Here we go again. In our last lesson, we identified some of the key challenges that hold up our closed process. And in this lesson, we're going to crack open the suggestion box and discuss ideas for achieving the fast close. The first idea questions whether we even need to perform a full financial clothes each month, financial information can be circulated in various forms. A full set of financial statements is perhaps the most robust, but as we all know, it also takes the most time and effort to pull together. Sometimes there are other choices to consider in this trade off for timeliness.

Some organizations will use what is known as a soft close and a soft closed means that full account reconciliations are not prepared for all the accounts and that perhaps only key accounts such as the bank account are reconciled. Full allocations of overheads may not be done, because the information is typically restricted for internal purposes. Only financial statements are pulled from the system and they give an indicative snapshot of performance. And the internal stakeholders realize that there's probably a few gap related issues that have yet to be incorporated into the official numbers. However, the cost benefit of preparing or waiting for more accurate information does not warrant preparing a full clothes. A third choice is to use a virtual close, which requires a process and system capable of producing financial information on demand.

This requires a high degree of data and system integrity. It can also be useful for developing more regular reporting that may not involve preparing a full set of financial statements. Think of a dashboard that tracks key financial indicators. revenue generated per day may be a key indicator for many types of business. tracking the cash position is often important. For some companies, one would say an asset Based lending facility, the amount of merging available might be a key financial indicator.

When you're able to identify, which are the key accounts, you can spend more time on developing a process to keep these accounts updated. And this ongoing reconciliation of key accounts enables the weekly or even sometimes the daily reports. an added benefit of continuous reporting is that it takes some of the pressure off the financial closed process and can eliminate some of those nasty surprises. So your financial reporting strategy involves more than just closing the books and generating financial statements. There are alternative ways to deal with timely reporting for our decision makers. Let's focus now on the monthly closed process is that is what we really want to focus on in this course.

The biggest opportunity for improvement comes from a shift in mindset. As we all appreciate initiate the closing activities can be a time consuming and exhaustive affair to complete. There's just so many activities to complete in the days following a period and close. So instead of thinking of the closed process beginning at the end of the period end date, start your closed process in advance of the period end date. Many of our reconciliations and transaction processing entries accruals, and gap adjustments can be done in advance of the period end date, which frees up time on the closing day or the few days after to simply update reconciliations or in some case, no further work is required at all. Another important idea is to rigorously apply a reporting materiality to our accounting adjustments.

As accountants, we all love balancing each account to the petty The reality is a lot of those dollars and pennies don't matter. Too much in the bigger picture objective of our financial reporting strategy. There's a trade off to be made between being precisely right but late, or approximately correct and timely reporting materiality is not the same as what the external auditors would use. It's much smaller than that. However, it's much higher than a rounding error. Perhaps a good rule of thumb would be to consider at what level your auditors consider an error to be trivial.

In other words, an error that no one including them is likely to question. Once you've established a reporting materiality. Now, you can go back through your journal entries, and determine whether some transaction streams and gap adjustments can be eliminated from the closed process all together. For example, a lot of companies will calculate prepaids on everything from subscriptions to professional dues, and in most cases, these Monthly entries are immaterial to the reporting process. When in doubt, leave it out. Let's discuss a few examples of some activities that can be done in advance of the period end date.

Example number one, the payroll accrual. Why do we need to wait for all the time sheets to come in before we start calculating the accrual? Surely we can make an estimate knowing our headcount for that final week, make the estimate and true it up the following month, the difference is almost virtually certain to be trivial. Example number two, the bad debt reserve. Why not sit down with the credit manager the week before the month end, and have that discussion about which accounts need to be included in the provision? It's unlikely that the credit assessment is going to change much in the matter of a few days.

Example number three bank reconciliations. This should be an ongoing daily activity. Not only will Help the finance department more tightly manage the cash account. It's also going to help you speed up the clothes if the corporate account only needs to reconcile one day a bank activity and not 30 there are lots of other examples of reconciliations that can be prepared ahead of the month and date and updated as necessary. Consider the interest expense accrual billing accruals commission calculations and vacation time accruals. Even expense accruals for the purchase of goods and services can be get ahead of the month end date.

For goods purchased, the organization can approve the purchase based on the purchase order and or receive a report rather than waiting for the supplier invoice to arrive. If you have a large contractor that is working for you, you can establish a simple incentive for them to get their hours in the day of or the day before the close so that you can make a timely accrual tell them that you'll Pay them earlier if they help you out with speeding up your clothes. A number of organizations will require manager approval of invoices before they get input into the system. This is another one of those handoff situations that can slow down the process. Instead, consider using a negative approval process for supplier invoices. That is input the invoice into the system immediately, and then notify the manager that the invoice will be paid unless they hear otherwise from the manager.

This puts the onus on the manager to be more diligent in the review of supplier invoices. Another idea for achieving a more accurate and timely expense cutoff is to use procurement cards for all those small incidental supplies. This will enable your staff to go online and pull off these transactions right at the cutoff date rather than waiting for dozens or hundreds of small invoices to trickle in from suppliers or through various employee expense reports. One final idea for minimizing the expense cut off is to develop a vendor portal for submitting their invoices electronically to avoid any flow time created by mail. Once again, you can establish a policy to prioritize payments to those vendors that submit invoices electronically as the incentive. And more and more of the key accounts get monitored on an almost continual basis, you're going to notice a few other opportunities will arise.

