The account reconciliation process is one of the main reasons why delays occur at month-end closing in most companies. In this article, Jorge Mejía, CPA, offers 4 best practices to accelerate the month-end close in any Accounting Department and avoid turning it into a monthly lengthy experience.
The Challenge – I read an article citing that the main reason why closing the books is delayed in most companies is because of the account reconciliation process. This means not only reconciling the bank accounts and credit cards but also reconciling all those subsidiaries that post to General Ledger (GL), mostly those that are not part of an integrated suite and are connected via complex integrations, with their corresponding GL accounts.
The Best Practice – The best thing you could do for reconciliations is being proactive. For credit card and bank reconciliations, for example, I wouldn’t wait until month-end to reconcile. Perhaps a weekly reconciliation is the best way to go. We’re in an online era and there’s no need to wait until month-end to reconcile those accounts. Talk to your bank and make sure you can download your transactions electronically for any period you need. Upload those into your Enterprise Resource Planning (ERP) software and reconcile them weekly. If you don’t have a bank or credit card module, then you should start there. By month-end, you should have 75% of your transactions reconciled. At least for me, that is enough to consider my month end numbers accurate.
The other thing I would highly recommend is to get an account reconciliation module. This is an application that goes beyond a bank reconciliation module. A modern account reconciliation module is a multi-user tool where reconciliations are assigned to a specific person or team. The application tracks the status of each reconciliation, ages the reconciling items and proactively alerts, via workflows, whenever a reconciling item is either material or have been unreconciled for too long. The one I’m familiar with is Oracle’s Account Reconciliation Cloud Service. The customers that are using it are very satisfied with the efficiencies and controls achieved.
Another best practice is to delegate the reconciliation process to the functional areas. For example, having the warehouse manager reconcile the inventory account. They are the ones that know the transactions taking place and the situations that can occur that in turn result in differences with the ledger. This is the perfect case to use an account reconciliation module. The Warehouse Manager will reconcile the inventory using the reconciliation module and the Accounting Department will have complete visibility of the process and will have also automated controls to ascertain accuracy in their numbers.
The Challenge – Typically, there are many journal entries that are dependent on the revenue generated during the period being closed. In Fusionworks for example, there are volume taxes and variable compensations that depend on the revenue. If the billing process is delayed, those entries are delayed as well and consequently, the closing process is also delayed.
The Best Practice – I worked in a global technology public company where I learned a thing or two. One thing I learned is to use estimates to accelerate your closing. They had a pre-set cutoff date (typically one week before month-end). As of the cut of date, they would generate a report with the month-to-date billings. Then, they would divide the revenues between the days of the month up to the cutoff date and multiply the result by the total days in the month. They would book the revenues using that estimated number or forecast if you will, via a reversing journal entry. As such, they literally had closed the revenue account prior to month-end. All the dependent accruals could then be processed. By doing this, they shaved at least two weeks off their closing cycle. They reverse the journal entry and recognize the actual revenue the following period. If the methodology is used consistently, it provides great efficiency and super-fast visibility to decision makers.
The Challenge – recognizing all incurred expenses even if you haven’t received the bills. Same as you, most of your vendors will send you their bills when they run their month-end billing as well. This is typically a major problem for services like security, consulting, utilities, usage billing like photocopiers, etc. You are not going to wait for all your vendors to invoice you to close your books.
The Best Practice – I hope you have a relatively modern ERP that allows you to issue Purchase Orders (PO) and to receive goods. Most ERP’s are built to allow for inventory receipts and to accrue for such receipts prior to processing the invoice. They also allow for a three-way matching process that improves the controls and allows for proper accrual reversal and recognition of the account payable. The same functionality can be used for expenses. You can configure this functionality and have the functional areas throughout your organization perform “Service Receipts”. In such instance, because the receipt is typically done in units, not dollars, you must set up the initial purchase order by pricing your units at a dollar each. That way, when the receivers “receive the units”, they would be registering the dollar amount they expect to get billed from the vendor.
The Challenge – Ideally you would like to operate in an integrated environment where all subsidiaries post seamlessly to the GL. When that is not the case, most companies need to download transaction reports, dump them in Excel and create journal entries. Then post them either manually or via import into the GL. These manual transformations are time-consuming and prone to errors.
The Best Practice – In Fusionworks we have migrated all our operational modules to an integrated platform, NetSuite, except payroll. We will be migrating it in the future but in the meantime, we need to book the payroll related journal entries in NetSuite. Booking those journal entries in a timely fashion is critical. NetSuite is an online accounting system where I can see our cash position in real time, but not if I don’t post my payroll journal entries. Transforming the journal entry coming from QuickBooks was taking valuable time from our Accounting Supervisor and was taking too long to post. Payroll is our primary expense and of course, cash outlay as well. We decided to look for a cloud integration tool to simplify the process. We found a tool called Celigo, an integration as a service solution (IaaS) that is very easy to use and most importantly, the first integration is free. We built an integration flow that translates the QuickBooks accounts into NetSuite’s and using the employee name, we can also determine the department, product, and location, three additional segments we use in our accounting that are not available in QuickBooks. We built the mapping tables and rules in Celigo and now, what took over ten hours of work and was being posted after month-end, now takes minutes and is posted immediately after the payroll is run. Now I can look at my cash and expenses real-time like it should be. There are many IaaS solutions out there, look for one compatible with your system and start automating those integrations ASAP.
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This piece was written by Jorge Mejía, CPA – Director of Fusionworks