So we are ten weeks prior 2011 year-end closing. “Yea, we still have more than enough time to do that,” you may think. Oh really? I don’t think so. Two weeks after now, you are going to be extremely busy with October month-end closing. And, it is not uncommon that month-end closing eats up at least a week prior and a week after the closing time. That means accounting staff actually have only two weeks-off of month-end activities every month.
So if my math is not wrong, actually you have 5 weeks only before the Christmas and the big day (year-end closing). And, you still have to do your daily tasks which are seems to be always peak.
Unless, you start doing something now onward, your year-end closing will be fallen behind the schedule. If you think there is nothing you can do until few days prior the big day, trust me, there is something you can do starting from today to make your Christmas and new year a little bit easier—go home earlier, have some fun without bothered too much with the year-end closing. Read on…
The closing process does not have to start on the first day of the closing year with a sudden rush of several dozen activities. Instead, many activities can be partially or completely shifted out of this core year-end closing period, you can start doing some of the year-end closing task from now.
There are at least eight to ten activities that can be completed during less active parts of the month and speed-up your core year-end closing process:
1. Catch Transaction Error and Derive Correction – Is there any guarantee that a closed transaction is absolutely correct? I am afraid there is no. In my experience, transactional errors are inevitable (wrong calculations, wrong accounts, wrong vendors, wrong customers, etc). You want to catch those errors at least before year-end closing. Learning erroneous means you learn nature of the problem and derive a correction. And, closing days isn’t a good time to learn about it. Instead, do it during less active parts. Catch transactional errors across January to YTD and derive correction.
2. Update All Reserves – Reserves are estimates, and calculating them in the midst of the core closing period you actually risk yourself for unexpected error. In fact, by doing so sooner, there is more time available to fully analyze available information about reserves for such items as obsolete inventory and bad debts, so updating a reserve in advance may actually result in more justifiable reserve information than would otherwise be the case.
3. Bill recurring invoices Prior Each Month-End Closing – The precise amount of a recurring invoice is usually known well in advance of the actual invoice printing date, so why not print it early? Just set the date of the accounting software forward to reflect the date on which they are supposed to be printed, which records the revenue in the proper month. And, that now for October, do that in the mid-Nov for November, and finally in the mid-Dec for December.
4. Review Preliminary Re-billable Expenses – Some expenses incurred by a company are re-billable to customers. If so, spend some time before the end of each month onward to review and organize this information, so that eventually billing it will be as trouble-free as possible. This review should include an examination of all expenses for receipts, and ensuring that expense totals add up correctly.
5. Review Preliminary Billable Hours – Does your company issue a large proportion of its month-end billings on the basis of employee hours worked? If so, you may find yourself inundated during the core closing period with the detailed analysis of hours worked by a job prior to entering this information into invoices. A careful analysis of hours worked is usually necessary in order to avoid customer nonpayment of invoices for a variety of reasons—hours incorrectly coded to the wrong job, hours charged in excess of authorized funding limits, incorrect labor rates, and so on. If you haven’t done that, to avoid these problems, starting from now, do review the information just before each month-end of October, Nov and December.
6. Conduct Bank Reconciliations On Daily Basis – I knew. You might have done with bank recon on monthly basis. That is great. But how did you do that? Did you wait for bank statement and proceed with month-end after? Conducting a month-end bank reconciliation requires wading through a large number of bank transactions and enter adjusting entry. From now on, I urge you to do bank recon on daily basis, instead. Assess the bank’s online bank account information every day to conduct a smaller incremental reconciliation. By the end of the month, there should be only a minimal number of open items left to reconcile. If you do bank recon on daily basis, you will save at least 2 hours on every month-end closing, it means you will save 6 hours for October, November and December.
7. Accrue Interest Expense – Accountants typically wait until the month has closed before making this entry, in order to incorporate into the expense calculation any last-minute changes in the debt balance. If you’re one of those accountant, you have more room for improvement. In fact, you knew already that if there is outstanding debt and interest payments not made each month, there should be a charge to interest expense that accurately reflects the amount outstanding throughout the month. However, if a change occurs within just a day or two of month-end, how much will this really change the total interest expense? Unless the amount of a last-minute change in debt is extremely large, completing the interest accrual a day or two before month-end will have little impact on the total interest expense charged.
8. Reconcile Asset and Liability Accounts – There is always possibility that unusual assets or liabilities are parked on the balance sheet when they should have been flushed out through the income statement. Conducting asset and liability account analyses in the core of month-end closing, according to my experience, is almost impossible. It is always a good idea to prepare the reconciliations on the last day of the preceding month. If you haven’t done so, consider to do that starting on October month-end closing. You will tank yourself in the year-end closing.
However, you still have some important task do on the core of month and year-end closing. Many accounts depend on how fast you can clean up the payables and receivable ledger—such as depreciation and commissions which are really time-consuming (and often irritating, to be frankly).
Depreciation is generally one of the last steps in the closing process, because it cannot be completed until the payables ledger is closed and used to update the fixed assets ledger. However, it is possible to develop a reasonably accurate depreciation expense a few days early. Doing so involves the risk that a fixed asset would be acquired or disposed of during the last day or two of the month. Even if some asset transactions are missed, is this of any real importance?
The truth is, fixed assets are depreciated over many years, ranging from three, four, five years to more than a decade. Even assuming the shortest depreciation period of three years, the impact on depreciation of missing a month is 1/36th of the total depreciable portion of the asset cost. Of course, the missing depreciation will still be recorded in the following month (thereby doubling the depreciation expense in a single month for that asset). But don’t do for December month-end. Wait until everything is in the ledger.
For commission, I know that closing of commission is also begins after all invoices are completed, so commission calculations are compressed into the end of the closing process. But you can consider beginning to close commission calculations a few days in advance. Presumably, some invoices were issued prior to month-end, so the commission on each one can easily be calculated in advance and verified with the sales manager. By doing so, only invoices issued at the last minute still require a commission calculation, thereby greatly reducing the volume of work to be completed on closing day.
Many closing tasks can be completely or partially shifted out of the core closing period. This is a simple yet effective way to create rapid improvements in the duration of the closing period.
In addition, by completing some tasks during the less-active period a few days prior to the close, the accounting staff may find that it has the leisure to do a better job of transactional analysis, and so creates fewer errors that would otherwise find their way into the financial statements.
The impact of these changes on the total duration of the year-end close can be profound, with three days of effort disappearing from each of month-end core close means you can save few days (if not a full week) in the year-end closing days.