Chapter 6
Month-End Reporting Refinements
Once you have achieved a much faster month-end, you will have the time to implement some further refinements covered in this chapter. This chapter is an extract from my white paper, “Rapid Reporting in Three Days or Less and Error Free.”1
AVOID LATE TIMESHEETS
I personally believe timesheets are only required if they are used for revenue generation, and even that is debatable. One accounting firm in the United Kingdom has dispensed with timesheets as it correctly pointed out, “We spent a lot of time filling out timesheets only to invoice the client a different amount of time in most cases.” The accounting firm now agrees on a fee range and discusses with the client where the fee should be on the scale. Their staff turnover has dropped dramatically and they estimated up to six percent of time was invested, by all staff filling out timesheets in six-minute units.
Get staff to complete non-revenue-generating time sheets by day –3 and to include their best guess for the remaining two days. You could even get them to project forward for the full week. Even if the estimates were 100 percent wrong, there would not be a material misstatement.
Ask all relevant staff to complete revenue-generating timesheets by noon on the last working day, with a best guess for the afternoon and corrections processed on the next weeks' timesheet. If by lunchtime staff members do not know what they are doing that afternoon, maybe they should be working for your competition.
MINIMIZE BUDGET HOLDERS' MONTH-END REPORTING
Budget holders' reports should be limited to half an hour of preparation. A one-page report should suffice, or two pages if you are using performance indicators. I once saw a pile of reports on a finance manager's desk. When I asked what they were, he said they were the budget holders' month-end reports. “What do you use them for?” I asked. “I do not use them; I call the budget holders if I need an explanation of a major variance,” he replied. Hundreds of hours of budget holder time were wasted each month that could have been better spent getting home at a reasonable hour. A good starting point is to cost out the monthly report preparation, as described in Chapter 3.
AVOID THE REWRITING OF REPORTS
Some organizations have made a major cultural change to report writing, committing the board, CEO, and the SMT to avoid rewrites at all costs, saving thousands of dollars a month of management time. The board no longer considers the quality of the board papers a reflection of the CEO's performance. The organizations have learned to delegate and empower their staff so that the SMT and board papers are being written with limited input from senior managers and are being tabled with few amendments, provided that the SMT agrees with the recommendations. The CFO can choose to put a caveat on each finance report: “While I concur with the recommendations, the report was written by ___________.”
The SMT and board understand that the report is not written in SMT-speak. Board members are encouraged to comment directly to the writer about strengths and areas for improvement in report writing. Where necessary, the writers are also the presenters. The organization thus has a much more relaxed week leading up to the board meeting, having largely delegated the report writing and the associated stress. The rewards include motivated and more competent staff and general managers being free to spend more time contributing to the bottom line.
REPORTING BASED ON 4 OR 5 WEEKS
Julius Caesar gave us the calendar we use today. It is not a good business tool because it creates 12 dramas a year for the finance team and budget holders, with each month being slightly different.
Between three and five months every year will end on a weekend, and finance teams often find that the month-end processes are smoother for these months. Why not close off on the nearest Friday/Saturday/Sunday to month end, as many U.S. companies do? This is sometimes called 4, 4, 5 reporting (see Exhibit 6.1 for the timings). The benefits of this include precise four- or five-week months, which make comparisons more meaningful, and there is less impact on the workweek as the systems are rolled over at the weekend.
EXHIBIT 6.1 Closing on the same day each month (4, 4, 5 accounting)
Otherwise, every month is a drama because we close on a different calendar day. Every month we have to issue detailed instructions that effectively say, “The tasks you did on Wednesday last month please complete on Thursday this month. The tasks you did on Thursday last month please complete on Friday” and so on.
Closing off at the weekend can be done for all sectors; some will require more liaison than others. It also would make a big difference in the public and not-for-profit sectors. You simply present to the board June's results and balance sheet. You do not need to highlight the July close. At year-end, the missing two or extra two days of income and balance sheet movement will be taken up in the auditor's “overs and unders” schedule.
You need to choose whether it is to be the last Saturday or the nearest Saturday, last Sunday or nearest Sunday to month-end, and so on. The last Saturday can have you closing six days before month-end, whereas the preferred option of the nearest Saturday will be a maximum of only two working days out.
