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How do companies that have a very tight and efficient close process deal with accruals?

Scott Gunn's Profile

Accurals can hinder the ability to close the books as errors cause delays and painful post close adjustments..

Answers

Topic Expert
Philip Boken
Title: Principal Advisor & Founder
Company: PCB & Company
(Principal Advisor & Founder, PCB & Company) |

An accrual is an accounting estimate. Companies with 1 to 3 day closes have started with discussing and validating the purpose of the estimate (ensuring everyone is "on the same page", followed by analysis of the process and the historical accuracy of the estimate (including what caused the estimate to be "off" from month to month). Essentially, those companies with a tight close are the ones that have taken the time to understand the drivers of the estimate and have refined their ability to make those estimates, in many cases being able to make those estimates prior to the month end cut-off. The nature and type of the accrual will drive how easy/difficult it is to obtain hyper-efficiency. My experience has shown that lack of standardization and reliance on manual processes when the automated solution is already in place (but underutilized) are key reasons for poor efficiency and accuracy with accruals.

Cheers. Philip

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

Assuming a non-public company:

I try to minimize as many accrual items as possible, such as payroll, and as Philip said, develop standardized solutions.

Year-end is the exception to the standardized solution, in that all accruals need to be accurately accessed.

Topic Expert
Bob Scarborough
Title: CEO
Company: Tensoft, Inc.
(CEO, Tensoft, Inc.) |

One of the keys for an efficient close is an accounting calendar. For example Thursdays are payable check days or Fridays at noon payables are cut-off for this week. An accounting calendar - what is scheduled when - is required to turn accounting operations into a predictable flow instead of an exception or response based process. Exception processes should require a higher bar of need and approval if you are looking for an efficient close.

Beyond this, more things are usually pushed into accruals instead of less. People don't keep the next month open for two weeks waiting for transactions to catch up. Only on a quarterly basis do people stop to more completely update their transaction ledger. This requires having a decent purchasing function in place to help predict the required accruals, a manufacturing process (if appropriate) with a weekly financial close for inventory values, and a process that captures sales transactions efficiently especially at month end.

I beleive Proformative has scheduled seminars on efficient close processes as well that focus on document tracking and defined business processes. Could be interesting to sit in on one of those sessions for ideas ...

Bob Scarborough (Tensoft)

Anonymous
(director) |

I agree with Bob on attending scheduled seminars where you can discuss divergent view points on accruals. We do it on the 25th of the month for a monthend close. Others may do it differently. But year end accruals are crucial.

Joe Szczepaniak
Title: Controller
Company: Block and Company
(Controller, Block and Company) |

Based on Mr. Boken's first sentence, I think we need to define the term "accruals". If you are you asking about capturing normal daily transactions and getting them recorded at month/year end, I don't consider these estimates. Most manufacturing organizations can use their ERP system to produce very accurate accruals quickly and on demand. Your internal controls should require a purchase order, receipts should be processed and entered daily into the system and you should be able to obtain (or have someone create) a report of unvouchered receivers including account numbers and standard costs (if applicable). Some more modern systems use an automated receipts settlement function to record the liability when material is received, eliminating accruals for these types of purchases.

The time consuming areas and where estimates should be used are those where purchase orders aren't required (freight, travel, temp services, etc.). You can do some preclosing work to determine what bills might be unprocessed. Working with your suppliers and emloyees to get invoices in on a timely basis can speed up this process. You can then use trend analysis where applicable to insure nothing was missed (or doubled up).

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