Financial administration providing up-to-date information for decision making
Up-to-date information forms the essential basis for company management decision making (management tools). Most of the information is gathered through the company’s financial administration or financial systems, but other systems are used as well. The information from the other systems is combined with financial information, or they are used to compile a separate report for management. The information from sales or customer relations management (CRM) systems is perhaps the most commonly included information. An example of a custom reporting set is manufacturing information.
Information is up to date when it is always available as soon as possible, and its accuracy can be trusted. Up-to-date is not synonymous with real-time, especially when referring to accounting information. This, however, is affected by the nature of the business.
Monthly closing dates are important for ensuring accuracy
At the end of each month (in practice during the first days of the following month), after the monthly entries, the accounting is closed, i.e. a monthly closing is made. All entries after this are recorded to the following months, and nothing that changes the reporting is added to the closed month.
Of the financial systems, invoicing and sales and purchase ledgers are often up to date every day. Electronic financial administration offers significant aid in this, but personnel must also review and accept different types of invoices daily. The timeliness of this information is a requirement, for example, for making a cash flow forecast. However, these are only parts of the accounting from which the most important basic reports, profit and loss statement and balance sheet, are generated.
In accounting, there are several different tasks that can only be conducted on a monthly basis. These tasks define the moment when the monthly closing of accounts is made. On the other hand, without monthly entries the basic reports will be inaccurate or even strongly misleading if they are used before the closing date. That is to say they are unusable before a check is made at closing time, verifying that all monthly items are included in the reporting. Good examples of monthly items include project income entries, fixed assets depreciation and all purchase invoices belonging to the month to be closed. Various accruals for ensuring all costs belonging to the month to be closed are also included, and everything not belonging there is excluded. This ensures that the monthly profit and loss statement is accurate, and therefore the business indicators calculated from it, as well as various comparisons made using it, are also correct.
Timeliness or accuracy
It is not always possible to achieve up-to-date information that is ensured to be completely accurate in all aspects. Is one of these characteristics therefore more important than the other? On my opinion, this is not the case. A compromise between these two characteristics must be achieved during the financial period. In year-end financial statements both are required, and therefore more time is reserved for compiling them.
During the financial period, timeliness is important; the management must receive the necessary information according to the agreed schedule. The information must be correct, but usually sufficiently accurate is enough. For example, in a company with an annual turnover of ca. 10 million, an error of ca. 10.000 euro in the reporting does not yet affect interpretation of the reports. The error can be corrected in the accounting of the following month. On the other hand, the same error in a company with an annual turnover of ca. 1 million might already cause misinterpretation of reports. The situation is the same regardless of whether the error was in income or expenses, too much or too little. The principle of materiality is mentioned in the Accounting Act: a matter disclosed in the financial statements is deemed material where its omission or misstatement could reasonably be expected to influence decisions that users make on the basis of the financial statements.
Timetable of monthly closing dates, forecasting and reporting
Monthly closing has to be done as soon as possible. This ensures the best possible timeliness of information, and at the same time guarantees sufficient level of accuracy and correctness. Usually, sales and purchase ledger is closed within approximately 5 days in the beginning of next month, and within a couple of days from that date all monthly entered items must be handled. Then the month can be closed and the monthly reporting to the management compiled.
In financial administration, a monthly schedule should be compiled for closing of accounting months, closing of various subsystems, analysis of various forecasts (sales forecast, profit forecast), and lastly, delivering the final reports to the management. Above all, this facilitates the work of financial administration by making it foreseeable. It also commits the authors/responsible persons of various forecasts to the schedule and informs the management on when the latest financial information is at their disposal. The schedule enables the management to set correct dates for analyzing the forecasts and reporting, and plan operations accordingly.
