Some of the more interesting innovations in financial accounting software are happening outside of traditional journal entry processing (that’s a good thing!). The interesting frontiers are in:
- Fraud/corruption detection
- Real-time auditing
- Big Data-powered budgeting/planning/forecasting
- Smart (i.e., ML powered) analytics
- Reinvented processes (e.g., mechanisms to bypass commercial banks and their fees)
- Robot process automation
- Data visualization of financial, operational and big data
- And more
One of those interesting spaces involves the Close. Closing the books is one of the most time-intensive, spreadsheet-laden activities that consumes Finance staff and leadership time. It’s a labor-intensive collection of activities that should have been automated years ago but wasn’t.
What accounting professionals have wanted in a set of closing tools would contain functionality such as:
- Simplified integrations with major accounting/ERP systems
- Built-in workflow tools to expedite the closing process and process exceptions
- Automated reconciliation tools
- Tools to automatically reverse prior period accruals and at least generate much of the next period’s accruals
- Automated schedules
- Robust multi-currency support
- Support for statutory charts of accounts (e.g., FERC, Plan Comptable)
- Exception handling and escalation tools
- Integration with the company collaboration tools (e.g., Slack)
- Error detection
- Tools to resolve calculation/formula errors
- Software that automatically works with multiple but different accounting calendars and charts of accounts
Spreadsheet software doesn’t really fill the bill.
Today’s closing technology
The target market for closing technology tools generally starts at the mid-market firm. Those firms have multiple legal entities, some consolidating entities and lots of accountants doing consolidation work with spreadsheets and other tools. Those firms might also have a joint venture entity, multiple charts of accounts, two or more different financial systems, and/or a foreign country-based plant/division. It is the extra complexity that these factors bring that warrant a more productive way (or technology) to facilitate closes. Smaller firms may not need anything like this as their bookkeeping environment is considerably more straightforward. For smaller firms, a consolidation/closing solution may be overkill.
Blackline has a lot of mind and market share with large enterprises. Many of their customers have remarkably complicated legal entity structures and complex accounting/closing issues to contend with. On the mid-market segment, there are solutions like FloQast and TrinTech Adra.
Whether it’s the large enterprise or mid-market, the technology to facilitate closing has improved a lot in recent years. Integration capabilities are markedly better/easier and the tools are getting ‘smarter’. Most solutions are now available in public, multi-tenant cloud deployments and this permits far easier collaboration and remote work on a close by accounting staff. Knowledge that used to be held in a proprietary spreadsheet that was not shared (or easily shared) with others was often a problem. Newer solutions have clearly made transparency and collaboration key value drivers.
But are closing times getting shorter? My, albeit anecdotal and unscientific, experience would suggest that more work is needed in this area. Just last week, a senior accounting professional at major firm told me her firm gets the books ‘nominally’ closed at around 10 work days after month-end but that other changes are made until 20 work days after month end. This firm is huge, has solid IT systems and is private equity owned. But the fact that additional adjustments are occurring approximately one calendar month after the closing date seems unremarkable. Several other firms also reported closing time frames in the 10-14 work day range.
In an era when people can order something online, pay for it and have it delivered the same day, why is the close still so stubbornly time-consuming and difficult? It isn’t because software isn’t real-time. I noticed only one system at a client of mine that didn’t operate in real-time or lack same day integration with the financial systems. So, what is the inefficiency driver? Mostly it appears to be the impact of new accounting treatments for leases, revenue recognition, etc.
These new accounting regs are painful as they may become a new accounting requirement before the firm can alter its non-accounting systems (e.g., order entry or pricing programs) to correctly parse out aspects of a transaction into the new accounting treatment entries. Until the feeder systems generate 100% correct events or accounting entries, the error detection and correction work needed will slow down the closing effort.
FloQast CEO discussion
Users of mid-market accounting software (e.g., NetSuite and Sage Intacct) may know of FloQast . FloQast software helps firms close their books and has tight integrations with leading ERP solutions. FloQast is often a top 3 download from the NetSuite and Sage Intacct partner product ecosystems.
