A virtual close involves the use of fully integrated company-wide accounting systems to produce financial statements at any time, on demand. This approach requires not only enterprise resources planning (ERP) systems, but also a great deal of effort to ensure that the underlying information is correct. The required investment is so large that you rarely see a virtual close in smaller companies.
The virtual close requires particular attention to the following areas:
- Centralized accounting. It is nearly impossible to achieve a virtual close without a great deal of accounting centralization combined with ERP software. Conversely, that means you cannot have accounting operations scattered throughout the business that operate on different accounting software.
- Standardized accounting. Business transactions must be defined and treated the same way everywhere. Otherwise, the accounting staff must spend time investigating transaction irregularities submitted by the various subsidiaries.
- Error tracking. Any errors found must be tracked down and their underlying causes eliminated. Otherwise, there are too many problems with the virtual close financial statements to place much reliance on them.
The results of a virtual close may not be completely accurate, since some expense accruals, cost allocations, and reserves are difficult to automate.
A virtual close differs from a soft close in that the soft close requires a limited number of closing steps; and because of those closing steps, the soft close is usually only used at month-end. Since a virtual close is essentially automated, there are no closing steps, which allows you to run financial statements for any time period at all; thus, daily financial statements are possible.
The expense and long-term effort required to create a virtual close are not a good investment in slower-growth industries where there is little new competition and product cycles are lengthy. However, this cost can be worthwhile in the reverse situation, where the business environment is changing with great rapidity, and management can use daily financial statements to make ongoing course corrections to the overall direction of the business. However, even in the latter case, a virtual close is only worth the effort if management is actually going to use the information to make decisions in a timely manner; if that is not the case, then a more traditional closing process may be a better and less expensive solution.
Virtual close is aholy grail of finance efficiency and a badge of honor for finance teams that could achieve it — the virtual close (sometimes labeled a “soft close”) was touted as a way to facilitate faster and more accurate dissemination of financial results via a nearly instantaneous “close and disclose” process. The promised benefits were substantial: senior managers would gain faster access to the financial information at the heart of their decision-making, and finance staffers would be liberated from the drudgery of a lengthy close process, and would thus have more time to actually analyze financial results.