Accounting: The Importance of Speed and How to Achieve It

Written By: Cargas Systems

from February 20, 2013

INTRODUCTION
There’s a saying attributed to the ancient Roman Seneca:  If one does not know to which port one is steering, no wind is favorable.  So we’ve known for thousands of years that we can’t plan without knowing our destination. It’s just as true that we can’t map our course without knowing our starting point.  We don’t think as much about that because we take it for granted that we already know it.  Still, let’s imagine that we’ve left port knowing our destination is due east.  A sudden storm blows our vessel off course and then the sun comes out again.  What should our heading be now?  From the information provided, it’s impossible to know.

So take a moment to think—as an owner or as if you were the owner—of your business.  Reflect on the last balance sheet you reviewed.  That’s your last known position.  What has changed since then?  Are your plans for tomorrow based on today’s starting point?

Oh, but someone may say that my goal is to make money.  To continue the analogy, if I’m sailing across the Atlantic to Europe, I don’t care whether I make landfall in Portugal or in France—if I just keep heading east, I’ll end up close enough to my destination.

In contrast, let’s consider this scenario.  Let’s suppose that the cost structure of your business changed yesterday, and you are now losing $1,000 a day.  If you act today to raise your prices effective tomorrow, you’ve limited your loss to $1,000.  But if you don’t learn about the changed situation for 30 days, you have accumulated $30,000 in losses in the interim.

The primary purpose of accounting is to provide information for better decision making.  And in a fast-changing world, accounting can best achieve its purpose by minimizing the lag between the end of the reporting period and the preparation of financial reports.  In an ideal world, we should be able to prepare financial reports this morning on the period ending yesterday.  If we accept this, what can we do to come closer to our ideal?

BUSINESS PROCESS
Start with a business process map to the destination.  In other words, define the steps that have to occur before distributing financial reports at the end of a period.  Begin measuring the time it takes to perform each step.  Then consider ways to reduce the time for each step.

Microsoft Dynamics GP has a tool to help you follow the closing process you’ve defined.  Open the Financial Checklists window (Click Tools, click Routines, choose Financial, and then Checklists).  Select the General Ledger from the module dropdown and Period End from the frequency dropdown.  Click the Add button to add custom routines.  As each task is started, the start time and user ID will be saved in the window.

Here are some common items that might be on your period-closing checklist and the corresponding GP functionality that will help you complete the task more quickly.  The table below is limited to processes related to the general ledger, fixed assets, accounts payable and accounts receivable.

SAMPLE PERIOD-CLOSING CHECKLIST

Task GP Functionality GP Navigation
Post recurring journal entries Create recurring batches; Batches can be perpetual or for a specified number of times. Transactions>Financial>Batches; Set Frequency dropdown to desired value.  Set Recurring Posting to zero for perpetual; otherwise to the desired number.
Compute entries for accrued revenue and expenses (e.g., unpaid payroll and benefits expense) Supports importing journal entries from Excel Use Integration Manager
Allocate revenues and costs 1.  Use Quick Journals for allocations that are always to the same accounts but in differing amounts.

2.  Use Fixed Allocation accounts to distribute transaction amounts to distribution accounts according to fixed percentages.

3.  Use Variable Allocation accounts to distribute transaction amounts to distribution accounts according to the proportionate percentage computed by the values of breakdown accounts.

1. Transactions>Financial>Quick Journals

 

 

2.  Cards>Financial>Fixed Allocation

 

 

3.  Cards>Financial>Variable Allocation.

Post fixed asset depreciation for the period and review payables invoices for additions to fixed assets. 1.  Link payables transactions to fixed assets based on posting account.

2.  Depreciate assets.

 

 

1.  Tools>Setup>Fixed Assets> Purchasing Posting Accounts.

2.  Tools>Routines>Fixed Assets> Depreciate

 

Compare balance sheet account totals to supporting schedules.  Includes verifying that subledger totals match general ledger account balances.

Also includes analyzing for impaired assets (e.g., bad debt)

1.  Print Accounts Payable historical trial balance.

2.  Print Accounts Receivable historical trial balance.

3.  If totals do not match, use Reconcile To GL window.

4.  Analyze info regarding past due accounts and collection activities.

1.  Reports>Purchasing>Trial Balance (select historical aged TB)

2.  Reports>Sales>Trial Balance (select historical aged TB)

3.  Tools>Routines>Financial> Reconcile to GL.

4.  Transactions>Financial>

Collections Management.

Perform bank account reconciliation(s) 1.  Manual reconcile.

 

2.  Electronic reconcile.

1.  Transactions>Financial> Reconcile Bank Statement

2.  Tools>Financial>Routines>  Electronic Reconcile> Configurator

 

Analyze unexpected variances Print preliminary financial reports and drill into unusual variances. Use Management Reporter

 

Additional Ideas TO Speed UP The Closing Process
It takes more time to be exactly right than to be materially right.  Information is material only if it would influence decision making.  So if there is a minor discrepancy, let it go for now.  You can always analyze the discrepancy before the end of the next accounting period.

 

This leads to another important concept.   Activities that can be moved forward into the accounting period to be closed will become irrelevant to the closing schedule.  For example, the accrual for unpaid wages for salaried workers can be determined at any point in the period; the computation can therefore be completed before the period ends.  Also, account reconciliations for bank accounts, payables, and receivables can be done at mid-month or more frequently.  This minimizes the need for resolution of reconciliation issues during the closing process.

 

A final concept is that the formulas for all allocations should be tested not just for the theoretical utility in presenting information by business unit or department, but for their effect on the speed of the closing process.  Ideally, all input variables should be known before the closing process begins; otherwise, there will be a built-in delay while the input variables are determined.  From this point of view, an allocation based on beginning of period head count is to be preferred to an allocation based on gross sales for the period (which would be known the morning after the end of the period).  By the same reasoning, an allocation based on gross sales is in turn to be preferred to an allocation based on net sales for the period, which would not be known until after accruals have been computed for returns, allowances, and bad debt.

 

PULLING IT TOGETHER
Set a goal to increase the value of the accounting function in your organization by providing financial information in time to make better decisions.  Hopefully the tips in this article will help increase the return on investment from accounting activities by producing financial statements more quickly.  But once that is done, don’t stop there.  Don’t limit yourself to a mid-course correction based on reporting the known position each month.  Move on to developing accurate forecasts of what the month-end position is going to be, and soon your organization will be anticipating problems and acting before it is blown off course in the first place!