Timely And Accurate Financial Reporting Chapter 7

The theme of my Blogs for this year is what I would include in a book about small business finance and accounting. This month I discuss accurate and timely financial reporting.

One thing I consistently see in well run companies is accurate and timely financial reporting. Among other things this increases the intrinsic value of the company. Why is this important and how is this accomplished?

Accuracy is the key to assuring you are basing your decision on correct information. Can you imagine purchasing inventory only to find you already had a significant quantity on the shelf? Perhaps it can be returned with shipping and restocking fees, but shouldn’t the inventory listed in our monthly closing have been right? And backing up that question, why isn’t it correct? Where was the break down? How much time elapsed between the time you got the information and when you had to make the purchase decision? It could well be that the information wasn’t available when the decision was made.

Perhaps this is not a great example, but it demonstrates my two key points: 1) Financial information has to be current to be useful for decision making and 2) The information needs to be correct in order to use the information to make informed decisions.

The preparation of accurate and timely financial statements each month requires a process. A calendar should be established and items that can be addressed each day prior to the end of the month should be done to reduce the pressure on the other accounts. Depreciation, prepaid expenses written off to the P&L and certain accruals can be done prior to the end of the month in order to have them off of the closing list when crunch time comes to the monthly closing calendar.

Another example of timing is Accounts Payable. Accounts payable should be one of the last accounts closed for the reporting period. Why? This allows the invoices for items related to the prior month to be recorded in the correct period, thus improving the accuracy of the financial statements. A good cut off for inventory so that costs are in the correct period is also required to improve financial statements. This process needs to occur throughout the system to assure accuracy.

Like any process top gain time in the closing schedule you need to run some elements and reconciliations concurrently. This is best done by assigning certain account reconciliations to multiple people in the accounting department. Further, no longer do you need to wait for credit card and bank statements in the mail. Now with electronic banking, these reconciliations can be done throughout the month and simply tied out with the final on line statement.

Take a hard look at your closing process. Like any process it can be analyzed and improved. Layout a calendar, assign responsibilities and put together a closing binder each month with the reconciliations. These simple but often overlooked steps will assure accurate and timely financial statements each month.

Your CFO and Controller should work together to accomplish accurate and timely reporting first, so that time can be spent analyzing the numbers, not just preparing them.