Close the Books Without Closing Down the Department

February 6, 2019


calendar_small.jpgEvery month, it's the same thing. After weeks of struggling to keep up with invoices, expense reports, vendor file maintenance, and all the other responsibilities of running an accounts payable department, the end of the month comes and you have to close the books.

In addition to your other duties, you now have to make sure all of the month's invoices and expense reports are in your accounting system, accrue all non-invoiced expenses, reconcile your accounts payable ledger against the general ledger, and generate reports for management to review.

Pulling all this together without letting your other work slide means strictly adhering to a month-end policy, effectively managing your staff resources, and fully understanding your organization's financial process. While month-end close is always going to be a headache, consider the following tips to be your bottle of Aspirin.

Invoices on Hold?

Your policy should start with the accounts payable data entry associates. Their job is to enter all invoices for a particular month into the AP system sub-ledger by the cut-off date, which is often noon on the second day of the month.

Entering every invoice by the cut-off date is not always possible.

"You are supposed to only enter invoices that have a receiver, a packing slip, and a purchase order," says Mike Iverson, chief financial officer for Financial Operations Networks. "What if you are missing one of those? What if there is an incorrect quantity between the invoice and the PO? You are going to put it aside and address it later."

The data entry associates should forward a list to their supervisor of all invoices on hold and the reasons why. The supervisor will then review that list and ask any questions. Ultimately, the AP manager will decide whether to accrue the items in the hold list.

Don't Mix Up Your Ledgers

An organization may have one or multiple AP sub-ledgers. There may be a sub-ledger account for materials purchases, another for building supplies, and then a miscellaneous "other" account. Eventually the AP manager will combine all the accounts into a single AP sub-ledger and reconcile it against the organization's general ledger.

One of the benefits of operating multiple sub-ledgers is that you can assign staff members to process invoices for specific accounts based on their skills.

"Functionally this helps organizations process invoices more efficiently," Iverson says. "Those who know the pipe vendors very well and their pricing may only deal with pipe vendor invoices. Those who are familiar with building materials will only deal with those. These different invoices might go into separate AP ledgers but will come together in the general ledger."

When reconciling the AP ledger against the general ledger, managers should look out for common mistakes that can lead to errors. One thing to look out for is an associate entering an expense directly to the general ledger instead of the sub-ledger. A general ledger balance higher than the AP aging report's balance is a good indication that this error occurred. Use the value of the difference to track the error down (look for a $100 transaction if the balance is off by $100).

Another common mistake that leads to reconciliation errors is expenses recorded as debits to the AP sub-ledger instead of credits.

"You should run a debit report in the general ledger," Iverson says, "meaning you want to see all the debits being charged this month. Make sure that you have all the substantiations for the debits on the AP account. If you don't, then you find out why."

Although debits to the AP account are not unheard of – such as debit memos and vendor charge backs – most AP transactions are credits. An unsubstantiated debit is likely an incorrectly keyed credit.

Where Are the Expense Reports?

Like invoices, AP processors also have to enter all travel and expense reports for the month into the AP system. While many organizations have policies that instruct travelers to turn in their reports before the cut-off date, travelers frequently wait until the last minute. The result is that processors - already struggling to meet the invoice entry deadline - now have a stack of expense reports to deal with.

Apart from asking travelers to be timely with their expense report submissions, there is not much AP can do to get the documents sooner. However, if AP knows ahead of time to expect a flood of reports at the end of a month, then they can better prepare.

Consider sending out emails asking all departments to keep accounts payable up to date on travel plans. That way AP can make note and be ready when travelers dump a pile of reports on their desk at the last minute. Travelers typically know several months before that they will be going on a trip or attending a conference. Take advantage of this information.

Things get trickier when a business trip occurs at the end of a month near the cut-off date.

"When that happens, I'll usually accrue what I think is going to happen," says Angela Easum, financial operations director for Financial Operations Networks. "I won't actually go chase people down for their expense reports." Accruing these expenses and making adjustments when the reports come in later ensures that AP accounts for late-month travel expenses in the correct month.

This strategy only works in small organizations, where it is possible to estimate T&E spend in a month. Larger organizations with many business travelers must instead review policies with travelers and ensure they turn reports in on time.

"Getting expense reports from people on time is a challenge everywhere," Easum says.