Example of a monthly schedule:
- The 2nd work day of the following month: closing of sales ledger
- The 4th work day of the following month: closing of purchase ledger
- The 6th work day of the following month: closing of the accounting month (not necessarily in the accounting system)
- Sales forecast ready: 8th work day
- Profit forecast ready: 10th work day
- Reporting and meeting of the management group 11th – 12th work day
- Meeting of the company board by 15th work day
Some might consider this a tight timetable, while others view it as having plenty of time for the various stages. I am of the latter opinion. My own experience of a tight schedule was in an international group of companies, where the accounting for the month was closed on the 2nd work day of the following month, and one week was given to prepare the year-end financial statements. The same days were also used to prepare the entire reporting to the parent company and management. In practice, we had to close subsystems before the end of the month, and for purchase invoices clearly arriving on the next month, estimate accounting entries had to be made to maintain monthly margins of correct magnitude. When preparations were made well in time, the schedule was well maintained.
Management reporting is internal reporting
In financial administration, both internal and external calculation is done. These two elements together result in reporting. External reporting is intended for external stakeholders and internal reporting to the company management and board of directors. These differ significantly in terms of schedule, type of information and details. Financial administration should clearly realize what is needed to produce relevant management reports, and which matters are only relevant for either internal or external calculation.
An example of external calculation is the value-added tax calculation. It is done monthly, and in some companies verifying it takes some time. If this might cause difficulties in keeping to the management’s reporting schedule, it can also be done after all reporting. The month is then closed definitively, also in the financial system. Usually, value-added tax calculation provides entries to the balance sheet, and they have no essential significance in terms of information used for decision making during an accounting period.
I have seen several companies where the chart of accounts is based completely on the requirements of external calculation, year-end financial statements. Therefore, the format of profit and loss statement is based on the Act, and it excludes both sales margin and EBITDA, which are not required by law. However, I recommend using a chart of accounts which includes at least EBITDA, and preferably both these margins. Reporting with these two business indicators alone produces a lot of useful information to the management, and the easiest way to obtain them is straight from financial administration, defined in the chart of accounts.
An example of the importance of margins is an entrepreneur who is recounting the success story of the company’s new product. “The product was such a success that it was practically a licence to print money.” Although the invoicing of the company probably increased to a good level, this still tells nothing of the profitability of the product. Neither the bank account balance alone provides accurate information on profitability if the payment terms of customers and suppliers differ significantly, or if, for example, value-added tax is not separated.
It is good to notice that management reporting has to be done several times in a year, with a strong preference for monthly reporting, but financial statements are done only once a year (with the exception of publicly listed companies). It is easier to gather information from the more accurate monthly profit and loss statement to be used in the more concise annual financial statements’ profit and loss statement, than the other way around. With the help of a good reporting system, this can also be automatized.
Outsourced financial administration and internal calculation
Small and mid-sized companies often have outsourced their financial administration, or at least accounting, to an accounting firm. Invoicing and purchase ledger can often be done using the company’s own resources. Outsourcing is usually a cost-efficient solution for managing a sector requiring specialisation. Larger accounting firms also utilize electronic financial administration, which makes schedules and transmitting of information more efficient.
However, the client company must be able to also demand the information and schedules required by internal calculation/reporting. Unless this is agreed upon with the accounting firm, external calculation is often the only requirement for information and schedule. If the profit and loss statement and balance sheet are always received two months afterwards, the information is no longer up to date and suitable for use in decision making. At the same time, the response time for making changes possibly required to the operation becomes too long.
With digitalization, the role of financial administration is gradually changing away from register keeping and routine work increasingly towards analysis and advice. Accounting firms offer more service and information analysis to facilitate decision making in client companies.
Financial administration as a developer of business
Financial administration is staffed with people who understand financial indicators. Digitalization will give these persons more time to distribute that understanding to the rest of the personnel in the company. Less time will be needed to complete routine tasks, but at the same time the overall business knowledge of the financial administration must be adequate to understand the business-area-specific meanings of various indicators.
Overall knowledge accumulates quickly by analysing sales margin and EBITDA. Changes between monthly incomes and expenses, calculated by month comparison, indicate the development direction of the business. With the indicators, both the companies’ internal financial personnel and the personnel of the accounting firms can easily see and share information on the operation of the company. Numbers can talk, just as long as one learns to listen to them.
Financial administration professionals produce up-to-date information for the company management to be used as a basis for decision making. Both have their roles in ensuring good results; financial administration ensures that the information is up to date and accurate, and the company management ensures that the financial administration knows what information is required for decision making and when. If needed Revise Oy can help you in these matters, so please do not hesitate to contact us.