By making this change, you are beginning to create 12 nonevents a year, the ultimate goal for all corporate accountants.
To make progress in this area, I would recommend the following:
- Contact your general ledger supplier and ask, “Who uses our G/L and closes on a set day each month?” They will link you to them and you will see first-hand the benefits of 4, 4, 5 accounting periods. Ask them, “Would you go back to regular calendar reporting?” Most are likely to give you a look that says, “Are you crazy?”
- Choose which day. It is best to be the nearest rather than the last “Friday”, “Saturday”, “Tuesday” to month end, etc. The last Saturday can have you closing six days before month-end, whereas the preferred option of nearest Saturday will only be a maximum of two working days out.
- Talk through the audit ramifications with the auditors, as they will have handled it before. At year-end, the missing day of income (two days on leap year) and balance sheet movement will be taken up in the auditor's “overs and unders” schedule. You simply close on December 29 but call the year to the December 31. The misstatement will be lost in the roundings.
- I would not inform the board. You simply present to the board December's result and balance sheet. You do not need to highlight the December 29 close.
DELAY CHANGING YOUR ACCOUNTING SYSTEM
Companies should be able to achieve day 3 reporting, no matter how antiquated their accounting system is. Much can be achieved with an old system. An old G/L is not an excuse for not reaching day 3 reporting! If you still believe the G/L is the problem, you need a paradigm shift in your thinking.
Many CFOs in large organizations are misled into making a huge investment in large G/Ls that serve to lock in analysis at the micro level. Jeremy Hope, of Beyond Budgeting fame, points out in his recent book2 that many such systems are dubious. I concur, for these systems often are designed by the people who always wanted to be NASA scientists and who have never run a finance team in their life.
Most accounting systems come with an integrated purchase order system. Some systems enable the order to be priced using the supplier's online price list and then emailed automatically to the preferred supplier, provided the order is within the budget holder's delegated authority. These systems should be purchased and implemented before the accounting team ever considers upgrading the G/L.
REMOVING SPREADSHEETS FROM THE MONTH-END ROUTINES
Excel has no place as a reporting or consolidation tool as it is too prone to disaster. This was explained in Chapter 4 on technology. It would be worth another read now to reiterate the dangers of relying on Excel as a reporting tool.
There is no problem when a system automatically downloads to Excel, with all the programming logic being resident in the system and thus bomb-proof. The problem arises when the system has been built in-house, often by someone who has left the company. Now the accuracy of reports relies on Excel formulas reading the imported G/L download. This is, as you may have personally experienced, a calamity waiting to happen.
DAY ONE REPORTING AND VIRTUAL CLOSING
Quick month-end reporting has been around since the early 1990s, when farsighted CFOs starting looking at the concept of day one reporting (DOR).
What Is Day One Reporting?
DOR is the condensing down of the monthly reporting process so that the month-end processes are completed and management reports are issued all within Day One, the first day after the previous month-end. Organizations that are achieving DOR complete all of the next tasks by 5 P.M. on Day One:
- Transaction information processed
- Accruals raised
- Consolidations complete
- Reports prepared
- Commentary/analysis added
- Reports issued to CEO
The introduction of DOR has created a precedent that means that reporting five, six, seven, or eight working days after month-end will soon be a perilous activity for the CFO. How will you explain this time wasting to a CEO who was used to Day One reporting in his or her previous employment?
In other words, soon it will not be acceptable for organizations and will be career limiting for CFOs to be responsible for time-consuming and costly month-end processes.
Case Study: Johnson & Johnson Vision Products USA
Around 1980, the first articles about DOR started to appear, and one of the first companies to put this into practice was Johnson & Johnson Vision Products USA, the makers of Acuvue soft contact lenses. The company had not realized there was a real problem until it benchmarked against other companies. It found, to its horror, that its two weeks to close was resulting in the company “paying more to have monthly reports ready later.” In other words, the quicker companies had fewer accounting resources. Johnson & Johnson quickly got to Day Three reporting by following these steps:
- All management was made aware of the problem.
- Buy-in was obtained from management.
- A multifunctional project team was set up (reporting, marketing, operations, information technology [IT], production planning).
- The project team was empowered to make decisions.