Recently, I had a chance to talk with FloQast CEO, Michael Whitmire. Here are some of the highlights of that conversation:
Brian: So, how is FloQast doing?
Michael: A few years ago, we were serving 100-200 customers and had approximately 50 employees. Today, we have over 800 clients and 140 employees. Our top technology partners are NetSuite, Sage Intacct and Workiva.
Brian: And financially?
Michael: We’ve raised approximately $32.9 in venture capital to date. This is being used to power growth and enhanced product functionality. Our 95% customer retention rate (or 5% churn) is helping us keep sales costs down and maintain strong net income.
Brian: What’s the long-term liquidity event you’re targeting?
Michael: IPO – definitely an IPO. We’re not building a company to be acquired. Remember, we’ve only been selling Floqast for five years and the mid-market is a huge market space to address.
Brian: Who is FloQast targeting as customers?
Michael: We initially targeted firms with 200-500 employees. Usually those firms had 3-5% of their workforce in accounting roles. Automating and reducing errors in their closes were important buyer values.
We also targeted lots of growing software companies, too.
Today, we are selling FloQast to a broader range of companies. Our customers can range between 200 to 10,000 employees and this moves us into the enterprise software space. We’re also much more vertically focused with customers in the software, health care, real estate, manufacturing, sports franchise and other sectors.
Brian: How is the mid-market customer different from the larger enterprise customer?
Michael: Mid-market firms don’t want to change too aggressively. Initially, they want an easy to use solution that can map to existing systems and practices. That familiarity aids in rapid adoption. Over time, they turn on more and more advanced capabilities.
Brian: What’s new in FloQast?
Michael: We introduced two big capabilities this year. In early 2019, we released automatic reconciliation functionality and this September we announced FloQuast’s integration with Slack.
Brian: Tell me about your recent financial audit study.
Michael: Some of the findings weren’t a big surprise at all while some clearly were. I wasn’t surprised that many companies see the audit as a necessary evil. It can be disruptive to the business, can slow down the close and isn’t always viewed as valuable.
I was surprised, though, to see that audit fees are still continuing to go up. While I’m not at all surprised that audit fees jump up in the year that a new a compliance matter (e.g., ASC 606) gets implemented, I expected the annual audit fee to decline in the subsequent year(s). That price drop should have occurred as all of the prior year tests for compliance on the new pronouncements would have been completed and any errors would have been corrected.
But, that’s not what is happening. It appears that the fees charged in a year with new compliance requirements become the new floor and that subsequent annual fees will go up from there. That surprised me.
The market for financial closing software continues to grow and cloud solutions are clearly the winners. It’s a good time for these solutions as other platform tools and capabilities (e.g., integration technologies, microservices and collaboration software) make these products more usable and easier to implement.
But like so many new vendors and markets, the full global penetration of these solutions is still an evolving story. Accounting rules do vary from country to country and it takes time to develop the specialized logic for this. Globalization also means that solutions need sales/implementation partners in many global markets as well as localized versions of the product and its training materials. Companies with a headquarters location in the U.S., Canada, UK and Australia will likely find the greatest selection of closing technologies available as well as the most mature products.
Financial closing tools will likely face increasing competition from ERP vendors as these firms will want to develop similar functionality to add to their financial applications suite. I know one major ERP vendor is already developing such a solution while others are content to ally with firms like Blackline, FloQuast, etc. This competition will likely drive some measure of consolidation within the space and I’d seriously expect one or more closing tool providers will be acquired in the near future. It’s a logical place for ERP vendors to go to extend their footprint and keep customers from considering offerings from competing vendors.
Several financial accounting solutions have created alliances with major accounting organizations and/or service providers. This might also be a good strategy for those closing vendors serving the mid-market. Sage Intacct, for example, has such a relationship with the AICPA and Xero has tons of relationships with regional and local accounting practices.
As to FloQast, their growth is real and I’ve seen them at Intacct, NetSuite and other user conferences/events. Whether they go IPO or not may depend on whether some large software house makes them an offer their board cannot refuse. Hot markets tend to trigger M&A interest from adjacent firms and sometimes being a holdout against large, deep-pocketed players isn’t the ideal space. Time will tell.