A smooth year end accounts process

If you’re managing a finance team, at some point you (or someone in the team) will need to prepare some kind of year end accounts, also known as statutory accounts. I’ve been doing this for many years now and in this post I will share my observations about what makes for a smooth year end process.

The short version of this; planning in advance will always reap dividends. As you will see, most of my advice concerns things you can and should be doing well in advance of year end.

1. Firstly understand exactly what you have to produce…

What accounting standards are you using? Check for any updates to these standards. If you are taking advantage of smaller company reporting, make sure you still meet the required thresholds.

Have you got anything to consolidate? Check through any investments and make sure these haven’t created any new associate or subsidiary entities. Do you need to produce a consolidation schedule for a parent company?

Who are you preparing the accounts for? This may be several audiences. For example, a charity prepares accounts for its members or donors, but may also require those accounts to obtain lending from a bank.

Don’t forget “the wordy bits”. Most accounts require some form of Annual Report to accompany them, and it’s tempting to leave this to last. However, you probably have a fairly good idea what sort of year it’s been before you prepare the accounts. So there’s no reason why you can’t have a draft available a month or so before the year end and you can update it with the relevant numbers later.

2 …by when….?

You may have a statutory deadline to hit, or something set by board meeting timings, or the requirements of a parent company. If your deadline is not for a long time after year end, I would recommend putting in an artificial deadline if possible so that you get on with it. For example, you could arrange a meeting with the owners where you will present the accounts to them.

As a wise manager once said to me; “Year End Accounts expand to fill the time available”.

3 …and to what standard or materiality…?

What I mean by this is how accurate do the statutory accounts need to be? This is always a difficult question for us accountants – we want things to be perfect. But if you have turnover of £10m and profit of £100,000, does it matter if you miss a couple of £50 invoices?

The level of accuracy required isn’t just about size of the issue; some parts of your accounts are more sensitive than others (for example, senior staff salary disclosures). And it might be that parts of your accounts or final year end figures are used for more detailed reporting elsewhere, for example in preparing reports for grant funders. So your analysis might conclude that generally you don’t mind being a few thousand pounds out but for the ACME Foundation transactions your tolerance is lower

This is the concept of materiality, which auditors use when they plan and conduct statutory audits; yours should be a lot lower than theirs! Even if you don’t have an audit you should still identify in advance your tolerance for error or omission (or more accurately, your audiences’ tolerance).

4. What resources do you have?

Who in the team is available to prepare the accounts? Who in the wider organisation needs to be involved in writing the Annual Report?

Also understand your tools – particularly what the accounting system does and doesn’t do. Allegedly some systems can just turn out year end accounts. I’ve yet to see this for real. Make sure you understand how the ledger close process works, whether you need to close the year end before moving into the next financial year, and whether your system operates on a period 13 basis or not.

5. Prepare an efficient statutory accounts model and test it before year end

I’m going to write a more detailed post about preparing an audit-friendly statutory accounts model, as it’s so important in preparing year end accounts quickly and accurately. Put simply, your model needs to update all schedules and notes automatically from a trial balance with no manual intervention from you. Try to create and test this well ahead of year end.

6. Prepare a thorough project plan

Working backwards from accounts sign off, put in the key milestones that you need. Remember to include management and board reviews, pre and post audit if required. The more complex the organisation, the more detailed this is likely to be. Even in a small organisation where I’m preparing year end accounts that won’t be audited, I will still want to set deadlines for closure of accounts payable and receivable ledgers, a date for a first cut of the numbers for management review, and a date for the final accounts. In a medium sized organisation where I have control over most of the deadlines, the key milestones for the numbers will look something like this;

Working day 1-2	Close all ledgers except general ledger
Working day 5	Prepare management accounts to normal level of accuracy
Working days 6-20	Review figures with budget holders
“”	Prepare and review balance sheet reconciliations
“”	Prepare a first draft of the stat accounts using the model you’ve already prepared for finance team analysis and review
Day 20	Post all journals identified from the processes above and prepare official first draft for management review

My actual plan will contain more detail, for example with exact dates for specific reconciliations and journals. For example, in one role staff costs were by far and away the biggest expenditure item, and were also crucial to calculating some of the income figures. I therefore gave this top priority, ahead of closing accounts payable.

Include deadlines and dependencies for the Annual Report, too. Even if you end up writing most of it, it is usually the report of the Directors / Board / Trustees so you need to give them time to be involved in the process. And don’t forget holidays – as most year ends are either March or December then holidays can impact significantly on the timetable. There’s no point in banning all finance team leave only to find that no managers are available to review the accounts.

If you’re preparing accounts for audit, remember to leave plenty of time for providing supporting schedules. Even with simple medium sized entities you will probably need to supply over a hundred supporting schedules. Many will be schedules you maintain anyway as part of business as usual. But it still takes time to tidy them for an external audience. The non-numerical disclosures can be the worst. For example – do you have an up to date register of board interests?

7. Build in a little contingency if you can but don’t go overboard

If you know it normally takes you two days to close accounts payable, add a third into the plan if you can. Aim to have final accounts complete several days before the auditors want them.

The key thing is to plan this in and not make it up as you go along after year end. You also need to understand that even with the best plan and additional contingency, your accounts will never be 100% perfect. (See note below about sticking to the plan). I would never recommend adding more than about a day to the time you think it should take, as this will keep you focussed.

8. Communicate the plan and key deadlines

This sounds obvious but you should always issue some kind of year end messaging to staff and any other contributors. This should set out key deadlines, for example for payroll cut offs, expenses etc. I’ve also had reasonable success writing out to suppliers to highlight our deadlines, guaranteeing payment for invoices received before our deadlines and threatening delays for those that are not.

9. Stick to the plan

Having created your robust and detailed plan, with or without contingencies, it’s really important that you stick to it.

Check in with the team on a daily basis for that crucial ten days or so. You want early warning if things aren’t going to plan so you can make a call about what isn’t going to get done.  Following the plan outlined above – it’s more important that the management accounts go out 75% accurate and on time than 90% accurate and several days late, particularly if you know where the inaccuracies are.

10. Use an issues log and only post adjustments at certain planned parts of the process

Resist the temptation to keep posting corrections to the ledger when preparing the statutory accounts. It’s better to log issues than fix as you go, particularly if there is more than one of you involved. I start an issues log, usually before year end, which we add to as a team while processing month end. We then resolve issues as a team during the review stage.  My constant mantra if we hit any issues we were not expecting: “Log it and move on”.

In the example above, I would issue the management accounts even with a number of unresolved issues. These might come from the team (“We’re missing invoices from these suppliers”) or from my review. We might not have completed all balance sheet reconciliations at this point. The key thing is to get the numbers good enough for the wider organisation to review.

We would resolve those issues over the next few weeks, and any others that come up as managers review their numbers. We would then post another batch of journals at day 20 to mop everything up – and that would be it. If we needed to make further adjustments we would do this on the accounts model.

There are several reasons for not fixing as you go:

• Firstly, it is more efficient – if you are jumping between tasks it is easy to forget where you got to in your review, or miss a journal.
• Secondly, the wonder of double entry tends to mean you have fewer issues than you think, as discovering a duplicate journal in the deferred income balance sheet reconciliation will also explain why you suddenly have more income than you were expecting.
• Thirdly, if you are constantly adjusting the ledger it is impossible to have a robust reconciliation process and you will waste a lot of time doing the same reconciliations again and again to match a moving nominal ledger balance.
• The final reason is this issues log will become a helpful source for planning next year’s process.

To conclude: to produce year end accounts successfully and smoothly, you need to plan well in advance. And be disciplined enough to stick to it.