The virtual close
/What is the Virtual Close?
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.
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Disadvantages of a Virtual Close
There are several disadvantages associated with a virtual close. First, its results may not be completely accurate, since some expense accruals, cost allocations, and reserves are difficult to automate. This makes it impossible to use a virtual close when highly-accurate results are needed, such as when financial statements are to be audited. Second, it can be expensive to install the systems needed to ensure that transactions can be processed as quickly as possible at the end of each reporting period; this is a particular concern when the accounting department is also understaffed. Third, it can require the cooperation of suppliers and other business partners to ensure that all source documents are being submitted to the company as quickly as possible. This is unlikely for a smaller business that does not have sufficient purchasing heft to control the actions of its supplier base.
When to Use the Virtual Close
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.
The Difference Between a Virtual Close and a Soft Close
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.