Month-end Close Improvement in a Vietnamese Manufacturer – from Day 11 to Day 2.5

Process redesign across the business reduced the management accounts close from 11 days to approximately 2.5 days within six months, while also improving the reliability of period-end information.

A large manufacturer in Vietnam, employing approximately 4,000 people, traditionally completed its monthly management accounts on day 11. The Board met on day 15, which gave directors only four days to review the financial results, reconcile them with their operational reports and prepare for the meeting. The company had recently upgraded to SAP and already had the basic systems required to operate a much faster close, so the initial focus was naturally on the Finance function and the amount of time it required to complete the accounts.

Mapping the complete month-end process produced a different picture. Finance performed the final accounting and consolidation work, but many of the transactions on which the accounts depended originated in Sales, Warehousing, Goods Receiving, Procurement and Payroll. Delays in these areas accumulated during and immediately after month-end and eventually arrived in Finance, where they appeared as a slow accounting close. Improving the reporting timetable therefore required changes throughout the flow of information rather than concentrating solely on the work performed by the accountants.

Following the transactions through the business

One of the first issues identified concerned the period-end sales cut-off. Goods could continue to be shipped and invoiced against the closing month for as long as three days after month-end, which delayed completion of the accounts and also created uncertainty over the correct accounting period for the transactions. With strong support from the CEO, a firm shipping and invoicing cut-off was introduced, the relevant Sales and Warehouse procedures were revised, and Internal Audit subsequently observed the process and tested compliance. The change helped the company close earlier while also giving greater confidence that sales had been recorded in the correct period.

Goods Receiving created another significant delay. Materials could already have arrived physically at the factory while the corresponding goods receipt remained unrecorded in SAP for several days, even though terminals were available in the receiving area. This left Finance without a complete record of inventory receipts and associated liabilities at precisely the point when the month-end position was being established. For several closing periods, a Finance employee worked alongside the receiving team before the cut-off to ensure that receipts were entered promptly and that the accumulated backlog was cleared. Once the new discipline had become established, responsibility remained with the operational team that generated the transaction.

Payroll proved to be the largest single constraint on the timetable. Overtime calculations meant that the final payroll information normally became available only on day 7 or day 8, after which most of the remaining accounting work had to be completed before day 11. The timing also influenced behaviour elsewhere in the close because completing other activities substantially earlier produced little immediate benefit while one of the largest monthly expenses remained outstanding.

Analysis of the payroll showed that a reliable management estimate could be produced much earlier. Close analysis showed that the company ran the payroll twice in the month. Basic pay for the second half of the month changed very little from the first half, while overtime varied broadly in relation to production volume. Using first-half basic pay together with actual production data therefore provided a sound basis for estimating the second-half payroll. The difference between the estimate and the eventual final payroll was tested and found to be immaterial for management reporting, allowing Finance to recognise payroll by the end of day 2 rather than waiting until day 7 or day 8.

This change had an effect beyond payroll itself because it removed the largest constraint from the closing timetable and made earlier completion of the other processes worthwhile. It also illustrated an important distinction between financial reporting for management and the pursuit of absolute numerical precision. Management required figures that were sufficiently reliable to understand performance and make decisions, and waiting several additional days for a small change in a number added little value where the likely difference was already understood and immaterial.

Purchase invoices showed a similar pattern of delay through unnecessary handling. Many invoices were returned to the original purchaser for authorisation before eventually finding their way to Finance, while others were left in desks, arrived late or occasionally disappeared altogether. Delivery drivers also handed paperwork to Goods Receiving, adding further administrative work to an area already responsible for recording physical receipts. The result was that Finance spent time identifying missing invoices and creating accruals for transactions that had already taken place.

The invoice route was simplified so that suppliers sent invoices directly to Finance, where they could be processed using the purchase order, goods receipt and invoice three-way match. Procurement informed suppliers that invoices received late would result in later payment, while invoices accompanying deliveries were directed through reception rather than being added to the Goods Receiving workload. The revised process shortened the route between the supplier and the accounting records and gave Finance much clearer visibility over invoices that had been received and those that remained outstanding.

Other closing activities were moved forward wherever the underlying information was already available. Bank reconciliations, for example, were substantially completed before the end of the month and then updated on day 1. Over time, the close became a process prepared throughout the month and completed immediately after period-end, rather than a concentrated sequence of activities beginning only when the calendar month had finished.

From day 11 to day 2.5

Within six months, the management accounts close had fallen from approximately day 11 to day 2.5 and the new timetable was maintained. The reduction of 8.5 days represented an improvement of approximately 77 per cent in elapsed closing time. With the Board continuing to meet on day 15, directors now received the financial results with around 12.5 days available for review and preparation compared with only four days under the previous timetable.

The improvement in speed was accompanied by stronger control over several of the underlying processes. Shipping and invoicing followed a clearer period-end cut-off, goods receipts were recorded much closer to the time of physical receipt, purchase invoices entered Finance through a controlled route, bank reconciliations were largely complete before month-end and payroll estimates were based on tested relationships between known payroll components and production activity. Earlier reporting therefore came from improving the way information was created and moved through the organisation, while maintaining the level of reliability required for management decisions.

The experience also changed the way the company viewed the month-end close. Although Finance remained responsible for producing the accounts, the quality and timing of those accounts depended on processes operating across the business. Sales, Warehousing, Goods Receiving, Procurement and Payroll all created information that eventually became part of the financial result, and improving the close required each area to take responsibility for recording that information accurately and promptly.

The result was considerably more valuable than simply producing the same accounts several days earlier. Directors had more time to understand the results before the Board meeting, Finance had more time to analyse and explain performance, and several of the operational controls supporting the financial statements became more reliable. The improvement came from treating timely management information as an organisational responsibility, with Finance providing the final output from a process that began much earlier and extended across the company.