The Fast Close, Part 2 (#17)
/In this episode, we discuss a number of closing activities that can be completed prior to the end of a reporting period. Doing so can greatly increase the speed with which financial statements are created.
Last time, I talked about several activities that you could shift out of your closing day activities and into the last few days of the preceding month. I covered payroll accruals, bad debt reserves, error corrections in the financial statements, and depreciation – all of them are things you can do before closing day.
In this podcast, I’m going to talk about more of the same thing. There are a lot of closing activities that you can complete early, so I plan to touch upon a number of them, both now and in the next podcast. After that, I’ll move on to other ways to create a fast close.
Review Rebillable Expenses
So, to jump right back into the examples, another task you can complete early is to review all expenses that you plan to rebill to your customers. This is a pretty common occurrence in companies that bill staff time to customers, because there are sometimes travel & entertainment expenses that customers are expected to pay.
If you wait until closing day to include these expenses in your customer invoices, you’ll probably be in for a rude surprise at least once every close, because some of the expense information is incorrect – usually because the expense is charged to the wrong customer, or in the wrong amount, or there are no backup receipts or incorrect receipts. Whatever the reason, it’s best to fix all of these problems before closing day arrives. Also, since employee expense reports tend to arrive really late in the month, this is usually an activity that you’ll have to deal with late in the day at the very end of the month.
Accelerate Commission Calculations
Here’s another activity you can accelerate – how about commission calculations? This is not something you can completely knock off before the end of the month, since some invoices won’t be done until closing day. But there’s no reason why you can’t complete the bulk of the commission calculations at the end of the month. This gives you time to make a leisurely review of the calculations and commission splits. That way, you only have to account for a small number of additional commissions during closing day.
Review Billable Hours
For a third possibility, consider doing a review of all employee hours that are supposed to be billed out to customers at the end of the month. It’s pretty common to see some incorrect hours, or missing hours, or hours that are charged to the wrong customer. If you wait until closing day to check this information and then finds mistakes, you’ll have a really hard time closing the books fast, because you’ll spend hours tracking down employees to get them to revise their billable hours records. And this can become a major problem when those employees are traveling or away on vacation.
My company takes this to an extreme. We dig into all billable hours records at the beginning of each week for the preceding week, and we hound employees until every last one of them has entered correct time records. We do that every week without fail, for three reasons. First, we get employees into the habit of entering their time on a regular basis, so we have fewer problems at the end of the month. Second, employees tend to forget what they worked on if they only enter their time at the end of the month, so it’s more accurate to record hours more frequently. And third, this means that only the last few days of the month are at risk of not being entered by the end of the month.
Complete Portions of the Financials
A fourth possibility for you is to complete some parts of the financial statements before the month is over. This does not usually mean the income statement or balance sheet, since these documents will change based on additional information you enter on closing day. No, what I’m talking about is operational reports. These will vary by company, but they usually include some kind of statistics. In our case, I enter such information as headcount, bad debts incurred, customer loss ratios – things like that. This is also a good time to review any spreadsheets you may be issuing with the financials, just to make sure that your dates and formulas are correct. I also like to create a separate subdirectory for each month’s reports, which I also do in advance. So, when it comes to financial statements, there are a lot of small things you can do in advance, though you probably cannot actually complete any reports.
Conduct Online Bank Reconciliations
One more possibility is to do on-line bank reconciliations. Most banks now have your transaction information available on-line, so sign in each day and reconcile your bank accounts. By doing this, the only reconciliation work left for closing day is for just the last day of the last month, which should be about 1/20th of the usual work load, since you’re only reconciling one work day instead of the usual 20 or so working days in a month. And also, this is just good business practice. When you reconcile every day, you can catch all sorts of unusual cash flows, both in and out, that you otherwise would not have seen until the end of the month – so it’s a really good control. We’ve been doing daily bank reconciliations every morning for every bank account, and we’ve been doing it for years. This is not just for the fast close – it’s simply a good idea.