Payroll accruals can be one of easiest to overlook, but doing so can lead to some misleading conclusions.
We recently worked with a company which somehow managed to grow to $100 million in revenue without entering any monthly payroll accruals. During one monthly performance review things didn’t seem so good. The company had lost money and we talked with management about what the reasons might be. The clever bookkeeper pointed out, “Aha, its because we had three payrolls last month!” Everyone else jumped on board and satisfied themselves with, “ah yes, it was the third payroll”, and prepared to move on to other topics with a clear conscience. We had to point out that yes there had been three payrolls last month, but that only masked another problem. When we adjusted for the payrolls the company had still had a significant reduction in its margins. Now the management team could spend its time on solving the real problem.
The above scenario doesn’t need to happen, but something similar plays out every month in thousands of companies across the world. For companies that pay their employees monthly this usually isn’t a problem. But most companies pay their employees bi-weekly. And because 26 pay periods don’t divide evenly into 12 months, there will be two months a year that have 3 pay periods instead of two. When proper payroll accruals are entered each month management knows in each time period exactly what its true payroll cost is no manner how many payrolls happened in the month. The initial setup each year takes a little bit of time and then the maintenance of the accruals throughout the year becomes relatively easy. Talk with your bookkeeper about making sure they are doing this correctly. If they need help, give us a call. Your Correct Profit Advisor can augment what your bookkeeper is already doing and combined they can deliver a powerful punch for your company’s management decision making.