The E2K Metric

One of the most significant challenges facing finance is to provide information faster and faster to end-users. By acting on information as it is produced, decisions are more effective and the costs associated with the information declines. To help drive this mandate for finance, the Event to Knowledge Metric or E2K Metric is applied.

E2K measures the time between when an event occurs and when the knowledge can be acted upon. The objective is to reduce the E2K time so that decisions are made as close to the event as possible. For example, it may take 5 days before all allocation entries are posted to a series of accounts, providing income information by cost center. By integrating all centers into a new automated system, this time is now reduced to 3 hours. Operating managers can now act on sales targets the same day the information is produced.

One place to look in reducing E2K time is internal reporting. Most companies are preoccupied with cranking out report after report with no regard with how the information is used. Transforming information into knowledge and reducing the inordinate amount of time on reporting are two fundamentals steps to cutting down on E2K times. Another obvious way of reducing E2K is electronic distribution of information to end-users. In some cases, quick flash reports can serve as preliminary sources of information before final reports are prepared and released.

In his article titled Event-to-Knowledge(1), Frank Potter describes four basic strategies for reducing E2K time:

1. Increase the material threshold for accrual and other adjusting entries.
2. Pre-calculate your monthly adjustments ahead of time, such as monthly depreciation.
3. Post more frequently to sub-ledgers and make correcting entries before month end closings.
4. Review the allocation and distribution process; making sure it is streamlined and efficient.

For labor-intensive businesses, getting your accounting cycles in sink with your payroll cycles can yield big results. No more payroll estimates, accruals, and reversing entries. And labor costs are now reported in the financials every two weeks or weekly.

However, the biggest step towards cutting E2K times is gained through “just in time accounting.” Just in time accounting provides accounting and financial information on a daily basis. At the heart of just in time accounting is the Virtual Close. Under the virtual close, the accounting records are closed by 2:00 p.m. the following day as opposed to the traditional close, which takes place once a month:

Event . . . . . . . . . . . . . . . . . Traditional Close . . . . . .Virtual Close

Month end closing process . . . . . .5 days . . . . . . . . . . . .1½ day

Generate / Distribute Financials . . . 4 days . . . . . . . . . . . ½ day

End User acts on information . . . . .2 days . . . . . . . . . . . . ½ day

The Virtual Close was popularized by Cisco Systems, which integrated all of its systems and technologies over an eight-year period. Web based applications are often deployed for virtual closings since they provide the infrastructure for instantaneous sharing of information. According to Cisco CFO Larry Carter, “We can literally close our books in hours. 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.”(2)

According to Mark Kruger of AnswerThink, all of our clients are moving toward the virtual close, cutting between a third to one half of their closing cycles. (3) Kruger suggests many larger companies can simply cut their E2K's by consolidating all of their companies – “Every legal entity costs around $ 250,000 to $ 500,000 to maintain because people spend money to account and consolidate those transactions.” (3)

Getting to the virtual close can be a monumental task because of the diversities that exist within a business. Everyone needs to get the right information to the right location on time with minimal errors. Once you have the system in place, you begin to reap the benefits. According to KPMG Consulting, the real benefits of a virtual close are not generating consolidated financials within hours or days, but giving decision makers instant access to critical information so they can be more pro-active.

One final point about E2K and the Virtual Close concerns the balance for accuracy. In light of the Enron collapse, the rush to “optimize” the financial function must be balanced with the goal of producing accurate financials. Therefore, as you move towards optimization, don't forget to balance optimization with controls that ensure high levels of accuracy in financial reporting.

(1) Event to Knowledge by Frank Potter, Strategic Finance Magazine, July 2001

(2) Cisco's Virtual Close, Harvard Business Review, April 2001

(3) A Virtual Close: as Easy as One, Two, Three? CFO Magazine, March 2001