With the tumult of 2023 coming to an end, finance leaders have found no shortage of factors that could potentially affect the year-end close, especially where it concerns accounts payable and receivable. CFOs and controllers need to take extra care and attention as they seek to close their books and look ahead to 2024.
One of the big factors has been interest rates being brought to their highest level in decades. Amal Shehata, an accounting professor at NYU’s Stern School of Business, noted that high interest rates have made it more difficult to access credit, which many businesses had come to rely on.
“What I think companies are probably most anxious about is their liquidity constraints,” she said.
Such constraints, according to Eric Scaringe, a principal with New York-based advisory firm UHY who works with CFOs and controllers, is why he predicts financial professionals will be seeing more unpaid debts going into the new year. People are looking for any capital they can leverage in order to offset their costs.
“I think CFOs will take a closer look at the types of customers and business sectors they work in to determine if they can collect on debts. There will likely be more scrutiny on getting that [paid] sooner rather than later,” he said.
Similarly Jim Cox, CFO of Idaho-based Clearwater Analytics, has observed float becoming a more important factor. When interest was at near-zero for years, people were less likely to hang onto cash. As rates grew, however, doing so became more attractive because having cash on hand allows for more operational flexibility.
“When the Fed funds rate is zero, the incremental value is marginal, but when it’s 5%, float becomes much more valuable,” he said. “So the reason you see people focus on shrinking float is because money is worth something now and costs something now.”
Another factor, closely connected with interest rate risk, is inflation. Raykhan Bekimbetova, controller for Washington, D.C.-based cybersecurity and professional education company ISC2 noted inflation had more of an indirect, but still significant effect on his own processes as it required his department to work hard finding new cost efficiencies. This has included finding new ways to optimize backend processes, adding variations to products, and finding less expensive vendors. He noted that these steps have been necessary as they can only raise costs so high.
“We are very cognizant of affordability issues of our products in smaller economies,”he said in an email, adding that his year-end close usually takes place in the beginning of January.
Facing these challenges, there are a few things financial leaders highlighted that can promote a smooth year-end close process:
1. Review your receivables and payables
It’s important not to become complacent when it comes to money going in and out. Shehata stressed the importance of reviewing and assessing items so leaders can act sooner rather than later to unexpected factors.
“Thoroughly scrutinize the quality of your receivables so you can be proactive before the end of the year, and that goes back to if there’s risk of customers not being able to pay,” she said. “Stop shipping unless they pay in advance. … The same on the other side with your accounts payable. Make sure you are being proactive, reaching out to vendors and really leveraging those relationships.”
2. Properly align talent, tech and processes
Cox noted that technology, talent and process must work together to have maximal impact. Instead of viewing each as individual silos to consider, leaders must make sure they’re all coordinating with each other.
“It is hard to switch technology solutions between now and the year end, so really understand what you can rely on with your technology,” he said. Number two, make sure you have the best people in place... Third, make sure everyone understands the processes they’re doing.”
That talent, using the technology they need to conduct their processes, means “everyone singing off the same song sheet,” he said. “You’re giving yourself the best opportunity to have a successful year end.”
3. Look at what’s coming down the pipe
Just as important as examining the past is looking toward the future. Scaringe said that CFOs and controllers should keep one eye on next year as they go through the process of closing out this year.
“Take a deep look at the horizon and see how many of these items currently or potentially will impact the business: the current geopolitical landscape, supply chain changes and inflation,” Scaringe said.
4. Assess policies and processes now rather than later
Finance departments need to assess their processes and policies for effectiveness as soon as they can, because doing so will reduce the risk of errors, misstatements and potential audit issues, Bekimbetova said. They must be cognizant of changes in standards, regulations and business operations, perform balance sheet reconciliations as soon as possible, and assess their internal controls.
“Early preparation will set the stage for a successful start to the new fiscal year,” he said.
5. Beware of fraud
Richard Corn, director of product management for BILL, noted that the sheer amount of fraud that AI enables will lead to companies having to increase their scrutiny of invoices, as it will be more difficult to determine their legitimacy.
“With the rise of generative AI, AP fraud is getting more sophisticated,” Corn said in an email. “It used to be easy to read a text, email, or other communication and judge likelihood of fraud based on writing style or grammar. Now, fraudsters are using generative AI to disguise voices or sound like other people. Payment requests should always follow internal controls with verification by 2 methods continuing to be best practice.”
