The 2 Day Close, Phase 4 – Simple Changes

In this posting I outline a few changes that every organization should consider to simplify accounting processes, improve accuracy and timelines of their financial information. Changing any process is never simple; however, the decision to make these changes are straight forward.  

Logical & Standard Chart of Accounts (COA)

The value of timely and accurate financial data will diminish if it cannot be easily understood by the end user. Utilize a logical and standardized COA to substantially improve the understanding of financial data while significantly reducing errors. Logical account number sequences or ranges provide intuitive charge coding and quick error recognition. A logical COA will allow end users to quickly confirm coding and proper report classification.   For example, when reviewing the Statement of Indirect Expenses the users can quickly confirm expenses are assigned to the proper cost pool.  

The COA for government contractors must also support the proper segregation of costs including, direct contract costs, indirect costs, B&P and IR&D costs. Each software vendor can provide a standard COA for government contracting to use as a starting point.  Our goal is efficiency, so avoid using alphanumeric accounts other than for unallowable expenses. I recommend no more than a two level account, as most systems utilize a second field to identify the organization owning that account.  Finally, consider limiting the number of characters in each level to three or four digits.  Extra digits simply require extra ket strokes for every transaction.  

Recurring Vouchers and Journal Entries

The use of recurring vouchers and recurring journal entries for repetitive entires will save time throughout the month. For expenses that are incurred without receipt of an invoice, such as rent or office leases, utilize a recurring voucher to record the expense and process for payment each month. Other items such as depreciation or amortization should be recorded using recurring journal entries. Unless your company is making large capital expenditures each month, recurring entires can be set at the beginning of the year and adjusted mid-year or at year end. Both recurring vouchers and recurring journal entries will eliminate the need to manually track each individual transaction. 

Upgrading Accruals

Business and technology have changed and accruals need to be upgraded to support the changes.  Greater efficiency can be achieved by logically establishing new accruals, eliminating other accruals and reconciling accruals after monthly closing.

Establish Accruals 

Establish accruals for indirect costs whose invoices are typically delayed. Create a recurring entry to debit the correct expense account and credit a corresponding liability account.  For example telephone invoices are fairly consistent each month; however, the invoices are received days after the cut off in our new closing schedule.  Set up a recurring entry for the standard invoice amount, debit telephone expense account(s), and credit the telephone accrual account. When the invoice arrives, charge the invoice to the telephone accrual account you set up.  After closing each month, reconcile the accrual account to identify material changes in the standard amount.  Next month, adjust your recurring entry accordingly, and correct the balance in the accrual account by charging telephone expense. This process will expedite closing and allow staff more time to analyze and reconcile invoices.    

Establish prepaid accounts and amortize the expenses throughout the year for expenses such as SaaS, maintenance and support fees.  Most companies receive these invoices annually, semi-annually or quarterly.  As you pay the vendor debit the appropriate prepaid account. Calculate the monthly expense and establish a recurring journal entry to debit the correct expense account and credit the prepaid account. After closing each month, reconcile the prepaid account to identify material changes in vendor invoices.  Next month, adjust your recurring entry entry and the prepaid account. This will provide a consistent expense charge each month.  

After closing each month, be sure to consistently review and reconcile each accrual and prepaid account. Document your reconciliation as well as any adjustments needed.  Review the other transactions your staff are recording each period to uncover additional steps to be simplified with recurring entries, recurring vouchers or automatic reversals.  

Eliminate Accruals 

Work to eliminate accruals for direct charge transactions and high volume transactions such as labor and revenue to improve efficiency.  To eliminate monthly labor accruals, align the last timesheet period each month with the month end date. For example, if your company utilizes a calendar month end, then the timesheet periods should be set to semi-monthly or monthly. If your company utilizes a 5-4-4 or 4-5-5 fiscal calendar for managing accounting months, weekly timesheet periods are best.  In that model payroll processing can be run either weekly or bi-weekly.  Use caution as changing your timesheet periods will require careful planning and communication with employees, managers, payroll processing services and your customers. Although this is a large change, consider the significant impact this could have on your closing schedule.  This change will eliminate labor, revenue and vacation accruals and the corresponding reconciliations. Eliminating your labor accrual will also simplify payroll accruals and the billing process.  Review other direct cost transactions to eliminate accruals and expedite revenue and billings.  One example to consider is aligning subcontractor invoicing with your month end closing schedule.

Automated Processing 

Most ERP systems include a process server or macro tool for automated processing. Utilize automated processing tools to eliminate complex processing errors.  Set up a process server “job” to run any process that requires multiple steps – I.e. indirect rate, revenue or billing calculations.  Once a process server job is set up correctly, staff will not spend time to review the process to confirm it ran correctly.  This will save time, reduce stress and allow staff to focus on more analytical tasks. 

Payroll Outsourcing

Outsourcing your payroll can significantly increase efficiency and improve employee satisfaction.  

Advantages of outsourcing payroll include:

  • Tax report filing, tax deposits and compliance. 
  • Payroll calculations including garnishments, medical spending and 401k
  • The ability for employers and employees to take advantage of pretax deductions.
  • Accounting staff can focus on analyzing payroll instead of calculating payroll.  

Disadvantages of outsourcing your payroll include:

  • Understanding the costs
  • Integration with your timesheets and expense report systems
  • Payroll Service Provider overselling services – I.e. the use of their timesheets or expense reporting which do not support government contracting requirements.  

As you select a payroll provider, recognize they will become an extension of your staff, and employees will view them as part of your HR staff.  Select a vendor that has the technology and employee support organization to create a positive impact on your employees. 

There is no need to pay a subscription fees for services your company is not ready to use. As with all SaaS agreements, be sure to understand your contract, the services included, current pricing and the price as your company grows or adds services. Ask your vendor for references and be sure to check all of them.  Ask for other government contractors with similar contracts. 

Summary

At the SaaS company I founded, we began running payroll in-house, and moved to a large payroll provider before we grew to 10 employees.  A few years later, we moved to a mid-sized payroll provider to better manage our costs and improve support. I prefer mid-sized payroll providers over large providers.  A payroll provider that is large enough to deliver the technology tools needed, but small enough to provide support and personal attention to your employees.  

Developing change in accounting and expanding these changes throughout your organization is part of a CFO’s role. Jezior Advisors offers virtual CFO services to help implement change in your organization. Please email me directly with any questions  joejezior@jezadvisors.com

The next posting – Continually Monitoring Data – When true organizational change begins.

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