For calendar year-end organizations, June marks the mid-year. Like a long baseball season, the fiscal year has its lulls as well. It’s during these periods that projects get put on the back burner and some of the routine slides into the fall. June, or more generally the mid-year period, can also serve as a refresher and call to focus topics that, if addressed now, can ease the year-end audit season and help firm up reported amounts to help round out the year. Here are a few areas that may be worth consideration during the summer months.
Stability and Good Cash Flow
Make sure your organization continues to do the basics well. Billing and collecting is the core of good cash flow and continued success. It also reduces the stressful year-end crunch to make up ground on your days in A/R ratio. Sometimes an organization can slip in its collection efforts, and it’s very difficult to fully recover. Billing and collecting can also be impacted by other situations. Two that occur frequently are system conversions and unexpected staff absences. In certain industries, an IT conversion can wreak havoc on timely processing of invoices and the accuracy of those invoices. The longer it takes for invoices to be processed, the greater the collection risk. Prior to these IT implementations, analyze your risk around increased days in A/R and develop contingency plans (i.e., additional temporary help) to ensure you can keep pace despite the temporary hiccups during the conversion. In addition, certain finance departments are relatively lean from a staffing standpoint. If you’re relying on one or two key employees to keep your billing process running smoothly, consider cross-training other personnel to assist in case of unexpected absences. Health issues and random life situations may pull your key personnel away for an extended period. Without a contingency plan, billing and collecting can suffer, creating a real cash impact to your organization.
The mid-year is also a great time to assess your major operational trends and results. You can use that information to forecast for the year and identify trends that may impact some of your major estimates. The allowance for doubtful accounts, self-insurance utilization, and defined benefit plan activity are just a few examples. Do you see a major improvement or deterioration in the aging of receivables? Have your wellness and safety incentives shown reduced claims for health and workman’s compensation? Did you have any early buyouts to your defined benefit plan that might trigger settlement accounting? These are just some potential items that may be impacting your organization – the actual list is much longer. It’s imperative to catch these developments sooner rather than later. You should communicate these items not only to upper management but also to your auditors so they know what is happening as well. Internally, management can make adjustments to correct any matters and can advise the owners and board members so there are no surprises. Likewise, your auditors appreciate understanding your trends. They may be able to provide insights about whether your circumstances are being felt within the greater industry and how others are addressing them. Also, certain developments may bring new accounting guidance into play or change the audit approach at year-end.
Stay Aware of Debt Terms
Most organizations are funded, at least partially, by borrowings from banks or through bonds. The related debt agreements typically require organizations to maintain certain financial covenants. The mid-year operational results should indicate whether there are any concerns about meeting those covenants. If that’s the case, there are benefits in getting ahead of the matter, and communicating with your bankers and auditors. Most banks are willing to amend agreements, or perhaps even waive a covenant violation. If you wait until year-end to begin that process, you’re likely to encounter longer delays before final amendments are executed. Plus, any delay in final debt amendments could push the issuance of your audited financial statements out beyond other deadlines, which could impact future financing or transactions. In most cases, the parties involved are willing to work together and appreciate the open dialogue and advanced notice.
Budgets and Forecasts
Whether you use a forecast or budget process, the mid-year period is a great time to make adjustments for any unforeseen items. Obviously, budgets are a key tool for tracking progress and identifying unexpected variances. However, budgets can’t anticipate everything. Your organization, especially in today’s ever-changing environment, has to be flexible and agile. If there are significant changes with your competitors, if you unexpectedly win or lose a major customer, or if your local community suffers a plant closure, you have to be able to adapt to the new normal. Realistically, budgets and forecasts have to adjust as well. They can’t be a static document; otherwise, they lose their effectiveness. As part of the annual budget process, consider dedicating time and resources to a mid-year budget review so you can make the necessary adjustments going forward.
Practice Your Reconciliations
Like billing and collecting, good account reconciliations are fundamental to maintaining accurate balances and reliable financial statements. Depending on your organization’s size and complexity, you’re probably performing balance sheet reconciliations monthly or quarterly. However, during the fiscal year, some account balances tend to either not get reconciled or aren’t reconciled in a timely fashion. This could lead to variances building up in an account and not getting identified until a subsequent reporting period, or worse, not getting identified until year-end. There should always be a focus on accurate and timely account reconciliations, but realistically, complacency tends to enter the process at some point. Mid-year is a good time to refocus the accounting staff’s efforts on reconciliations, and you can do this by “practicing” for an audit. Select a month and stress to staff the importance of accurate and timely reconciliations, then have managers review the work for accuracy and reasonableness. This should promote a more consistent culture or habit of doing the reconciliations, it should identity any missed variances or errors, and it should make the year-end process smoother.
The doldrums of a long fiscal year happen to everyone and every organization at some point. The mid-year period is a great time to take a step back, get back to the basics, identify areas for improvement, look at the bigger picture, and make the necessary adjustments. The efforts during the mid-year period should make the year-end process easier, and all parties will appreciate that.