When the financial period for any given month comes to an end, revenue, costs, and all other aspects of agency financials need reconciling; this is month-end. While this reconciliation process is obviously in the remit of the finance department, it is up to other agency departments to ensure that they have also completed their responsibilities for the month. Whether submitting timesheets for accurate revenue recognition or ensuring that all costs are captured on jobs, all departments have a role to play when it comes to month-end.
Christian Arpe-Hansen, Former agency CFO and Tangram Partner shares his tips for a smooth agency month-end.
For a robust agency finance department to have a successful month-end, they need to start with an organized timing plan. Each agency department should be aware of its month-end responsibilities and the associated deadlines. There should be no ambiguity; everyone should be clear of the role they play at month-end.
For example, all staff should be responsible for having their timesheets done by the date finance stipulate. By doing so, Project Managers can complete their monthly job evaluations as part of their month-end responsibilities. So, every step in the process is necessary. Besides those all-important timesheets, Project Managers will also need to review estimates, purchase orders (POs), and invoices. Are all estimates up to date? Have all POs be raised against the job? Have invoices been raised etc?
Once they have gone through that process, one of the most important jobs for Project Managers is assessing job completion. In order to recognize the correct amount of revenue, this assessment is imperative. It is important at this stage not to overestimate your expected revenue.
Revenue Recognition: Is WIP Methodology the Best Way Forward?
The short answer is yes. WIP methodology provides the best results. Using WIP means you only recognize the revenue as you earn it, based on your effort to date. Whereas, using the billing method for recognizing revenue means agencies can get ahead of themselves, by doing so before they have completed the work. This can lead to months of work ahead, with no revenue coming in, as it has already been taken up.
Let’s imagine a small agency has just started up. They use Xero and recognize revenue based on billing. However, with swift growth, they find themselves employing 50 people. The processes that had been in place as a start-up no longer work for a growing agency, especially when it comes to revenue recognition.
A robust process needs to be put in place to change revenue recognition methodology. System-wise, there are a few challenges. However, with the right processes in place before change-over, it is indeed possible. The biggest challenge, though, is usually with agency staff and getting them across the new method. A period of change is inevitable, but it can be done. This kind of change is never easy in people’s minds, but it is not impossible.
Addition Work to be Done at Month-End
Once revenue is recognized, financial transactions will need reconciliation. Accounts Receivable, Accounts Payable, and WIP accounts all need to be reconciled, along with company bank accounts. Some agency management software may have a checklist function that enables managers to create a checklist at month-end. Functionality of this kind allows them to assign different people to their relative tasks. They can then tick them off accordingly. Additionally, comments may be added to create an overview of the state of play.
If your agency management system doesn’t have this function, a checklist is still a great idea. Checklists ensure that all parties responsible for month-end tasks have a clear to-do list.
Choosing the Right Software
Having the right agency management software is, of course, a given. Without it, in the current business environment, a large percentage of agency time is wasted. Features that allow you to accrue and defer revenue based on effort are necessary for today’s agency. We have written articles and presented webinars on choosing the right software for your agency. Check them out, and if you need additional help, please don’t hesitate to contact us.
These procedures are standard financial practices for month-end and will be similar at any agency. Create a checklist, make sure all agency departments are clear on their responsibilities and timings, and this will put you on track for a smooth month-end.
If you need help with your month-end processes, are thinking about changing to an agency ERP system, or want to change the way in which you recognize revenue, get in touch.