1.How did Cisco's improved financial reporting enable it to rapidly grow?

Ciscos Virtual Close

Larry Carter

A version of this article appeared in the April 2001 issue of Harvard Business Review.

In many companies, days, weeks, or even months can go by between the time a sale is made or an expense generated and the time the finance department provides an accurate report of these events to management. As a result, executives, salespeople, and production managers have to make important day-to-day decisions without an up-to-date, concrete understanding of the businesss status. In effect, employees have to act in the dark.

Five years ago, we set out to radically accelerate our financial reporting process. At that time, Cisco Systems was a midsize company grappling with tremendous growth opportunities and an ever changing networking market. The lack of reliable and up-to-date financial information was a real hindrance. It took 14 days to close our books, and until then we couldnt be sure exactly where our operations stood or whether we were on track to hit our revenue and profit goals. That was unacceptable. Our decision makers needed more than quarterly reports; they needed daily financial insight.

Decision makers need more than quarterly reports; they need daily financial insight.

So the finance group set some aggressive goals: we would generate consolidated financial statements in one day, cut finance costs in half, and transform the way we supported the companys decision makers. We wanted to move from being a gatekeeper of information to being a catalyst for change throughout the organization.

Those kinds of objectives were unprecedented, but Im pleased to say we have exceeded our own expectations. After five years of refining our accounting processes, honing the quality of data we collect, and dramatically increasing the speed of its distribution, the finance group has achieved the virtual close. We can literally close our books within hours, producing consolidated financial statements on the first workday following the end of any monthly, quarterly, or annual reporting period. More important, the decision makers who need to achieve sales targets, manage expenses, and make daily tactical operating decisions now have real-time access to detailed operating data.

More Than Technology

Achieving the virtual close was not just a matter of rolling out new technology. It required a sustained, companywide effort to redesign our processes and align disparate parts of our business. Every month, we meticulously reviewed the closing process to pinpoint opportunities for improvement. We established quality standardsand metricsfor all data-collection activities. For example, we standardized the definition of bookings and backlogs, thereby avoiding disputes among the sales, manufacturing, and accounting departments about order status. We consolidated responsibilities for accounts payable and purchasingmost finance groups split these taskswhich boosted productivity and cut down on errors. We eliminated practices that yielded little financial gain for the required effort, such as capitalizing assets valued at less than$5,000. Through such steps, we reduced the number of transactions that our systems and employees had to monitor.

We also worked closely with all of Ciscos divisions to give employees real-time access to crucial business metrics such as orders, discounts, revenues, product margins, and staffing expenses. We developed Internet applications and other mechanisms to ensure that all operating and financial data were reported consistently, avoiding the time-consuming task of reconciling the numbers. By 1998, we had globally consistent information available on-line for Ciscos decision makers. Today, we update our bookings, revenues, and product margins by the minute.

These tools and data have been invaluable in helping Cisco manage its rapid growth. Executives can constantly analyze performance at all levels of the organization. Regional sales managers can compare their performance with forecasts. Business heads and hiring managers can evaluate whether their staffing budgets will allow them to accelerate or decelerate hiring during any given week.

We also share our financial data with outside suppliers; daily information about our product backlog, product margins, and lead times triggers decisions throughout the supply chain. Suppliers use the information to order inventory, adjust manufacturing capacity, and anticipate shipment volumes. They can, for example, review sales forecasts for a particular product and plan their inventory accordingly.

Our order-tracking reports have been particularly valuable in identifying market segments that are growing or slowing. About two years ago, these reports highlighted a significant and sudden downturn in our Japanese bookings long before the rest of the world recognized the countrys impending recession. We acted immediately and worked to accelerate our bookings in other regions to compensate for the Japanese shortfall. Simultaneously, we worked to increase the number of Cisco employees in the Japanese marketat a time when our competitors were scaling back. That investment enabled us to meet growing demand when Japans economy began to recover. As a result, we gained 50% market share against our competitors in that country.

Real Value

The concept of real-time accounting is particularly relevant in todays high-speed global marketplace, which has fundamentally changed the way businesses are run, the conditions for success, and the criteria for maintaining competitive advantage. In this environment, the principles of real-time accountingproviding a deep, accurate, up-to-date understanding of a businesss performancecan go a long way toward helping companies create the consistency and predictability of earnings that will ultimately enhance shareholder value. Thats certainly been true at Cisco, where our new reporting capabilities have helped us achieve 44 consecutive quarters of growth.

Real-time accounting is not a panacea for operational glitchesat our company or at any company. But the financial reporting capability better prepares management to tackle future challenges, from managing growth to handling regional economic downturns. At Cisco, weve truly changed the way we operate by improving the analyses we rely on. Our virtual close allows us to change direction and refocus our resources quickly, giving us a sustainable competitive advantage. And that defines the true value of real-time accounting.