We are often asked if we recommend monthly or period reporting to our clients. Both approaches have merits and shortcomings, and we want to simplify the decision as much as possible. Below we have focused on the major and important drivers.
The simple answer to this question is that if your business’ revenue varies greatly by the day of the week, and/or if your business’ profitability is heavily dependent on inventory turnover, we usually recommend establishing your financial records using period accounting.
Why is this? Primarily, if you have a business that is highly dependent on weekend or weekday sales, period accounting will allow you to compare periods that have the same number of weekends or weekdays. When using monthly accounting there will be a different number of high sales days based on how the calendar month falls which in turn can impact the meaning of same store sales numbers from month to month.
This same reasoning holds true for inventory. If inventory is consistently counted on the same day every week and the reporting period includes the same number of weekend days and weekdays, then food and other costs are not distorted. Period to period comparisons become more discerning and relevant to assess performance and make meaningful management decisions. Additionally, inventory orders are more predictable since you are able to anticipate volume on the number of busy days which are consistent each period. This will ultimately improve inventory control.
Before jumping in with two feet, it is important to understand the drawbacks of period reporting. First, you need to be selective regarding the accounting software you choose as not all accounting software programs can accurately manage period versus monthly reporting. It is also important to note that bank statements, merchant statements, and sales tax filings all follow a calendar month schedule therefore requiring partial period accruals for these items. Overall, the level of complexity in your accounting procedures will increase by moving to period accounting, but the accuracy of period comparability provides more insight.
Although there are some complexities and nuances with setting up period accounting, the benefits far outweigh the costs in these types of businesses when analyzing your business’ financial performance and associated future direction.
|Easy to understand||X|
|Better comparability of budgets and sales||X|
|Easier planning for inventories||X|
|Easier to compare labor costs||X|
|Ease of matching monthly rents, sales tax liability, bank statements, and utilities||X|
By Diana Mead, Managing Member