Keeping the Month Open – Resist the Temptation

We all know how the conversation starts. 

The month has been a bit disappointing. 

Sales are behind target. 

There are orders that will probably go out tomorrow or the next day. 

“Let’s leave the month open for another day or two and get the sales in.” 

“It won’t hurt. We have the orders after all. That’s the important thing.” 

“We will catch up next month.” 

I have seen this countless times and, in my experience, it causes far more problems than it solves. 

One of the most basic disciplines in monthly accounts is having a clean cut-off. 

June is June. 

July is July. 

Once you start moving activity between months, the numbers become much harder to trust. 

“But We Need to Show the Investors a Good Month” 

This argument comes up regularly. 

We need to hit the number for the bank. 

The investors are watching. 

The shareholders are expecting it. 

My view is simple. 

Tell them the truth. 

If June was £200,000 behind forecast but July has started strongly, report exactly that. 

“June finished £200,000 below forecast, but £250,000 has already shipped in the first few days of July.” 

That is a much better conversation than artificially improving June and creating a problem for July. 

Investors, banks and shareholders can cope with a disappointing month. 

What they do not like is discovering that the numbers have been moved around to make performance look better than it really was. 

Trust is far more important than short term trading performance. 

Issue One – Once You Pop, You Can’t Stop 

This is where it gets dangerous. 

Suppose you take £200,000 of July sales and put them into June. 

Great. 

June hits target. 

But July now starts £200,000 behind. 

What happens when you get to the end of July? 

Exactly the same temptation appears. 

Take some August sales. 

Then August starts behind. 

So you take some September sales. 

And on it goes. 

Once you have done it, stopping becomes surprisingly difficult. 

Each month needs the next month to rescue it. 

You become addicted to keeping the month open. 

And the longer it goes on, the harder it becomes to unwind. 

Issue Two – You No Longer Know Your Real Margin 

Monthly accounts work because revenue and the costs relating to that revenue sit in the same period. 

Move the sales and that starts to fall apart. 

You may put the invoice into June, but the goods actually leave in July. 

The stock movement may therefore happen in July. 

The labour may be in July. 

The freight invoice may arrive in July. 

Commission may be calculated in July. 

Accruals may not capture everything properly. 

So June gets the revenue without all the costs. 

June looks great. 

July gets some of the costs without the revenue. 

July looks terrible. 

Your gross margin is now wrong in both months. 

And if the gross margin is wrong, your profit is wrong. 

More importantly, you stop knowing what is really happening in the business. 

Was June genuinely strong? 

Was July genuinely weak? 

Has margin improved? 

Has it deteriorated? 

You do not really know, because activity has been deliberately moved between periods. 

You may have improved the reported result. 

But you have made the management information worse. 

And that is a poor trade. 

Issue Three – Your Debtors Ledger No Longer Reflects Reality 

This is often overlooked. 

If goods really go out on 2 July but you date the invoice 30 June, your debtors ledger now has the wrong date on it. 

The customer may be paying perfectly on time. 

But your system makes them look late. 

Do that regularly and your aged debtors report becomes unreliable. 

You can no longer easily tell the difference between: 

• customers genuinely paying late;
• customers paying to terms;
• invoices that really need chasing;
• invoices that only look overdue because you moved the date.

That damages credit control. 

It also damages cash management. 

Your debtor days are distorted. 

Your aged debtors report is distorted. 

Your expected cash receipts are harder to forecast. 

Your credit controller may even end up chasing a good customer for money that is not genuinely overdue. 

All because you wanted to improve one month’s sales number. 

Issue Four – Eventually Nobody Trusts the Numbers 

This may be the biggest problem of all. 

Once management knows the month is being moved around, people start to question everything. 

June beat forecast. 

“Did it really?” 

Margin improved. 

“Was that real?” 

Debtors increased. 

“Are customers paying more slowly, or did we just pull invoices forward?” 

At that point the management accounts have lost one of their most important qualities. 

Credibility. 

Management accounts are there to help you understand the business and make better decisions. 

If you cannot trust them, they stop doing their job. 

You are no longer managing the business from reliable information. 

You are flying blind. 

Issue Five – Due Diligence 

Then one day someone wants to buy the business. 

Or invest in it. 

Or lend you money. 

And they start asking questions. 

They will want to understand your monthly trading. 

They will look at sales trends. 

Margins. 

Working capital. 

Debtors. 

Cash conversion. 

And they will want to reconcile it all back to the underlying records. 

So how are you going to explain that June includes sales that actually happened in July? 

Or that July looks weak because some of its sales were pulled into June? 

Or that your debtor ageing does not quite match when the goods actually went out? 

You may understand why you did it. 

But what is an interested party going to think? 

More importantly, what are they going to think about you? 

Due diligence is not just about proving the numbers. 

It is about building confidence that the numbers can be relied upon. 

Once a buyer or investor finds one cut-off issue, the obvious question is: 

“What else has been moved?” 

Then they start digging. 

Harder. 

What was originally an attempt to make one month look slightly better can suddenly create questions about the credibility of the entire financial history. 

And that can affect far more than one month’s reported sales. 

It can affect confidence. 

It can affect valuation. 

It can affect the deal. 

If you ever expect somebody else to rely on your numbers, make sure they are numbers you can explain. 

Summary 

So that little decision to improve the sales number has now affected: 

Sales. 

Margin. 

Profit. 

Debtors. 

Cash flow. 

Credibility. 

Quite a lot of damage for a couple of extra days’ revenue. 

The answer is simple. 

Have a clean cut-off. 

If June was disappointing, report a disappointing June. 

If July has started brilliantly, report that as well. 

You have not changed the underlying performance of the business by moving a few invoices backwards. 

You have only changed the numbers you are using to understand it. 

And as an FD, I would much rather explain one bad month than explain why nobody can trust the management accounts. 

If you would like to find out more, please contact me, Jason Soars, Fractional FD,  [email protected], 07894641231, www.linkedin.com/in/jasonsoars/