In this episode, we discuss more 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.

Interest Expense

First, let’s talk about interest expense. If you have debt outstanding, you probably have a really good idea of exactly how much is outstanding throughout the month, as well as the amount of the interest rate. So. If you expect no changes to the debt balance during the month, either up or down, then you can easily calculate an accrued interest expense well before the end of the month. And even if you do expect some changes to the debt balance before month-end, you can usually figure out what the changes will be if you have any remotely accurate cash forecasting system in place. So, in most cases, you can accrue an interest expense figure that should be pretty close. My company has debt, and I usually accrue the expense about a week before the end of the month.

Accrued Vacation Time

Next up, let’s try accrued vacation time. A lot of people don’t even bother to accrue any changes to this amount until the end of the year, because they don’t think that it changes very much. The balance usually stays pretty steady if your company doesn’t experience much employee turnover, and if employees are fairly reliable in using up their excess vacation time. If this is the case, then great – review it well before the end of the month, and maybe make some small accrual adjustments now and then.

Ah, but. What if your staff is not so reliable in using up their accrued vacation time? This means that the accrual will keep going up over time, and possibly pretty fast. The best way to get the calculation under control is to change your vacation policy to a “use it or lose it” policy.

My company allows only a 40-hour vacation carry forward into the next year, which makes it really easy to accrue vacation time – we just calculate a 40-hour accrual for everyone, and make a few minor adjustments if employees have even less time left to roll forward.

By using this approach, we cap the upper end of the dollar amount of the accrual, so the risk of being off by a substantial amount is nearly zero. So, with this “use it or lose it” policy, we don’t worry too much about having an incorrect vacation accrual, and we usually review it several days before month end.

Accrued Contractor Fees

Here’s another one. What about accruing for the services of any contractors that you may have working for you? This could happen if you outsource a lot of departments, or if you operate under a contractor rebilling model; that’s where independent laborers work for you, and you rebill their hours to your customers. In either case, you could be talking about a pile of expenses that need to be recorded with a high level of accuracy.

One of our divisions operates under the second scenario, where several people are contractors for short consulting projects. To accrue their hours in advance, we give them access to the company’s timekeeping system, and make absolutely certain that they keep their hours up-to-date. Then at the end of the month, I offer to pay them the very next day if they can get all of their hours recorded in the timekeeping system by the day. This allows us to accrue for their time before the closing crunch begins. It’s usually just about the last accrual that we do before the end of the month.

Account Reconciliations

OK, here’s one final item to consider. It’s possible to complete your reconciliation of the asset and liability accounts before the end of the month. What I’m talking about here is verifying the detailed contents of each account, to make sure that what is in each account is what’s supposed to be there.

I’ve run across a lot of people who swear that this is not an area you can complete early, because changes are being made to these accounts right through closing day. However, here are a few arguments in favor of doing this work early. First, if you do all of the other advance closing steps that I’ve been talking about, there’ll be far fewer changes to these accounts on closing day.

Second, doing account reconciliations a little early allows you more time to research why each entry was made into each account – and that means you’ll can take your time to ensure that the contents of each account should actually be there.

Now, if you were doing this on closing day, you’d be flying through it as fast as you could go, and would probably make some mistakes that could screw up the financials. In other words, it may actually be more accurate to reconcile accounts early.

And third, you can still reconcile the accounts on closing day, just to make sure that any late entries ended up in the right accounts. However, by doing most of the reconciliation work early, I usually see only a small number of reconciling items left to review. In fact, we don’t bother to reconcile accounts on closing day, because we haven’t seen a problem in this area in a couple of years. Instead, if we make some late entries to an account, we just include them in the next month’s account reconciliation work.

Well, that covers many of the closing activities that you can shift into the preceding month. If you decide to take this approach to your close, make sure that you create a closing checklist, where closing work is divided up into the period before closing day, and during closing day. I have one, and I use it as a check off list for the close, usually starting about ten days before the month closes.

So far, I’ve covered the shifting of work out of closing day. It’s the single best way to improve your closing speed. But this doesn’t mean that we’re done with the fast close. Ah, no. There’s quite a ways left to go before you reach a one-day close. For the next podcast, I’ll talk about how centralizing some accounting functions will also improve the speed of your close.