Baker Watkin chartered accountants and chartered tax adviser

Baker Watkin

Middlesex House

Rutherford Close

Stevenage SG1 2EF

t: 01438 750555

e: enquiries@bakerwatkin.co.uk

Monthly reporting

The preparation of monthly management accounts can become a chore such that by the time the information is completed it is too late and potentially unreliable for the use of running your business.

Monthly management accounts are not the only tool which you use to run the business, however, they may indicate to you financial trends which other reports do not give you and may also be required for bank covenant purposes. They are one of the dials on the "dashboard" required to run your business.

With this in mind therefore, I set out the steps below which may help you in proving the processes. Initially, perhaps you would like to rate your month-end reporting process:

Time		Rating
Reporting where the finance team can report a bottom-line number at any time during the month.		Exceptional performance: best practice.
Two to three days from month end.		Better practice bench mark.
Four to five days.		Now considered slow reporting.
Over five days.		Potentially dangerous to the business.

Rome was not built in a day and the objective should be set to reduce the report process over an agreed period of time.

The steps for these are:

1) Establish reporting rules within the finance team

The first thing to realise is that the monthly accounts will never be right. They only need to do enough work to arrive at a reasonable view.

Any work done after this point has been reached will not really add value. Therefore, we need some rules about the month-end reports.

The month-end report should not be:

• Delayed for details.
• Be consistent between months, eg same judgement calls, same format.
• Be a true and fair view and free from any reporting-writing errors.
• Be concise – just a few pages to comprise the financial package such as a one-page report on each major income and expense line so that this can be reviewed by the board with minor points omitted.
• Provide trends and bullet points for review by the board.

2) Stop Spring cleaning at month-end

This is not the time for Spring cleaning. Essentially it means that the finance team and budget holders need to be re-educated. Any mis-coding errors, unless resulting in a material misstatement of the profit and loss account are processed during the following months.

Budget holders should be educated to review their cost centre numbers via access to the reports available during the month. They should highlight any discrepancies immediately with the finance team.

3) Avoid high volumes of processing invoices at the month end

It might be an idea to consider pushing processing back from month-end by avoiding a payment run at month-end. It is better practice to have a weekly or more regular payment runs with none happening within the last and first two days of the month-end.

Major budget holders who hold on to invoices should be checked on a regular basis to ensure that they are not sitting on invoice approval. The accounts department does not want to receive a large pile of invoices on the last day of cut-off.

4) Avoid late month-end inter-company adjustments

Inter-company adjustments at month-end, except for major internal profit adjustments, should not be made. Where there is a difference it should be decided in advance whether the accounts payable or accounts receivable is correct and adjust accordingly, leaving the inter-company parties to sort out the issues following the month end. This is a major decision and the Board need to be involved in approving such a decision.

5) Early closing of accounts payable ledger and accruals

The longer the accounts payable ledger is kept open after the end of the month then the more difficult it is to complete prompt month-end reporting. For a tight cut-off, those approving invoices will need to have cleared all outstanding issues regarding purchase invoices as soon as possible in order to give the accounts department time to meet the cut-off deadlines.

I would suggest that those approving invoices do it two working days before the month-end. If invoices are booked into the system before being authorised, it should avoid the delays caused by slow authorisation. Maybe authorisation levels need to be reviewed so that budget holders are not overwhelmed by paperwork and only authorise those purchase invoices/credit notes/credit card payments above a certain level.

6) Early closing-off of accounts receivable

Accounts receivable should be closed off on the last working day, with the transactions in the afternoon being carried forward to the first day of the new month. Closing off earlier is more important if you have an organisation where the sales department raise a lot of sales invoices on the last working day of the month. A provision can always be made for accrued income.

7) Early capital expenditure cut-off

Any capital projects can really be closed off one week before the month end. Any equipment arriving in the last week can therefore be treated as arriving next month. That way the fixed asset registers and depreciation can be calculated prior to the end of the month.

8a) Early stock and work in progress cut-off

These cut-offs can really be done at close of business on the last working day. Any delay here this will cause unnecessary delay in the month-end accounts. If it is causing a problem then consider closing down the inventory before the end of the month with the production thereafter being carried forward to the next month.

This at least gives a day to check the valuation and the records. Consider running the accounts on a week by week basis where the stock figure at a weekend is used. A stock count should be avoided at the month-end as it should be carried out on a rolling basis and be held no nearer to the month-end that the third week of the month.

8b) Deferred and accrued income

Again, it might be useful to consider running these at the weekend and/or in line with the accounts receivable closedown.

9) From end of business last day to end of business first working day

The success of month-end reporting is critical during this period. At end of business on the last working day all the cut-offs should be done. It gives an opportunity to print off the first cut of the numbers.

This report will be designed for detailed review and would contain current month, the last three to six month numbers and month's numbers from last year in a series of columns. The report should be reviewed by the accountant to see where they think the numbers could be wrong.

First thing the following day, the areas where further work needs to be done are identified and worked on during this day. It needs to be decided who is 'reviewing what' with a view to having a true and fair set of numbers by the end of the day.

It is important to catch all material adjustments that are found and see the net result before it is decided to adjust the numbers. Therefore an 'over's and under's' spreadsheet should be set up. One to trap major adjustments and you would need to decide yourselves what these are and they depend upon the size of the business; and one for smaller items that can be tidied up during a quiet time in the following month.

If adjustments are found then they need to be entered on the appropriate spreadsheet set up for the purpose. During the course of that working day you need to agree those items that will be adjusted for so that the numbers are true and fair and that way you will then be in a position to give the Board a one page first report.

10) Create a report for the expected month-end numbers at the end of day one

If you are able to issue a profit and loss statement it gives a handful of numbers making up the best estimate of the bottom line for the Board, immediately informing them of any real problems. It is not important to provide too many lines because you may find that the Board are not concentrating on the big picture.

Therefore there is no harm in stating your degree of accuracy (eg plus/minus 5%, plus/minus 10%). However, never run off this first report until all the accounts payable, accounts receivable, accruals, prepayments, deferred and accrued income and inventory cut-offs have been successfully moved back to the last working day of the month.

11) Freeze the numbers after the end of the first working day

It is important to stop adjusting the month-end result after this first report is issued at the end of business on day one. By maintaining an 'over's and under's' schedule for all material adjustments, you can monitor the net impact on the bottom line.

12) Perform a review of your month-end routines

It is important to remove all the tasks that were only done last month because they were done the month before. Make sure that duplications are avoided as much as possible. Baker Watkin can offer help in assisting you in setting up such systems and identifying the blockages that occur.

If you would like to contact Andrew Watkin to see if he can help you with these reporting issues on 01438 750555 then please do so.

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The information contained in this briefing is based on information available as at 24 February 2011 and may be subject to amendment. It is written as a general guide and is not a substitute for professional advice. You are strongly recommended to obtain specific professional advice from us before you take any action. No responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this briefing can be accepted by Baker Watkin or the partners.