the finance team in the reader download.
Catch All Adjustments in an “Overs and Unders” Schedule
Month-end reporting is not the time for spring cleaning, no matter how tempting it can be. This requires a re-education within the finance team and with budget holders.
All miscodings, unless resulting in a material misstatement of the P/L, are processed during the following month. Budget holders are educated to review their cost center numbers via online access to the G/L during the month and are requested to highlight any discrepancies immediately with the finance team.
We want to have a regime where we catch all material adjustments and see the net result of them before any decision is made to adjust (e.g., only a material month-end misstatement will result in processing an adjustment). The first time you do this, set up two overs and unders spreadsheets, see Exhibit 3.4, at the close of the last working day.
EXHIBIT 3.4 Maintaining an “overs and unders” schedule
One spreadsheet is to trap major adjustments. If materiality is set at $40,000 for a P/L adjustment, I would recommend setting the threshold for the over and unders schedule at around 40–50 %. In this case it would be between $16,000 and $20,000, so I would go for $20,000. The other overs and unders schedule is to trap minor adjustments between $5,000 and $19,000.
If they find adjustments, the accountants will enter them on the appropriate spreadsheets that reside on a shared drive on the local area network. More often than not, you will note that adjustments have a tendency to net each other off.
If there is a material misstatement of the net result, we will process one or two appropriate adjustments and then remove them from this schedule. This will bring the total of the overs and unders to an acceptable figure. We then process all the other adjustments during the quiet time in the following mid-month. In the quiet of mid-month, the minor adjustments are reviewed for their causes and work done to fix the problems. This minor schedule is now no longer continued.
Avoid a Huge Wave of Accounts Payable Invoices at Month-End
The last thing the accounts payable (AP) team needs is to receive a tsunami of invoices on the last day of cutoff, as shown in Exhibit 3.5. It is important to push processing back from month-end by avoiding a payment run at month-end. It is a better practice to have weekly or daily direct credit payment runs with none happening within the last and first two days of month-end.
EXHIBIT 3.5 Accounts payable invoice processing volumes during month
Change invoicing cycles on all monthly accounts such as utilities, credit cards, stationery, and so on (e.g., invoice cycle including transactions from May 28 to June 27 and being received electronically by June 28). Since you are looking at one month's activity it is not worth preparing accruals for these suppliers as the previous month's reversing accrual will make any difference immaterial.
Early Closing of the Accounts Payable Ledger
I have not come across an organization that can justify closing off accounts payable after the last day of the month. Whatever date you pick to close AP, you will never trap all the invoices. Remember, we are after a true and fair view; we are sculptors rather than scientists.
If accounts payable is held open after month-end, you will find it difficult to complete prompt month-end reporting. What benefit does holding open the accounts payable for one or two days have? We could hold the accounts payable open for six months after month-end and still not get the plumber's invoice that arrives when they are doing their year-end and realize they have forgotten to invoice for work done on the refit.
Better practice is to cut off accounts payable at noon on the last working day. In my workshops, I have come across organizations that cut off accounts payable even earlier, on day 2 and day 3 (see Exhibit 3.6). They manage this by more reliance on recurring reversing accruals, supplemented by budget holders accruals for the larger one-off amounts. They place timeliness above preciseness. This requires good communication to budget holders and suppliers, with the latter sending their invoices earlier through changing the billing timings, as already mentioned.
EXHIBIT 3.6 Month-End Timings Explanation
“Your month-end result doesn't become more accurate the longer you leave it. It just becomes more expensive to produce.”
In order to lock in this change you may need to run a workshop with the budget holders and follow up with one-to-one educational support, as required.
Close Accruals before the Accounts Payable Cutoff
The accruals cutoff does not need to be after the accounts payable (AP) cutoff; it can and should be before. Let me explain.
One smart accountant I have come across worked out that budget holders know little more about month-end purchase invoices at day+2 than at day 2. So, the accountant introduced accrual cutoff on day 2, the day before month-end. Budget holders were required to send their last invoices for processing to meet the month-end AP cutoff by noon day–2, which gave AP 24 hours to process them before the day 1 AP cutoff. He also told them to prepare their accruals in the afternoon of day–2, directly into the G/L.
All that is required is a guarantee that all invoices approved for payment by budget holders within the deadline will in fact be processed prior to the AP cutoff, or accrued directly by the AP team.
Cutting off accruals early recognizes that month-end invoices will not arrive miraculously by day+1 or day+2 so staff will need to phone some key suppliers to get accrual information regardless of when the cutoff is.
Set a Materiality Rule for Accruals
We need to set a materiality rule for accruals. If materiality is set at $40,000 for a P/L item, I would recommend setting the threshold for the minimum department accrual at around 40–50 % of this number. In this case it would be between $16,000 and $20,000, so I would go for $20,000. If a department is too small to have $20,000 worth of accruals, then it does not need to do accruals.
If materiality is set at $20,000 for a P/L item, then we might set the minimum threshold for accrual total for each business unit between say $8,000–$10,000 (using the 40–50 % rule). In this case I would set it at $10,000. If a department is too small to have $10,000 worth of accruals, then it does not need to do accruals. This should limit accruals to less than half the budget holders in the organization. If a manager of a small budget complains, point out that they will be able to accrue when they get promoted. We should set limits on the individual debit items in the accruals to somewhere around a quarter of the accrual threshold. If departmental accruals must be greater than $20,000, each debit must be greater than $5,000.
Avoid Inter company Adjustments
To stop the politics of intercompany disagreements at month-end instigate a simple rule that the accounts payable (AP) or accounts receivable (AR) ledger is always right, and the other party has to adjust accordingly. Leave the intercompany parties to sort the issues out in the following