Know What Buyers Are Buying

In addition to asking travelers to keep AP apprised of planned trips and conferences, consider also asking departments to let AP know about significant coming purchases. Much like an unannounced stack of expense reports, an unexpected influx of invoices can also slow things down during month-end close.

For example, if a department is working on a new project that will require a lot of independent contractor labor, letting AP know will allow AP to schedule their staff accordingly to handle the increased invoices.

You can also take matters into your own hands and examine seasonal trends. If your organization has historically handled specific types of invoices at certain times – such as an increase in lawn care invoices during the summer months – be aware of these trends and allocate your staff resources.

One of AP's key responsibilities during month-end close is capitalizing purchases. By capitalizing a purchase, the organization spreads the cost out over the course of the product's life. Businesses have written policies outlining which types of purchases they capitalize, versus which they treat as current expenses.

To this end, invoices must be clear about what the purchase is. Failure to capitalize a product can have a negative impact on the organization's financial statements.

Many organizations capitalize computer hardware and software purchases. "Getting information from your IT group is important," Easum says. "Maybe they purchased ten items for $1,400 total, in which case we wouldn't capitalize it, or one item for $1,400, which we would. I might not know because the invoice might not specify."

Whether AP needs to capitalize an expense or simply assign enough staff to handle the volume, the month-end process moves smoothly if AP knows what purchases are coming around the corner.

Ensuring Accurate Accruals

On the cut-off date, if your organization received goods that month but did not receive an invoice, AP will accrue those expenses and recognize them on the books. Generally, AP uses receiving documents and purchase orders to accrue expenses for products. Accruing service payments, however, is not as easy, especially if the vendor performed the service at the end of the month.

A contractor may perform IT work for your organization on the 31st. Instead of a bill, he or she will give the buyer a receipt indicating the hours worked and stating that the contractor has permission to send an invoice.

"The buyer takes that receipt and sends it up to AP with a note saying they have agreed to pay $100 an hour for eight hours worth of work," Iverson says. "When AP gets that document, they are going to approve $800 worth of IT work and put that on a manual list of accruals. All of your accruals go into your financial statement on the 31st. When you receive the invoice next month, you reverse the accrual."

In rare instances, you may make a purchase where the invoice arrives before the good. If, at the end of the month, you have an invoice but not the purchased item, you should not accrue it.

"Most people will just put it in the back and say 'it's nice that the supplier is pre-billing us, but I'm not pre-paying them. I don't have the goods or services, so I'm not putting the invoice on my books until I actually receive the benefits of the product or service'," Iverson says.

However, some organizations' pay based on invoice date, regardless of when they receive the good or service. These organizations will typically enter invoices into their system once they arrive. Instead of putting them in the accounts payable ledger, AP puts these invoices into a holding account. Do not recognize the expenses until you receive the product or incur the service.

Invoices Received After the Cut-Off Date

When closing the books, your cut-off date is law. Generally, if you close your books before the final day of the month and you receive an invoice before the next month starts, you should record that invoice next month. Only re-open the books if that invoice represents a significant expense.

Imagine your financial statements for the month show a profit of $50,000. Immediately after closing the books (it is still the same month), you receive an invoice for $25,000. You will likely want to go back and include that $25,000 expense in the previous month, so that your profit figures do not appear inflated.

"Most of the time, it's not that significant and you will simply put the expense in the next period," Iverson says. "But it's a judgment call made by management. What they don't want to do is have costs in one period and the associated revenue in another. That offsets how the business is actually operating."

Above All, Have a Policy

Like every process in accounts payable, a detailed, written month-end policy outlining each staff member's responsibilities is essential. The Accounts Payable & Procure-to-Pay Network offers several valuable resources to help you make sure you provide the financial reports management needs without compromising your other responsibilities.

However, regardless of how prepared you are for month-end, it will always disrupt the daily routine.

"Typically you are going to have a schedule during month end and, frankly, other things are going to sit on your desk until you are done," Iverson says. "There are only so many hours in the day. Things get backed up. Try your best to have some people working on the closing while others focus on the day-to-day stuff."

Still, by following a detailed policy and by taking advantage of the best practices described above, you can prevent your month-end process from becoming a month-long process.

Subscribe to our Monthly Insider

You may unsubscribe from our mailing list at any time. Diversified Communications | 121 Free Street, Portland, ME 04101 | +1 207-842-5500