Tag Archives: Accounting Period

End of Month Shipping Frenzy

Is it the customers’ product demand schedule or lack of planning foresight that has you in a shipping frenzy?

I spend a fair amount of time at various client companies, often in remote sites and plants in addition to their headquarters. I interview many people in numerous roles during our internal control engagements, internal audit consulting or whatever projects these companies ask us to work on. I also observe many activities, such as inventory receiving and inspection, work in process operations, construction of fixed assets, and how all these are recorded in the sub-ledgers and represented in financial statements.

A while ago I decided to develop an Aged Backlog Report for one client company since they were struggling with meeting customer ship date requests. I divided the report output into 10 columns: 5 future and 5 past. Each backlog item, as documented in sales orders now falls into one of these 10 columns. For example, a customer ordered item requested to be shipped on May 26, 2016, at this time of writing falls in the Next 30 Days column. If not shipped by the due date, it will automatically be moved to the Past 30 Days column and so on. The full range is Over 180 Days in both directions, future and past.  I testing I implemented the report at several other client companies.

In the process of developing this report and making it useful I was thinking of a phenomenon so many of the manufacturing companies I work with experience: Uneven distribution of product shipments throughout the month with a peak shipping day on the last day of the month or quarter.

I recently looked at several of these Aged Backlog Reports, all from different organizations, with different product lines and a different customer base each and noticed something very similar in all of them: The customer Requested Ship Dates (due dates on sales orders) were almost uniformly distributed throughout each accounting period.

I didn’t see a concentration of customers requesting their shipments to leave the warehouse on the last day of the month or the last week of the month; yet in all of these companies there seemed to be relatively less shipping activity going on during the month followed by a shipping frenzy toward the end of each accounting period, culminating with an almost epic effort to get as much stuff out as possible before the clock strikes midnight.

This was confirmed by examining sales journals in several accounting periods (assuming billing was not much delayed following actual shipments).

What causes this phenomenon? Or is it really a phenomenon given how common it is? I know for a fact that this is not driven by customer specific demand, as sales orders’ due dates clearly indicate. Is it lack of planning?  I don’t think so. Sales orders’ due dates are supposed to create the demand and drive purchasing of material, scheduling of machines and work centers and allocation of resources. If planning is not to blame, then it must be the actual results from these planning activities, or just not adhering to schedules.

Despite all this logic I think it all comes down to natural human behavior. We know that we have an inherent quality to procrastinate; we experience that with daily chores we are assigned to, filing our tax returns, and other activities, when we pretend that there is plenty of time to complete them and one more day won’t make any difference. There may be people exhibiting less, or even none of this behavior but the majority of us are impacted by this on some level.

I think this quality is carried over to the work place. The first few weeks of lighter shipping each month followed by a much more intense week and especially the last two days of the month or the quarter, seem to prove this theory.

Which brings up another question: If companies seem to exhibit such uneven shipping and fulfilment output throughout each accounting period, is that an indication that resources are underutilized? Are people taking their time much of the month, only to accelerate their activities (hence the increase in output) at the end of the period an indication of a higher utilization potential? Does that mean that with more effective management a company can grow by adding fewer employees proportional to the revenue growth? This sounds very optimistic and possibly only doable to a certain extent.

I’d love to hear your personal opinions and actual experience and observations in your own companies.

The last day of the accounting period phenomenon

Is shipping on the last day of the month that important and at any cost?

In my work in management consulting in the areas of accounting and finance I get involved with many client companies’ financial statement preparation, disclosure work and internal control (plus internal audit in several of the larger companies). What is common to all of these companies, regardless of size and industry, is the fact that in the last few days of any accounting period there is this frenzy of activities, mostly shipping, with several of these companies stuffing trailers with products until midnight of the last day of the fiscal period.

What seems odd to me, although I perfectly understand the motivation behind this, is that all of that hard work in shipping and accounting on that long Friday (or Saturday) night will only result in these trailers being hauled away by the common carriers the following Monday. I always questioned the fact that this behavior does not really comply with GAAP rules as to me the earning process is not complete if these trailers are left in the rain or snow to sit there for more than 48 hours while the customers who ordered the products hidden in these containers have no idea that ownership had already been transferred to them.

Besides, If I am the seller who recognizes revenue on the last day of the month, it is implied that my customer must recognize the inventory in transit as well as a liability to me on the same day (which may or not be the last day of their accounting period). Is that what the customer really wants? Probably not, unless their requested ship date happens to fall on the last day of the seller’s accounting period.

Of course, this assumes that revenue recognition can take place when products are shipped and there are no other conditions that must be met (such as installation, or training and acceptance by customers, among other things) before the seller of the goods can include these amounts in gross revenue for the period.

While I have no problem endorsing the fact that a “for-profit” business must make every effort to maximize financial results and increase the value of shareholders’ equity, I question this type of behavior as it implies that in the first two or three weeks of each month there is no urgency to get things done, or to follow customer delivery request dates that are captured on company sales orders that drive the entire manufacturing process. If there are approximately 22 working days per month, shouldn’t manufacturing and especially shipping activities be spread more evenly across those days?

So now that these last minute shipments have made it into the trailers, I don’t think there will be much left to do on Monday, the start of a new accounting period, and we will need to wait for finished goods to appear on the shipping docks, once again late in the month, for this process to only repeat itself.

As for billing these shipments, unless the earning process is really complete, I would wait for that to happen, and who knows, this might increase the real sales in the following period. What do you think?

I realize that management puts pressure on operations to perform in order to deliver the forecasted (and desirable) financial results, but I think that more important is to follow a strategic plan, coupled with a solid budget and meaningful analysis year round, while focusing on customer demand (including following the very important customer requested delivery dates) and not just on “how much more can we get out the door before the clock strikes midnight”.