The Fast Close, Part 9 (#24)
/In this episode, we talk about the techniques that can be used to improve the closing process for payroll. Key points discussed are noted below.
Payroll involves a couple of closing activities that can really slow down the close, but you can get around one of them with a procedural change and the second one with a systems change.
Commission Calculations
The first item is commission calculations. It tends to be one of the absolute last items to do in the close, because you have to wait until all invoices are completed before you can figure out which person has earned a commission. And on top of that, your commission structure may be really complicated, perhaps with commission splits, overrides, bonuses, and so on. Because of all the complexity, you do an initial calculation and then send it to the sales manager for a review, which may not come back for a day or two.
There are some ways to get around these problems. First, the quick and dirty – and least accurate -- approach is to figure out the historical commission percentage of sales in each month, and just book an accrual for the commissions to be paid, based on your total sales. This only works if the commission structure is really simple, because most of the time, the complexity of the commission system could result in a very different commission percentage every month.
A better approach, and the one that I use, is to calculate commissions the night before the end of the month, so I’ve included almost every invoice, and then tack on the few remaining invoices that have to be created once the month is over. At that point, I book the commission accrual, even though no one has reviewed the calculations yet. My reasoning here is that the commission I’ve booked is almost certainly going to be very close to the final corrected number. Usually, the only changes I see after that point involve who gets the commission, not the amount of the commission.
In short, these changes allow me to finish off the commission accrual on closing day in less than an hour.
Unpaid Wages Accrual
Now, the second activity that can slow down the close is the accrual of unpaid wages. This is mostly a problem for companies with lots of people who are being paid on an hourly basis. In the worst case scenario, these employees fill out manual time cards, which require all kinds of reconciliation time, as well as time to track down missing timecards. If you have a labor-intensive operation, this may even be the chief bottleneck that gets in the way of a fast close.
Here’s how you get around the problem. As was the case with commissions, I’ll first bring up the idea of a quick and dirty – and less accurate -- solution, which is to assume that everyone works a standard number of hours per day, so you accrue this amount, and don’t even wait for the timesheets to arrive. And, as was the case with commissions, this is not such a good idea for a lot of companies, because the hours per person may vary a lot.
The approach I use is to require everyone to enter their time in an internet-based timekeeping system, which automatically summarizes all of the accrual information for me. A key part of this approach is to issue constant reminders to employees before the close, so they know they have to submit their hours. In addition, we are very pushy about getting all employee hours entered every single week. By making a big deal of this all the time, we’ve really trained employees to submit their hours on time, every time. Of course, there will always be a few employees who haven’t recorded their hours for the last few days of the month, but at that point, I feel a lot more comfortable accruing for just a few hours of unrecorded time.
Now, what if your employees don’t have internet access? You can set up computers on the company premises, so that they can enter their time. Or, you can set up computerized time clocks that automatically upload all employee hours into a central database, and that basically gives you the same information that would have come from an internet-based system.