part of their roles, and that it feeds into creating a more predictable business going forward.
When the period is closed out, accurate invoices can be automatically set out, bringing payment closer. And, as soon as the past period is closed out, all eyes turn to the road ahead and to the part you can actually influence—the future.