By Diane M. Calabrese / Published November 2020
Summing it all up…That’s one way to look at what it means to close out the financials.
When a business reconciles earnings and expenses for a particular period, such as a quarter, it is closing out the financials. The process must be undertaken to maintain a firm grip on capital, debt, invoices, and inventory. The endeavor also informs every aspect of reporting required, such as to taxing entities
“Closing out the financials is a normal process for most businesses, which is done monthly and at the year’s end to assure and reconcile all accruals, depreciation, amortization, and interest expenses, to name a few major entries that are required to be properly entered and reconciled for that given period,” says Gregg Brodsky, senior western sales manager with Alkota Cleaning Systems Inc. in Alcester, SD.
“You need to have an accounting package properly set up with AR (accounts receivable), AP (accounts payable), and payroll and inventory, or the data output is virtually worthless,” explains Brodsky. And he points to the increased understanding of the way that solid accounting procedures contribute to the strength of businesses.
“Most organizations in the pressure washer distributor category have advanced greatly in the last decade with understanding accounting in general,” says Brodsky. “Many were manually entering inventory purchases, expenses, invoicing, and payroll.”
Younger members of the industry may have no firsthand knowledge of the labor-intensive efforts by in-house bookkeepers and accountants who once kept information current in detailed handwritten ledgers. (It’s as unthinkable to them as an onboard navigator charting a plane’s course with maps and a protractor.)
We did not just jump from all paper to all computer. With some of one (paper) and some of the other (computer), a sort of confidence evolved that using a computer-based spreadsheet could straighten out anything. With the “confidence,” things had the potential to become untidy.
“Everyone, I am sure, remembers the days when they would procrastinate gathering up all their paperwork until March 1 of the following year and hand off their past 12 months of hard work to their so-called accountant,” says Brodsky. “This was the typical definition of flying by the seat of your pants. Too late to adjust to anything…”
As Brodsky notes, rigorous procedures prevent chaotic situations and extra hours of work. They save time and facilitate reporting requirements, even as they allow for a real-time and constant evaluation of a business’s trajectory.
Closing out the financials in a consistent way also allows businesses to take advantage of opportunities to evaluate their company in the context of its competitors. Brodsky cites distributors who for years have been using a benchmarking program available from the Cleaning Equipment Trade Association.
“CETA’s flagship benchmarking program has saved businesses time and money while building tens of thousands of dollars in profit,” says Brodsky. “Businesses are finally tracking and measuring performance with their new-found tools while they plan to refine approaches in ways that boost profit.”
Adoption of a process of closing out the financials using advanced accounting software is ongoing in our industry. Once adopters adapt to the software, they begin to learn from the considerable information available.
“Since most pressure washer distributors are now using a software accounting package, they are still learning how to understand their financials,” says Brodsky. “An example of one major issue still in play when closing the financials is not having inventoried items by part number added to their system. Since many are not tracking inventory by purchase order or invoice, you can assume a large inventory shrinkage write off at year end, when it is too late to take corrective action.”
Financials should be evaluated by the day and closed monthly, says Brodsky.
And a physical inventory should be done at least annually before closing year end.
Closing out the financials brings order to a business. Just the routine aspect of the effort ensures that tracking where money comes from and where it goes does not get derailed.
A power washing contractor is unlikely to be selling anything except service. Invoicing is straightforward—service rendered and charged, invoice outstanding or invoice paid. Or is it?
The contractor likely would benefit from knowing the actual cost of doing a job. The cost for fuel, chemicals, and water may vary from one seemingly similar job to another.
Close monitoring of expenses enables the contractor to adjust future quotes to be sure that a profit is being made on every job or at least most jobs. If the cost of completing a job invoiced at $5,000 is $6,000, the contractor wants to make a correction to quoting prices as soon as possible.
Moreover, closing out the financials pushes contractors to take a critical look at all expenses. There’s a cost attached to everything, from storing equipment to keeping the office lights on. Tallying costs accurately is necessary to obtain a true measure of profit.
Distributors and manufacturers have much more complex accounts to reconcile.
Both have costs attached to paying employee wages and benefits, insurance, facilities, and vehicles. Pro-curing raw material, distribution, and research add to the costs of manufacturers. (The foregoing are the short lists.)
The more accurately a business can identify the cost of every expense line, the more ably it can do a cost-benefit analysis for a possible change—such as a new product or a satellite structure—or take a new approach to sales.
Most companies now advertise in multiple ways—through all avail-able channels, as the lexicon goes. Is the return commensurate with the expense?
By separating online sales and personal-contact sales, a company can compare results when doing its monthly or quarterly closing of financials. It’s especially useful for the business to be able to determine which approach is more cost effective.
Order is not synonymous with uniformity. A business must choose an accounting method. In the simplest example, it must decide how to record sales.
What if the sale is made in April and the payment is received in May? Is the payment recorded on the April tally or is it recorded on the May tally?
Companies that use an accrual method of accounting would record the sale and the payment for April. Companies that use a cash method would have to record the payment on the May tally.
The choice between accrual and cash methods of accounting belongs to the business, but taxing entities want to know which method is used. (There are exceptions regarding where choice resides given that subcontractors may have accounting methods imposed on them.)
Most small companies use a cash method because it’s easy to understand and offers a clear picture of cash flow. The accrual method can reduce taxes for a quarter in which payments are slow to arrive. There are plusses and minuses attached to each method.
If a company is large enough, an in-house accountant (certified) is as essential as electricity. For smaller companies, there are excellent bookkeepers for hire as well as online subscriber services that provide help from a CPA when needed.
Only publicly traded corporations are required to use GAAP, or generally accepted accounting principles that are disseminated by the Financial Accounting Standards Board. The U.S. Small Business Administration recommends that companies of all sizes and structures use GAAP because doing so elevates their perception in the eyes of lenders and creditors.
GAAP adherents will also be ready to respond to requests for proposals circulated by governments or large businesses. What are GAAP principles? In short, the list of principles center on honesty in every part of the accounting process.
There’s no implication that those not using GAAP are dishonest. Instead, the principles remind accountants to be consistent and sincere in every decision made and to scrupulously avoid speculation of any kind.
Until 10 years ago, the biggest obligation companies had to the federal government was paying federal taxes. Today, it is paying federal taxes and meeting the requirements of the Affordable Care Act. Companies must also meet payment schedules for state taxes.
By closing out the financials by month or quarter, a business is prepared to meet payment and filing deadlines for taxes. Scrambling and trying to assemble records just before a deadline wastes time and leads to errors.
Closing out the financials brings order and increases appraisal of a company’s creditworthiness; it also protects the company from sinister actors. Laxity in closing out the financials is an invitation to a troubled employee who assumes “no one will notice” an item or an amount missing.
Similarly, the closing—reconciliation—is a way to verify that bank statements on deposits and withdrawals align with in-house records. Unfortunately, banks today also have situations in which accounts are pilfered, often by hackers but sometimes by in-house personnel.
Closing out the financials and, when possible, adopting GAAP sends a signal to the business community that a company is serious about all it does. The company values order and consistency so much that it takes time to “document” all in its accounting method. Most importantly, the message of rigor naturally carries over to the essential business activity of the company.