The CFO Journal section of the Wall Street Journal rather smugly reports that big companies close their books at the end of the month in part because “Bigger companies tend to attract the best talent when it comes to financial executives. The time taken to close the books is an excellent tell about the people in charge.” In fact, the speed with which bigger companies close their books is most often a solid indication of just how little their leaders understand about the principles of lean, and the concepts of waste.
The little known secret of how the big guys close their books very quickly is that they very often do it twice: the first time (for public assumption) is loaded with accruals, and the second one reverses the accruals and replaces them with the actual numbers. For instance, the first one might include an accrual (accounting terminology of ‘wild ass guess’) for the electric bill of $1,000. A week or so later they track down the actual electric bill for $1,106, and the original accrual is reversed while the actual bill is entered. The $106 difference is carried over to the next month or quarter and buried in some obscure line along with the differences between all of the other accruals and the actual expenses. A big variance between the two closing is a big problem, and heads occasionally roll in accounting when they aggregate sum of their wild ass guesses – I mean accruals - is a big number.
In other words, they close the books very fast because they don’t really do the work. It is about the same thing as manufacturing shipping faster than the competition by shipping products missing lots of parts – then coming along later with a good product and telling the customer to keep it and return the bad one, but please don’t tell anyone what we did.
“The time taken to close the books is an excellent tell about the people in charge.” You bet it is. But the time indicating something about the character of the executives is the time required to close the books once and for all – not the time to vomit something generally in the ballpark to Wall Street.
Lean Accounting is really a big umbrella that includes Accounting for Lean – getting rid of standard costs, etc, - the sort of accounting that helps companies find waste and make solid lean principles decisions – and actual Lean Accounting - doing accounting in a lean way. The companies very good at lean accounting close their books at warp speed – often in a day – and, yes, their leadership is very, very good. I have yet to meet one of these very good, very lead CFO’s working at one of the big companies the article praises. The big company financial leadership is more often much better at the creative side of accounting – accruals allocations, assignments and assumptions – than they are at actually shortening the cycle time of their processes.
If you look at the accounting process and what goes into closing the books you typically see the sort of thinking that would get a manufacturing manager summarily fired on the spot. The article states, “Increases in workload during closing activities were reported for companies of all sizes, with 18% of large companies experiencing a more than 40% increase, compared to 15% of mid-size companies and 8% of small companies.” It is the typical hockey stick effect – not much work done for three weeks, then an avalanche of work compressed into one week to meet the deadline.
In accounting this is generally the result of thousands of transactions cranking through all month – many of them all screwed up as is always the case with people doing work – then at the end of the month accounting adds them all up, finds all sorts of problems in getting them to balance with much of anything and works long into the night trying to fix them and get them all sorted out. Lean companies are simply better at two things: (1) minimizing transactions which minimizes errors while the big guys still suffer from the illusion that tracking more details gives them better control, and (2) killing snakes as they find them – finding and fixing errors every day, as well as getting to the root causes of the errors and eliminating them. Both result is far less work at the end of the month to wade through and fix the morass of sludge known as the general ledger.
Another thing lean companies do is to pay their bills as they come in, not waiting for the 11th hour so they can keep the cash in the bank for an extra couple of days. To be sure they will sit on some whopping invoice for a new machine, but the avalanche of invoices that come in are viewed as inventory – turn them fast or else they will drive up cost and hide all manner of inefficiencies and errors.
The other thing lean companies do is trust people. The typical account close is the equivalent of manufacturing having a quality inspector at the end of the line, as well as another inspector checking what the first guy did, then a third inspector keeping tabs on the first two, and on and on. If you ever get the feeling the accountants don’t trust you, don’t take it personally. They generally don’t trust each other either. Lean companies trust their accountants to assure the figures are right and balanced, then give the books a review by the top person, and close them. Quality inspection is no more effective in accounting than it is on the factory floor.
So the Wall Street Journal thinks “Bigger companies tend to attract the best talent”? All depends on how you define “best” I suppose. I’ll take the small company lean accountants over the big company master manipulators any day.