I was involved with a small business that had a consistent monthly turnover; every month we would report £100,000 in sales. It was amazing and it never varied – so I asked why it was like this. The answer was simple; we didn’t close the month until the £100,000 sales value had been reached and this could be any time from the end of the month to the middle of the next month.
Why were we doing this? Because the management got paid a bonus when sales topped £100,000 each month. I asked them if it would be OK to pay their salaries only when sales reached £100,000 – but they weren't keen.
Closing the month means that incoming sales are no longer registered in the current month, but in the new month. The opportunity to register sales in March finishes at midnight on 31st March, after which sales are registered in April.
The problem with closing a month late is that you’re robbing sales from the new month and registering them in the prior month. So the new month might only be, say, 20 days – unless you rob again from the next month. And so the vicious cycle continues, even to the extent that your financial year closes months late.
Why does this matter?
It matters because as your business grows (or declines) you set an expectation amongst your sales team that there is flexibility and that commission and bonus payments can be achieved even when an order is late. You also can’t see whether your business is growing or reducing in turnover. That’s dangerous.
I changed the rules so that all sales registered in a month had to be achieved in that month, and the books closed on time on the last calendar day of the month without exception, even if the last day was a Sunday. I had to be clear - in order to properly register a sale we had to receive an unconditional order from the customer. We didn't need to have raised an invoice, or even started the work, just receive an order.
You can set your own rules - orders, shipment, invoice or cash. But they are rules not guidelines. For us, given that sometimes an order would take months to complete, receiving the order was the point we registered the sale. Your business will be different and you may recognise revenue in a different way.
The first month after making the change was a disaster and we had many difficult following months, but the sales team eventually got used to it. It was often very fraught at the end of the month as we scrambled to get quotes out and unconditional orders in, but it was fair and the people who put the work in were rewarded.
Whatever the current size of your business I recommend you close on the last day of the month and not a minute later. The discipline it creates will yield huge dividends.
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