You Can Know What You Don’t Know: Financial Reporting

​Last month I started a series offering various best practices and tips to address the many challenges
executives at health centers face.

This month, I’m going to write about a topic that is a major challenge to many executives: how to
improve the accuracy of monthly financial statements, and do it in a timely basis. Numerous clients over
the years have told me they either never receive monthly financial statements, relying on year end
audits, or they take two to three months to receive them and even then, the accuracy is questionable or
the usefulness is limited per the executives I’m speaking to.

I’ll start by saying that your organization should be generating accurate financial statements prepared in
accordance with generally accepted accounting principles (GAAP) on a monthly basis. I have had some
organizational senior leaders tell me that their financial leadership tell them it’s not possible to prepare
financial statements monthly. Not true, and that’s a red flag. There are many schools of thought as to
timeliness, but not too many different views as to whether it’s possible to generate GAAP-basis
financials on a monthly basis. It’s possible. Some organizations are able to generate their financial
statements within 5-10 days after month end and some take longer. Some take MUCH! longer. My rule
of thumb would be that in no circumstances should it take longer than 30 days after each month end to
generate monthly financial statements.

If you’re reading this and you are thinking, “We’re not getting financial statements out the door before
60 days. What is the disconnect?” Very simply, it’s leadership overseeing bad processes. Often times it
is due to the perception that all the work done at year end in order to close the books for a year end
close and for the independent audit needs to be done monthly, and therefore the conclusion is that it
takes too long. However, I would flip that around. As a practical approach, it is important to perform an
accurate monthly close process in order to generate the financial statements, and with a good monthly
process, the effort needed to perform the annual close is much less of an undertaking.

The quicker an organization needs its financial statements the more likely they will need to either have a
robust and accurate purchase order system or a strong system of recording estimated accruals.

If 25-30 days is an acceptable time frame, then the accounting department needs to choose a final day to
“cut off” each of the major accounting cycles: revenues and disbursements/payables. The primary
reason for the stated delay provided by accounting departments is receiving invoices with dates of
service related to the prior month.

A typical approach would be the following schedule if we use the 25 th as an example:

1. Close revenues by the 5th of the month
2. Close payables by the 15th of the month – this means that any invoices received after the 15th that are related to the prior month will be posted to the general ledger with the current month instead of the prior month. As the accountants study trends, they will get a sense of the volume of invoices that are received late and can then accrue estimates for the “yet to be received” invoices. Additionally, the payables team could reach out to the vendor to request earlier receipt of the invoices.
3. Perform bank reconciliations by the 8th day of the month
4. Before the 20th , perform other close procedures: monthly journal entries, accrued payroll, etc.
5. By the 20th of the month, prepare first drafts of the financial statements for review.
6. Between the 20th and the 25th, perform various analyses and make corrections or revisions as necessary.

Some companies use cash basis for recording payroll, which is an inaccurate approach. Those 2-3
months per year where there are “3 payrolls” cause results to dip. Since most payroll is paid in arrears,
accruing payroll based on dates of the payroll period will fix these spikes in payroll expense.

How do companies generate financial statements with a quicker time frame than the above, for example
8 to 10 days? Most companies do not receive enough of their invoices from their vendors within a day
or two of month end in order to post accurate accruals. One approach is to use a purchase order (PO)
system that records accounts payable transactions and expenses based on their internal PO system. This
allows them to record expenses without waiting for invoicing. If they do not have a PO system, they are
simply using an estimated accrual system. They have studied trends and identified major expenses to
accrue and use an estimation process. This is quite an effective approach. Once past a learning curve, it
allows the team to issue materially accurate financial statements within a few days of month end. There
may be a need to keep the books open longer for year end in order to rely on hard data for the year end
close but it is an effective approach throughout the year.

In the next article, we will continue discussing the month end close by discussing tips for accurate
revenue recognition, which also impacts A/R.

​What lessons are you taking away from these thoughts? I hope at the very least it is that a professional
approach to monthly financial statement production can help executives have the information they
need to run their health center effectively. Additionally, a second set of eyes can be immensely
valuable.