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The importance of month end cut off



The key to taking charge of the financial management of the practice, is to receive the right information, in the right format at the right time. This means information that is accurate, in a format the optometrists can relate to (a summary of the Income Statement) and by the tenth of the new month, so that it is current. If things are going wrong, it can be identified and rectified. 

The month-end cut off of the accounts is critical to the accuracy of the management accounts. In order to receive accurate management accounts, it is important to make sure that cut off rules are enforced. The accuracy of management accounts is based on the information that they are prepared from. Incomplete or erroneous capturing will result in unreliable information. Cut-off, simply put, means that each month, we must match the revenue generated with the costs incurred to generate that revenue. In other words, February management accounts should include only sales and costs incurred within the month of February.

Consider two examples:

Example 1

A practice outsources the accounting function to an off-site bookkeeper. This bookkeeper relies on staff at the practice to send the source documents, such as supplier invoices, in order to capture and prepare management accounts. If the staff member responsible for sending supplier invoices to the bookkeeper, forgets to send the invoices for the last week of February, then the management accounts that the bookkeeper produces will be inaccurate.

Reconciliations will alert the optometrist to the fact that cut-off was not tested. Some may be asking the question whether this should not be the job of the bookkeeper or accountant?  “Blind faith” managing style can be very damaging to a business. This happens when the Boss accepts everything, that her staff tells her, without checking the facts herself. She should understand the process and be able to check these tests if necessary. An easy way to control this is to know the benchmarks of key things such as gross profit percentage, net profit percentage, turn over against forecast, expenses as a percentage of turn over etc.

Example 2

A practice uses a practice management software application, that allows the Boss to get real time information regarding the key indicators in the business, such as for instance, stock, turn over and debtors. The system is a real time system and as a result, once a day has passed, it is not possible to go back the next day, to capture data on that day in history. In this instance, it is critical that the Boss makes sure that capturing is done on a timeous basis.

If stock arrives at the practice near the end of the month, and is not captured into the System, then at stock take time, this stock will not be counted as part of the stock take and this will result in an understated stock figure and an overstated cost of sales figure. This can result in an inaccurate number for the gross profit in the management accounts. This leads to making decisions on inaccurate information, which could be dangerous.

Lastly, to produce accurate management accounts, it is essential to do a monthly stock take. This can be a simple quick process if set up with bar codes and a scanner.