Despite being separated by almost 600 years, modern-day accountants still share a common practice with Luca Pacioli.
Like the father of accounting, today’s finance teams continue to work within the confines of the monthly close, a process that can still take up to 15 days for some businesses to complete, writes Aaron Harris, chief technology officer of Sage.
This delay means companies are often not getting an accurate view of their financial performance until halfway through the following month. In today’s fast-paced business environment, where real-time insights can be a real difference maker, this approach does not align with modern business needs while also consuming valuable time and resources that could be better spent on strategic initiatives rather than what is effectively a low-value proposition that doesn’t particularly register elsewhere in the business when completed correctly.
To achieve greater agility, accuracy, and foresight needed to adjust and adapt, businesses must shed the constraints of the financial close and embrace continuous accounting – where the traditional month-end close is replaced with ongoing, real-time accounting activities.
Of course, a complete transition isn’t going to happen overnight. However, by making incremental improvements to drive financial reporting latency towards zero with the help of Artificial Intelligence (AI) and automation, businesses can already start to de-emphasise the close. Breaking a cycle which, if not vicious, is not adding as much value as it should.
Evolving beyond manual processes
The monthly close exists, in part, because the traditional manual processes needed to capture the information required to present a full and accurate picture of an organisation’s financial performance take a long time (and effort) to carry out.
Take invoice processing as just one example. If vendors send customer invoices via email in a PDF or (heaven forbid) mail an invoice in the post, it causes a delay to extract information and input it into your accounting system. That’s before considering the time spent chasing customers for late invoices. Or what about that painful part of a finance team’s job when they have to chase employees to complete timesheets? It can be a frustrating task that is taking away from their ability to do more strategic work.
Automation dramatically speeds up these repetitive tasks so they can be completed in sync with business activity. And, because it no longer takes so much time to complete, there’s less need to group the work into monthly reporting periods to get it done. That’s a win for finance teams who are reportedly spending 25% of their time on the close, per our Sage customer surveys.
For example, Large Language Models (LLMs) can be used to create emails to nudge customers and employees. And AI-powered solutions can automate extracting and entering data from traditional paper or PDF invoices, speeding up the data collection process and empowering people to be more productive with humans only brought in at the review stage.
Spending less time on the minutiae of the close positively impacts on a personal, human level as well. Michael A. Smith, SVP of Finance & Accounting at Operation Hope—the largest non-profit in the US focusing on financial literacy and empowerment—recently told me at Sage Transform 2024 that AI automation has given him invaluable time to spend with his two kids and be present as a father.
Greater accuracy and trust
When information can be captured closer to real-time via continuous accounting, you can move away from after-the-fact visibility and achieve a more accurate view of business performance in the moment. Of course, that is only possible when the information provided can be trusted as reliable.
Automation can reduce human errors in manual data entry that can occur during the often stressful and hectic time that is the monthly close. In fact, AI models are already achieving 100% accuracy on nearly 70% of invoices that flow through.
Coupled with the real-time visibility into costs or expenses across the business, this approach allows for decision-making based on up-to-the-minute information rather than historical data. This real-time perspective offers a more accurate view of business performance at any given moment.
It is important that this continuous assurance elements work hand in hand with continuous accounting to ensure reliability. By mitigating risks associated with bad data and ensuring compliance, it fosters trust in the financial data being used for decision-making. Moreover, as businesses shift focus from manual tasks to managing relationships with vendors, they can foster more accurate and reliable supply chains, contributing to overall business performance accuracy.
Greater foresight and agility
Automation in continuous accounting not only increases accuracy but also gives businesses the gift of time. By automating tasks such as invoice processing and accruals, businesses can redirect their focus from tedious manual work to strategic initiatives that add value to the business. This shift in focus allows for more agile decision-making and fosters innovation.
Moreover, with real-time data at their fingertips, businesses gain foresight into their performance and financial health. They no longer have to wait until the end of a financial period to assess their standing. Not to mention unlocking quicker detection of issues and exceptions that previously would only be spotted after the damage is done.
More immediate access to insights allows businesses to respond quickly to changes and seize opportunities as they arise. In essence, continuous accounting enables businesses to be more proactive and less reactive, resulting in greater agility in an ever-changing business landscape.
That’s exactly what CB insights, a provider of market intelligence on private companies and investor activities, was able to do as they turned a 60-day soft close into a three-day hard close. With all that extra time – literally weeks and weeks of it – they were able to direct energy and attention to strategic areas of the business. A case in point being a reduction in their DSO (Days sales outstanding) by 10 days and an extended 13-week cash forecast.
In conclusion, the traditional ‘close’ of accounting is giving way to a new era of continuous, real-time insights, thanks to the revolutionary impact of AI. This shift is not just a change in process; it’s a transformation that promises greater accuracy, trust, foresight, and agility in managing business finances.
By moving towards eliminating the close, we are breaking free from the constraints of a term and a practice that by nature is not continuous. We are moving towards a future where real-time data reigns supreme, offering businesses the ability to make informed decisions at any given moment, rather than waiting for the end of a financial period.
It doesn’t stop at improving financial processes; it has the potential to drive new growth and development for businesses. By automating tasks and providing real-time insights, businesses can foster innovation and finance teams can rebalance priorities and their time away from the monthly close.
As we embrace this new age of continuous accounting, it is about more than changing how we handle workflows. Moving away from the close is about opening up a world where businesses can operate, grow, and succeed more effectively.