“Well, you know, it is month end”, I say, and colleagues nod sympathetically and steer clear for a while. For most non-finance types, it’s a mysterious process that seems to cause a lot of stress. For finance types, it is a beast to be tamed.
By “month end” or “month end close”, I’m referring to the process by which a month (or other period) is brought to an end in the financial system. This means trying to get the numbers as accurate as possible for some sort of eventual output. This could be management accounts, a report for a funder, a VAT return or just the sense of achievement and closure.
It means making sure you have accounted for all the expenditure and income for that month. Depending on the organisation you may also carry out certain “month end” tasks such as calculating depreciation, reconciling the bank and other balance sheet accounts.
In this post I set out a few things to consider which might make a month end less stressful.
How accurate do these month end accounts need to be?
We all know that management accounts are a trade-off between timeliness and accuracy. And in general there is plenty of business advice out there which boils down to working out where you get the greatest return for your effort. (Eg the 80/20 principle).
The key thing is to understand what the significant numbers are in your accounts and what you need to do to get those right. “Significant” is not always the biggest, but it usually is. As I wrote a couple of months ago, you need to make sure that the numbers you are reporting are useful.
If payroll makes up 95% of your expenses, then do you need to get all the other expenses posted on time? Does it matter if a few of them slip into the following month?
How long should month end take?
The only answer to this that works for all scenarios: month end should take as long as you need to make the numbers meaningful without taking so long that the numbers cease to be useful.
There are plenty of advisors and consultants and tech salespeople telling you that month end should be complete within one working day and that they can tell or sell you the secret to this. It becomes a performance measure for the team, something for an FD to boast about on their CV. “I got month end down from four days to two days”.
However, as I get older, and particularly as I work with small and medium organisations where finance people are always multi-tasking, I think fixating on the number of days is less helpful than considering the overall proportion of finance team time that it takes. There may be good reasons why the process takes five days instead of two, if the team are fitting in month end tasks around their normal duties.
Month end should not cause a significant disruption to the team. Some extra effort for a couple of days, maybe, but not so much that it causes burnout. What you definitely need to avoid is the scenario where it is both stressful and takes more than a couple of days.
Why are you accruing for that?
When I’ve had the choice, I’ve tended to move away from doing month end accruals. In large organisations they become an industry unto themselves. Finance team members post accruals for all the expenses that are missing. Then other finance team members have to explain to normal people why their transaction reports have lots of lines that say something like “MONTH END ACCS ADJUSTMENT £20” and “REVERSE MONTH END ACCS ADJUSTMENT £20”.
Even worse, I’ve seen examples where finance teams accrue expenditure to budget. Why? Put crudely, it’s easier to do that than explain the variances.
There may be some good reasons for doing some specific accruals. An example of where it might be useful is if your organisation has a lot of irrecoverable VAT. If you only adjust this when you do the VAT returns, then you will have spikes in expenditure every quarter.
But I really can’t see much point in painstakingly calculating a third of an estimated electricity bill as part of your month end routine. Ditch it.
Are your numbers comparable to budget and each other?
Another issue I have come across is where budgets and actuals do not align because of a processing issue. Or where the basis of the actuals is not internally consistent when you look at the detail.
For example. In leisure, tourism and hospitality, you often budget weekly as income depends on the time of the year. You also budget staff costs according to these peaks and troughs. However, many businesses in this sector (and more so since RTI came in) do a monthly payroll. Assuming that payroll staff will need at least a week’s notice and usually more to calculate the pay, particularly in a variable pay environment such as hospitality, you end up with pay costs lagging a couple of weeks behind income and budget in the management accounts.
This means that drawing metrics from month end accounts without correcting for this is meaningless. But you could instead produce a reasonably accurate weekly “flash” report comparing sales to costs calculated from timesheets. (This is where it would be worth developing a Power Query solution that would amalgamate timesheet information, both for this report and then later for payroll input).
Can you capture that data with the original transaction?
Another cause of delay at month end is where transactions have to be analysed and / or categorised. For example, you might need to allocate expenses to a job costing system. Or you might need to split donations received into restricted and unrestricted funds. Often the delay is because there is judgement involved and this may need specialist review.
There are various solutions to this;
- capturing more of this information at point of ordering, for example a purchase order system that includes job costing details.
- investing the time in training staff inputting data so that they’re better able to make the call themselves. For example, when I worked in a partially exempt organisation, I trained all staff to identify if VAT was recoverable or not. I still checked it at the end of the quarter, but knew that most of the posting would be correct.
- a combination of technology and training. For example, in the same organisation, we reorganised our property codes so it was clear which ones were opted to tax and which ones weren’t. This made it easier for staff to input correctly first time round.
These are not necessarily quick solutions. So I would always go back to my first question about how much accuracy is necessary. Sanity, not vanity.
Do you have to produce the same thing every month?
Finance people like routine, and we’re also taught that comparability is really important. So we tend to churn out the same reports each month. However, what that probably means is that we’re compromising on some analysis that perhaps needs to be a bit deeper, or take place a while after month end.
I make a distinction between information that has to go into regular management accounts (at the minimum, some kind of income and expenditure analysis against budget) and information that management needs to see but perhaps not so regularly.
For example, if staff costs are important then other staff metrics such as churn and sickness rates are also important. But do managers need to see these every month? Or is it better to produce a quarterly analysis that really dives deeply into the reasons behind the numbers?
I know I’d prefer to see the latter.