- The focus was on continuous improvement and teamwork.
- Deadlines were adhered to.
At Day Three, the company hit the wall; improvement now required a complete paradigm shift by the finance group. The group needed to reengineer the process, so it:
- Identified nonvalue tasks, such as: posting of automated journals on Day One, journals having to be reviewed before entry into system, period production not finalized until Day Two, allocations not made until end of Day Two, inventory movement entries not made until Day Three.
- Applied the Pareto principle (80/20) rigorously, focusing on the big numbers. Materiality levels were established—manual journal entry line items were reduced by 80 percent.
- Eliminated all interdepartmental corrections at month-end.
- Eliminated management review, as budget holders now had responsibility to resolve issues.
- Condensed the management report into one page of key indicators plus one page on the business unit's performance.
- Used estimates to avoid slowing down the process. (The difference between estimate and actual was found never to be significant.)
- Communicated changes to month-end reports far in advance.
- Ensured that budget holders tracked activity throughout the month, eliminating the usual surprises found during the closing process.
- Processed allocations without reviewing departmental spending.
- Moved preparations for month-end close to before period-end instead of after.
- Replaced reconciled accounts in Days One and Two with variance analysis.
- Manually entered the last day's debtors and cash receipts as total, and the details were handled later.
See Exhibit 6.2 for the Johnson & Johnson time frame. I suggest the same for your organization.
| Original Johnson & Johnson Time Frames | Suggested Targets for the Reader |
| At start—8 days | Immediately go to 3 day close |
| 6 months later—3 days | 6 months later—2 days |
| 12 months from start—2 days | 12 months from start—1 day |
| 24 months from start—1 day | 24 months from start—virtual close |
EXHIBIT 6.2 Johnson & Johnson Time Frames
Johnson & Johnson streamlined all processes by following three principles: (1) eliminate what you can, (2) simplify what is left, and (3) consolidate similar activities or information—and in so doing reached the El Dorado of accounting Day One reporting.
Case Study: Motorola—12 Nonevents a Year
In the 1990s, Motorola had six operating sectors each containing multiple divisions over 30 nations with over 40 balance sheets. It moved from an eight-day close to a two-day close quickly by following these steps:
- Adopt world-class “better practices.”
- Look for ways to change; don't say, “No, it can't be done.”
- Allow natural competition between sectors to reduce errors (nobody likes being on the bottom).
- Count the processing errors, which moved from 10,000 errors for every 700,000 transactions to 1,000 errors per 2 million transactions (Five Sigma) with a target of only three errors per million (Six Sigma).
- Eliminate time costly errors.
- Use “Post-it” reengineering (see section in Chapter 10, “Lean and Smarter Work Methods”).
- Allow sectors to have their own accounting systems.
- Look for hundreds of small (1 percent) improvements.
The financial impact of this change was amazing, with the worldwide finance costs falling from 2.4 percent of annual revenue to about 1 percent (a reported savings of greater than $10 million per year). Motorola found that its final reports were virtually error free. In other words, by being quicker, the company also successfully tackled the error rate. The month-ends were drama free, with less anxiety and higher morale in the accounting team. What was also unbelievable was that the company stated that the finance team managers even had more time for analysis within this Day One reporting regime than they had previously in the error-prone, eight-day close.
These two case studies had a profound impact on my appreciation of how a month-end could be reengineered and led me to developing the “Post-it reengineering” process featured in Chapter 10.
Day One Reporting Has Been Superseded by Virtual Closing
Day One reporting has been superseded by those who have developed systems capable of giving the CFO a full accrual net result at any time during the month. The virtual close, as it is called, is performed by CISCO, Motorola, Oracle, Dell, Wells Fargo, Citigroup, JP Morgan Chase, and Alcoa.
Research on Quick Month-Ends
There has been much research on quick month-ends, and an Internet search using the string “month-end” + “quick” + “reporting” will find further information.
PDF DOWNLOAD
To assist the finance team on the journey, I have included some articles. The reader can access, free of charge, a PDF of the following material from www.davidparmenter.com/The_Financial_Controller_and_CFO’s_Toolkit.
The PDF download for this chapter includes:
- Articles on 4 or 5 week reporting periods
- Articles on virtual reporting