Accruals - Are they worth the effort?

Accruals - Are they worth the time and effort?

Because.....Star Trek?

Soooo, accruals.  In my experience, accruals are bottlenecks in every medium to large company - in some cases even in small companies.  Typical issues include late delivery, incomplete or inaccurate numbers and time consuming processes to collate and post.

On top of that, in many businesses, monthly costs are comparatively consistent - so the monthly result isn't particularly different if you don't post accruals.  Depending on the focus of your management reports, it may not matter at all (for example, if your management reports are cash focussed or primarily focussed on non financial performance indicators).

With that context, why do businesses spend the time and effort to collect data and post accruals (at least on a monthly basis) ?  For compliance reporting, such as half and full year accounts, you obviously have to take the time, but why every month?

The answer is actually simple.....

The accruals process is a fantastic indicator of the level of commercial awareness of that business unit.

 Why?  Well, let's look at what is a "good" accrual:

1. It's timely : That is, the information required is provided before the close deadline each and every month;
   
2. It's accurate : The information included reflects the value of goods and (particularly!) services received but not invoiced.

Why does the business unit need to have good commercial processes and awareness to produce good accruals?  

• Accurately tracking services performed but not invoiced is HARD.  Even harder is trying to work out whether the time spent by the consultant was included in the original quote, or will be an additional amount.
  
• Meeting deadlines regularly is hard.  Particularly hard is meeting deadlines when the team is working in shifts, because (for some reason) the shift change always happens over the month end.

Given that services contracts, irrespective of the business, are quite often the source of significant overruns (and lost value!) business units with a commercial focus make a huge difference to profitability.  In my experience, only business units with a strong commercial focus, with a team head who pushes the point, actually manage suppliers properly and are able to produce quality accruals regularly.  

So, the obvious next step is to ask what can be done to encourage and develop the high level of commercial awareness necessary?

Practical Tips!

1. Inform and Educate:  It is really important to simply communicate the reason why commercial practices are important.  For those in the mining industry, that's pretty easy at the moment, low prices and a cash squeeze have a wonderfully focussing effect.
   
2. Focus on purchase orders : If you don't have a purchase order requirement, or don't enforce one, then fix that now.  Purchase orders provide an extremely valuable documentation chain and hence are an excellent way of highlighting poor behaviours and rewarding good ones.  Examples include tracking purchase order issue dates compared to invoice dates, highlighting the use of a purchase order to rein in ambit claims etc.
   
3. Spend time to simplify processes : Many business units will already have a tracking system of some sort.  Given that it was developed by the business unit and presumably fits in with the way they work, spending time to refine that system will be time well spent.  You are more likely to achieve better results by working with the business unit, rather than foisting a process that works for you.
   
4. Highlight time savings for them : Most people in business units I talk to hate the time spent in trying to comply with "finance" processes, however logical they appear to by.  Equally though, time spent trawling through consultant/supplier invoices to deal with overruns (and endless meetings to resolve unexpectedly high costs) are also not their favourite things either.  So, focus your efforts on controlling one supplier at a time - use techniques/change processes etc to help them save time managing one supplier properly.....over time, those changes will creep into general practice.
   
5. Don't expect perfect results in the first couple of months.  Commercial awareness is developed over time, so focussing on one key supplier first (the most troublesome, the largest) allows everyone to see results, ask and answer questions, as well as refine procedures and ideas.  

So, to answer the original question.  Yes, they are worth it - if they are done right.

What happens at your workplace?  What techniques or problems do you see?  How have you improved your processes?  Sound off in the comments!