The Financial Controller and CFO's Toolkit. Parmenter David

EXHIBIT 3.3 Changing the focus of our work

      A rapid month-end gives the finance team more time for the future. There are, on average, 22 working days a month. For a day one reporting entity, the finance team has 21 days allocated to the current month and beyond. A finance team taking 9 days to report has only 13 days left, a 40 percent reduction.

      It is important to cost out to management and the board the month-end reporting process. When doing this exercise, remember that senior management barely has 32 weeks of productive time when you remove holidays, sick leave, travel time, and routine management meetings. Thus, a cost of $1,000 per day is not unrealistic. Based on an organization with 40 budget holders, with around 500 full-time staff, I believe the cost estimate is between $0.9 million and $1.5 million.

      Such an analysis can be easily performed by your accounting team in 30 minutes, and will be valuable in the sale process of changing month-end reporting time frames.

      I have included a costing template in the reader download as a guide to this exercise.

      MAJOR STEPS YOU CAN DO BEFORE YOUR NEXT MONTH-END

      Set out next are the major steps you can achieve within the month you are currently in.

      Establish Reporting Rules within the Finance Team

      Members of the finance team have to realize that they are sculptors, not scientists. There needs to be recognition that the monthly accounts are not precise documents. Assessments need to be made, and the monthly accounts will never be right; they can only be a true and fair view. We could hold the accounts payable open for six months after month-end and still not have the plumber's invoice that arrives when the plumber's company is doing its year-end and realizes that it has forgotten to invoice for work done.

      We therefore need some rules about the month-end reporting process which need to be signed off by all the accountants. The month-end financial report should:

      ● Not be delayed for detail.

      ● Be consistent – between months, judgment calls, and format.

      ● Be a true and fair view and error free.

      ● Be concise – less than 10 pages (include the major business units' one-page reports but exclude minor units reports. These are shown as a consolidated number in the consolidated P/L).

      ● Be a merging of numbers, graphs, and comments on one page.

      ● Not be changed for adjustments that are likely to be set off by others yet to be found – instead all adjustments are to be offset against each other on an “overs and unders” schedule.

      ● Be based on an agreed corporate view of materiality. Materiality will not be set at a different level for each budget holder. If materiality is set at $20,000 for a P/L item consolidated result, then this amount is set for adjustments, variance reporting, and accruals across all entities.

      I have included a draft set of rules for the finance team in the reader download.

      Catch All Adjustments in an “Overs and Unders” Schedule

      Month-end reporting is not the time for spring cleaning, no matter how tempting it can be. This requires a re-education within the finance team and with budget holders.

      All miscodings, unless resulting in a material misstatement of the P/L, are processed during the following month. Budget holders are educated to review their cost center numbers via online access to the G/L during the month and are requested to highlight any discrepancies immediately with the finance team.

We want to have a regime where we catch all material adjustments and see the net result of them before any decision is made to adjust (e.g., only a material month-end misstatement will result in processing an adjustment). The first time you do this, set up two overs and unders spreadsheets, see Exhibit 3.4, at the close of the last working day.

EXHIBIT 3.4 Maintaining an “overs and unders” schedule

      One spreadsheet is to trap major adjustments. If materiality is set at $40,000 for a P/L adjustment, I would recommend setting the threshold for the over and unders schedule at around 40–50 %. In this case it would be between $16,000 and $20,000, so I would go for $20,000. The other overs and unders schedule is to trap minor adjustments between $5,000 and $19,000.

      If they find adjustments, the accountants will enter them on the appropriate spreadsheets that reside on a shared drive on the local area network. More often than not, you will note that adjustments have a tendency to net each other off.

      If there is a material misstatement of the net result, we will process one or two appropriate adjustments and then remove them from this schedule. This will bring the total of the overs and unders to an acceptable figure. We then process all the other adjustments during the quiet time in the following mid-month. In the quiet of mid-month, the minor adjustments are reviewed for their causes and work done to fix the problems. This minor schedule is now no longer continued.

      Avoid a Huge Wave of Accounts Payable Invoices at Month-End

The last thing the accounts payable (AP) team needs is to receive a tsunami of invoices on the last day of cutoff, as shown in Exhibit 3.5. It is important to push processing back from month-end by avoiding a payment run at month-end. It is a better practice to have weekly or daily direct credit payment runs with none happening within the last and first two days of month-end.

EXHIBIT 3.5 Accounts payable invoice processing volumes during month

      Change invoicing cycles on all monthly accounts such as utilities, credit cards, stationery, and so on (e.g., invoice cycle including transactions from May 28 to June 27 and being received electronically by June 28). Since you are looking at one month's activity it is not worth preparing accruals for these suppliers as the previous month's reversing accrual will make any difference immaterial.

      Early Closing of the Accounts Payable Ledger

      I have not come across an organization that can justify closing off accounts payable after the last day of the month. Whatever date you pick to close AP, you will never trap all the invoices. Remember, we are after a true and fair view; we are sculptors rather than scientists.

      If accounts payable is held open after month-end, you will find it difficult to complete prompt month-end reporting. What benefit does holding open the accounts payable for one or two days have? We could hold the accounts payable open for six months after month-end and still not get the plumber's invoice that arrives when they are doing their year-end and realize they have forgotten to invoice for work done on the refit.

Better practice is to cut off accounts payable at noon on the last working day. In my workshops, I have come across organizations that cut off accounts payable even earlier, on day 2 and day 3 (see Exhibit 3.6). They manage this by more reliance on recurring reversing accruals, supplemented by budget holders accruals for the larger one-off amounts. They place timeliness above preciseness. This requires good communication to budget holders and suppliers, with the latter sending their invoices earlier through changing the billing timings, as already mentioned.

EXHIBIT 3.6 Month-End Timings Explanation

      “Your month-end result doesn't become more accurate the longer you leave it. It just becomes more expensive to produce.”

– Quote from a CFO with international blue chip experience

      In order to lock in this change you