Chapter 9 – Lean In for a Fast, Accurate and Efficient Close

Our finance team takes nearly a month to close the books.  The limited amount of data that is provided is not only stale, it is often not accurate and needs to be constantly revised.How can we diagnose the root of the problem?  What program of action can be implemented to improve the close?

The Financial Close delivers your business’s periodic report card.  The Close, a collection of activities that completes all financial transactions, closes all financial accounts and projects, corrects transactional errors, analyzes the results, and reports them to management, helps your management team diagnose how they are performing and act accordingly.  The Close is not just another analytical tool – it is the analytical tool of all analytical tools.  When used, it delivers the right (i.e. verified) information to the right people at the right time.  And time is critical in the race against your competitors, since whoever learns fastest wins.  So why are so many companies lacking when it comes to a quick, efficient and informative Close?  A “bad Close” is the equivalent of waiting a month after finals to get your child’s report card and then discovering that the grades posted were not correct.

Fortunately, the answer to this problem has already been worked out in the form of the Toyota Production System (or “Lean” as it was renamed in the U.S.).  As with any major social, economic or cultural event, there was a time lag between the innovative idea of Lean and its full impact.  In the 20th century, almost no back office professionals had access to Lean.  Few books discussed Lean and few, if any, colleges required undergraduate business students to study it.   But a few back office managers who had the mindset to look for new ideas became aware of how Lean practices could impact their results and began emphasizing its concepts. They recognized that nearly every Lean tool and technique could be used to improve their company’s Financial Close.  They discovered that they had to unlearn a great deal of what they thought they knew about how back office operations worked, but what they gained in terms of efficiency was not only powerful, but profitable.

To make it work, the managers used a key Lean method, time reduction, as the entry point of their analysis; they first set a target of less than a week to complete the Close.

They then used a Lean tool, “value stream mapping,” to provide an understanding of every process that contributed to the Financial Close. The method used a step-by-step map of information backwards from the final product, the reporting package requested by management, to the original inputs.  This backwards-looking drawing captured every step of work in each process (cash and investments, procure-to-pay, manufacturing, quote-to-cash, revenue recognition, capital assets, tax, etc.) so that everyone who contributed to the end-to-end stream of work understood what could go wrong and how mistakes occurred.  They used the map to observe how work was being performed, and mapping provided contributors with a common language, enabling them to lay out what they currently did at more than just a single process level.  Finally, it exposed activities that were unnecessary, becoming a blueprint that showed in detail how work flow could be executed unobstructed by unnecessary waste, variability, inflexibility, and constraints.

After modern U.S. managers gained an understanding of their processes, they implemented a simple but critical Lean tool, a checklist.  The checklist included a calendar of times and dates that each task was to be performed.  It measured the tempo of each work stream during the Close. Not only did it ensure that tasks were performed, it functioned as a signal to perform tasks, alerting managers when something was amiss with throughput in one of the processes. By tracking time, managers understood each team’s capacity and throughput.  Combined with timesheets, the checklist helped you reduce hours worked during Close.  It allowed them to tinker with the allocation of work to speed up certain activities or slow down others, and isolated whether a system constraint, an error, or waste in a process was holding up the flow for a particular work stream. Companies using Lean quickly found their processes more efficient, accurate and, yes, adaptable to dynamic growth.

Once these managers understood the processes more intimately, a light bulb turned on for  employees.  Confronted with a stretch goal of a very short Close, they began paying attention to everything that constrained the flow of their work.  After being introduced to the concepts of waste, inflexibility and variability, they recognized these problems everywhere.  Almost everywhere they found waste in the form of activities that did not add value to the final Close package.  Defects, workarounds, queues, and work-in-processes delays that had previously gone unseen were identified and addressed.  In most cases, they found that they were over-processing information and spending precious work hours doing so. These were eliminated.

The managers found waste at the individual, team, and company levels.  Information could not be analyzed because systems were not refreshing data until the end of each day.  Employees were creating small dollar journal entries so that the numbers would be “right.”  The adjustments and re-work resulting from these entries held up the Close, yet they did not have a material effect on results.  Most importantly, teams discovered how much time was devoted to correcting previously recorded journal entries or waiting for systems to reboot after they crashed.

The managers detected constraints caused by employee work schedules.  Too much work was being scheduled on the same days during the first week of Close.  When tasks were performed varied each month.  Non-critical work was performed in parallel with critical work. Unnecessary time buffers were created to compensate for unscheduled vacations or leaves of absence. All of this variability forced certain teams to work twelve to sixteen hours a day during Close.  Others worked less than six hours a day during non-close weeks.

Surprisingly, managers encountered inflexibility when implementing these changes.  As predicted, a few information system tools could not be integrated with other tools.  A few tools could not be refreshed as often as desired.  Some were not reliable when stressed.  However, what surprised managers most was that certain employees refused to adopt the new approaches. They did not comply with updated schedule or customer demands.  They did not want to change or adapt their capabilities.

Fortunately, managers discovered that as they became more familiar with Lean concepts, they were able to significantly reduce the hours it took to complete the Financial Close.  Bringing together contributors and customers to attentively review work streams developed a shared understanding of what needed to be changed.  Waste was reduced in every process.  The huge spike of hours worked during Close was dampened by rescheduling tasks or by moving work to off-site service centers.  The off-site centers extended the workday without extending any particular employee’s workday.  And sources of inflexibility were either replaced or the process was adapted to offset these constraints.

Teams that adopted Lean concepts to improve their Close discovered how Lean could transform how they worked.  While challenging, to close in less than a week became the new normal.  New goals were developed.  For instance, a new goal was to close in a week and reduce the average workday during the Close to fifty hours or less.  Lean improved the employee’s work-life balance.  It gave them time to further examine their work streams and investigate other concepts from Six Sigma or the Theory of Constraints.  It gave them new mental tools to approach their everyday challenges.  And it gave them the confidence to ask a new question:  can we close the books every day?

• Takeaway questions:
  • How many journal entries are required to complete your close?  Who records the close entries?  Who reviews the entries?
  • How many man hours does it take to record and review all close activities each month?  When do these activities occur?
  • What errors or delays occur each month during the financial close?  How much wasted time is required to fix these problems? Do the same problems occur every month?
  • How often do you have to correct errors for a previous period?
• Have you encountered a similar problem? How did you deal with it? Share your story.