The Fast Close, Part 5 (#20)
/In this episode, we discuss how issuing a comprehensive financial statement package prolongs the time required to close the books. A better approach is to use a two-stage release of information, where the core financials are issued at once and everything else is issued later. Key points discussed are noted below.
Earlier, I talked about how shifting closing work into the preceding month and centralizing accounting operations in one place can seriously reduce the amount of time needed to close the books. This time around, I’ll cover how the structure of the financial statements themselves can cause problems with the speed of your close.
The Trouble with Comprehensive Financial Statements
If you issue just the basic set of financial statements at the end of the month, then you’re in a distinct minority. It’s great if you can do this, because you finish all of your accounting transactions, press a few buttons, and your accounting software spits out the reports you need. Unfortunately, most of us have to issue additional reports. These may be a reconfiguration of the existing reports, usually the income statement. The most common change I’ve seen is different groupings of the results of corporate divisions, sometimes splitting them out by themselves, and sometimes clustering several divisions together. This may be because a manager runs several divisions and wants to see their results in one income statement, or perhaps because management wants to sell off a cluster of divisions, and so wants to present their combined results to a buyer. Whatever the reason for the special income statements, you’ll certainly be spending more time assembling and presenting this information.
I’ve been dealing with special income statement layouts for years, and I find that the best approach is to use the report writer in my accounting software to create any income statement that management wants, if I think they’ll keep asking for it month after month. Even if it’s a one-time request, I still try to create it with the report writer, because the alternative is to use an Excel spreadsheet, and it’s much easier to make a mistake in that.
Now, creating a special income statement is the easy part of a financial statement package, and it really doesn’t take that much extra time. The problem is when managers start asking you to include operational information in the financial statement package.
This causes all kinds of trouble for several reasons. First, operational information, such as inventory accuracy, or the order backlog, is created in other departments, and they may not be too accurate in compiling this information – so you may be including incorrect information in the financials, and that may cause delays if management wants you to fix the errors and then re-release the financials.
The second problem with operational information is that it may be delayed – and I mean really delayed. This happens because a different department is compiling the information, and they may not be in much of a rush to do so.
A third problem is that operational information may be used to calculate bonus payments. If that’s the case, managers all over the company may pounce on this information as soon as the financials are released, and you end up defending metrics that were compiled by somebody else – and doing it right when you’re trying to clean up from the close.
Use Delayed Information Releases
So – what do you do with operational information? Your best bet is to separate it from the basic financial statements, and release it on some other day, preferably a couple of days later. By doing so, the departments supplying this information have more time to get the information right, and the accounting team knows the financials will not be delayed because of missing operational information.
Better yet, I prefer to issue operational results once a week, instead of once a month. That way, managers are usually more than happy to split off the operational results from the regular financials in exchange for more frequent information.
The other problem with the financials is that top management sometimes wants you to release a different set of financial statements to each manager. For example, this could mean that the marketing director gets the basic financials package, as well as the expense statements for just the marketing department. If you run into this problem, and you can’t persuade top management otherwise, then try to just issue the core financials to everyone, and delay the release of any additional financials until the next day.
By now, you’ve probably seen a common theme in these recommendations, which is to only release the basic financial reports that come with your accounting software, and delay the release of any other information.
This means that you have a two-stage release, with a primary focus on basic financials on day one, and everything else on a later date. This obviously sounds simple, but it’s easy to gradually get into a trap of issuing more and more information with the financial statements package, until the sheer volume of the release eats up an extra day of your closing time. In short, be vigilant – and report less necessary information separately.