Lesson #1: When to Close AP

Transcript

Welcome to the Mastering Expense Accruals video series! I’m Mike Pietrobon, Product Marketing Manager here at Gappify, and proud accountant and CPA. We’re creating this series to provide insights into an area of accounting that is both underserved and lacking in guidance. Today’s lesson is “When to Close AP”, so let’s dive right in.

Firstly, a little background. Every company strives to report financial results quickly and accurately, but sometimes achieving these two objectives come at the expense of the other. With respect to Accrued Expenses, one of the key considerations in this balancing act is when to close your AP module. So what factors should you consider when deciding whether to close on D+2 or D+5? And what are the best practices to ensure a successful execution?

Agenda 

To answer these questions and more, this video will cover the following topics:

1. How to balance the competing priorities of timing and accuracy in determining when to close AP
2. What best practices can you apply to execute successfully
3. What are the most critical takeaways from this course

And lastly, for those who watch until the end, we’ll have some bonus recommendations on steps you can take to optimize your accruals process

The Balancing Act – Timing vs Accuracy (1:11)

There are many factors to consider when deciding what the optimal date is to close your AP Module, but here are the most critical:

Invoice Coverage (1:20)

The first consideration is the amount of invoice coverage you are achieving by closing on one date vs another. There are various parameters to use, but the most common are a) the total $ amount or b) the % of total invoices processed. For example, closing on D+2 may allow your team to process 75% of your invoices, while closing on D+5 may result in 90% invoice coverage. 

Since no company is the same, determining what coverage levels make the most sense depends on the organization. To help answer the question, you can pull historical coverage data from most ERP’s and perform an analysis to guide your decision.

Accruals Process Maturity (1:57)

A second consideration is how robust and mature your accruals process is. This process needs to catch any expenses not captured through invoicing, and this means relying on accrual confirmations, management estimates, or even late invoice accruals. So, if you have a history of missed accruals or errors, or have a small or inexperienced team, you may want to close your AP module later to reduce the risk of error.

Spending Consistency (2:21)

A third consideration relates to how volatile or predictable your spending is. The more variation in month-over-month expenses, the higher the risk of closing your AP module early because it becomes increasingly difficult to use estimates to capture accurate accruals. 

For example, if you have a high-volume of one-off expenses such as office repairs or variable hourly contractors, it may make more sense to delay closing your AP module. If, instead, your expenses are recurring and consistent such as system subscriptions or most utilities, it is likely easier to close your AP module quicker.

Now that you’ve decided when to close your AP module, here are some best practices to help ensure successful execution:

Best Practice #1: Close AP module before starting your Accruals process (2:57)

Firstly, if there’s one primary takeaway from this video, let it be to wait until your AP module is closed before you start calculating or collecting your accruals. We cannot stress this enough. The last thing you want to have to do in the middle of a busy month-end close is reconcile between AP and your accruals. 

The most important example of this is sending accrual confirmations. If you start this process prior to AP closure, you risk double counting, as the vendor invoice you were trying to confirm could be received and processed while you’re busy preparing an accrual based on the confirmation amount.

Best Practice #2: Formalize the Process (3:35)

Secondly, create process documentation and ensure sign-off by the accounting team decision makers. Misalignment on deadlines could result in delays to your overall month-end close, such as if you delay sending accrual confirmations because team members thought that AP wasn’t going to be closed until D+6. This also creates accountability within the organization as expectations as well as roles and responsibilities are clearly defined

Best Practice #3: Seek Automation (4:01)

Lastly, leverage tools that automate the grunt work. There is no shortage of solutions to help with automating various accounting processes and workflows and Accounts Payable and Accruals are no different. There are tools that support invoice processing, automatically read and ingest invoices, automatically send and manage accrual confirmations, or run accrual calculations to estimate expenses.

Key Takeaways (4:23)

If you take anything away from this lesson today, have it be these 3 recommendations:

1. Take the time to analyze your invoice coverage to identify the optimal close date for your org
2. Close AP before sending expense accrual confirmations
3. Seek out automation tools. A great way to take some initiative here is to prepare a business case for the solution you’ve identified and propose it to management.

Bonus Recommendations (4:57)

And for all of those who stuck around, as promised, here are a few of Gappify’s bonus recommendations to optimize your accruals process:

1. Perform a late invoice review, by comparing invoices received after AP closure against your expense accruals. This will provide extra comfort over the accuracy and completeness of your accruals.
2. Stagger your expense confirmations by launching external confirmations before your internal confirmations. Why? Because external confirmations are the most reliable accrual source, obtaining responses may save your internal team from spending time having to complete duplicative confirmation forms.

To wrap-up, ultimately, by determining the optimal time to close your AP module, your organization will be better equipped to balance the critical internal objectives – timing and accuracy. So thanks for your time!

Next Steps 

Next up in the “Mastering Expense Accruals” docket is “Lesson #2: The Optimal Mix of Accrual Types’. If you’d like to register to be notified when this and other future videos are released, sign up using the form below.

And lastly, if you have questions or are interested in learning more about how Gappify can automate your accruals, you can contact me at mikep@gappify.com, head over to our website, or request a demo to see our platform in action.