Remember those dashboard reports we talked about at the outset? Now you're going to be able to issue in term results perhaps on a weekly or daily basis tracking those handful of key financial indicators. This is also going to help in detecting errors on a more timely basis. So this activity to error detection that is gets bumped forward from the closing activities to the pre closed period. You may have Also looked to automate some of your recurring journal entries, for example, that depreciation entry or that amortization of debt issuance cost entry, but also look for other automation opportunities, such as the interface between various systems you use or any journal entries that are required to accommodate something your current system is unable to do. Don't forget to automate the reversal of accrual entries, a feature which most accounting systems enable.

When you're able to automate the accounting staff spend more time reviewing and analyzing the results than they do preparing and posting entries. Consider which activity you'd prefer your staff to be doing on the day of the close. And one more idea for shifting our mindset around the closed process is to standardize whenever possible. Create a closing checklist of items to be done before the period end and after. Create a journal entry log of each other be expected journal entries each month, assign accountability for each journal entry to one responsible person so that everyone on the accounting team is clear about the roles they play in the closed process. Having a well trained and stable group of staff will help tremendously in realizing efficiencies through the learning curve.

I've seen it happen time and time again. Finally, think of whether streamlining your chart of accounts could help. For example, ensure that the account descriptors are clear, even creating a reference sheet for those accounts that are often confused and help users get those transactions posted into the right accounts the first time. Where this gets trickier is when you have different charts of accounts for different divisions or companies. different charts of accounts arising from different systems create all sorts of accounting mapping nightmares for the corporate group, which begs the question is technology the answer? And in the short term, you can attempt to standardize the chart of accounts across your entity.

However, I'm sure many of you are shuttering at the mere suggestion. Newer financial systems are enabling the finance departments to add dimensions to accounts to allow them to customize their internal reporting, without changing the chart of accounts itself. So for example, you may have a standard sales account. But for most companies, having one sales account alone is not all that insightful. Instead of creating dozens of different general ledger accounts for different product lines or locations. Each sales transaction can be tagged to a specific product line or tagged to a specific geographic location, allowing the same level of slice and dice analytical and reporting drill down without cluttering up the chart of accounts.

Next having subsidiaries they close their books prior to handing them off to the corporate accounting group will almost always necessitate a longer extended clothes. The only way to strategically shorten the clothes from this bottleneck is to centralize the key aspects of the accounting function. A lot of business units heavily resist giving up control their accounting function. However, there are considerable efficiency opportunities. Working from a single system and a single database streamlines the assembly and review of financial information. A single system simplifies the internal controls over financial reporting.

A single system enables the ability to implement workflow software which helps manage each task of the closed process inside a system. And generally speaking, a centralized accounting function will have a smaller headcount, then a decentralized accounting function. Interestingly, fewer people not only cost less, but have been shown also improve the speed and the overall quality of the closed process. implementing an integrated financial system is an important consideration of the fast close methodology. Because it eliminates the interfaces, it forces everyone to post data into one system, and it also enables the multi dimensional reporting. Let's talk about some of the more tricky accounts that tend to bog down the closed process.

And the first one is inventory. This is particularly troublesome for those of us that manufacture products and have large stores of finished goods, raw materials and parts. A periodic system is typical and realistic and only the smallest a business or a business that doesn't carry much inventory. Not counting inventory leads to large, impossibly inaccurate swings in profit. As a finance function, you cannot accept those kinds of surprises. However, counting inventory each month is time consuming most businesses with inventory have perpetual records to track inventory quantity.

But there's more than a few of us that probably struggle with keeping those records accurate. In fact, a good target to shoot for is 98% inventory accuracy. So what are a few ideas for improving your inventory reconciliations? The first thing to do is to ensure that you've developed strong inventory controls, lock down the warehouse and develop a process to track inventory movements is the first step. The second step is to standardize your inventory storage system. Every piece of finished goods inventory and raw material should have a designated slot in the warehouse to avoid losing or misplacing inventory.

Cycle counting is a common approach to ensuring that inventory records do not fall out of sync with the actual inventory quantity. Cycle counts are where certain inventory items are only counted period. Honestly, throughout the year, Counselor agreed to the perpetual records and the two are constantly being reconciled. The results of cycle counting will help to highlight where you have problems, your cycle counts can become a process of continuous improvement. When you measure and create a report of count accuracy results, consider having specific staff responsible for counting specific aisles in the warehouse and make that count results public to encourage them to be more diligent in their checks. You may even consider making the accuracy of the inventory records and element of employee bonus incentive compensation when the improvement targets are met and tied back perhaps to that 98% target we talked about earlier.

You should also have the accounting people conducting spot checks throughout the year. Improving inventory accuracy really requires management attention, discipline and persistence. billing is another area that can slow down the close. Particularly if you're an organization that builds based on time, or sending out monthly invoices is the standard as much as possible. Customer invoices should be generated throughout the month as goods are delivered or services are rendered to release some of the month end billing pressure. When you're still confronted with a month and billing push, put as many people on the issue as possible to immediately get the sales into the system.

Create the invoices even if you're waiting for information just to get the revenue recorded. Then move on to your other closing activities. If you're sending out customer statements postpone this activity until after the close so as to not let this slow down the closed process. This was a longer lesson than I think a quick recap is in order. We started the lesson by questioning the need for a full clothes. Perhaps you can get away with a soft clothes or a virtual clothes.

Next, we talked about shifting our mindset to begin our closed process in advance of the period ending date. This is crucial. We then talked about establishing a reporting materiality threshold to eliminate the minutiae that sucks up time and resources to calculate during the close. We then finished by talking about a whole bunch of ideas around the sorts of activities and the use of technology to help us with achieving the fast close. It all sounds pretty easy, doesn't it? Well, hold on there cowboy.

There's one part we really need to drill into a little bit more before we can go meddling in the closed process. And that is our people. And let's cover that