Not all that long ago, the term “virtual close” was obscure jargon rolling off the tongues of Cisco Systems’ CFO Larry Carter and the folks at Motorola. Today, most large corporations have either initiated the journey toward a virtual close, or made it one of their top priorities.
O.K. So you’re not Cisco or Larry Carter. But you admire his accomplishments — and rightfully so. After all, on any given workday, Cisco can churn out consolidated financial statements and balance sheets and continually monitor critical business information.
For example, if a Cisco manager wants to analyze revenue and margins based on geography, line of business, product, and sales channel for the day, month, quarter, or year, she can do so within seconds. But getting there was no mean feat. It was a key reason why Carter won a CFO Excellence Award in October.
“Since 1993, virtually all of our clients have been moving down that pathway, cutting anywhere between a third to a half of their close cycles” says Mark Kruger, managing director of Finance Solutions at management-consulting firm Answerthink.
Although closing cycles can take up to two weeks at some companies, the average cycle today is anywhere between six and eight days. For his part, Carter predicts that in three to five years, the one day close will be commonplace.
So, what exactly is a virtual close and how does it create value to justify the costs necessary to achieve it?
Cisco CEO John Chambers defined the term in a 1999 interview with USA Today as “the ability to close the financial books with a one-hour notice.” But it goes beyond consolidating financial statements quickly, and extends to giving executives and employees access to real- time information. According to Chambers, the virtual close lets managers “spot problems and opportunities at any time.”
This is not to say that most companies today don’t have the capacity to monitor their financial information regularly. It simply means that at many firms, the financial staff spends too much time on transactional activities such as allocations, recurring journal entries, and reconciliation of accounts at different levels of the organization in a slow, non-automated fashion, says Kruger. Given that most companies today close their books on a monthly basis, a problem can persist for weeks before it is identified and properly addressed.
“The faster managers can get to information, the better and more effective will be the actions that are taken as a result,” says Lawrence Maisel, principal at the Balanced Scorecard Collaborative. “For example, if sales are slowing in a particular geographical area, a company can better respond if it has access to information in real time.”
But although many CFOs recognize the benefits of a virtual close, they are daunted by the effort involved or are simply at a loss as to how to get there. And the fact that you’re not Cisco does not preclude you from being able to reduce your close time to five days or less.