Sometimes when we do our monthly reviews with clients, a theme appears. This month it was matching.
Matching means making sure that revenues and expenses are matched in the same period. In layman’s terms it simply means if you invoiced a client for work done in that month, you want to make sure all the expenses of delivering that service are also recorded in that month.
Matching gets rid of the “noise” of timing differences on your P&L, and the ensuing rollercoaster you’ll see in margins and income monthly. When you make a focused effort on matching revenues and expenses, theoretically your margins and income on your P&L will start to normalize.
Why is matching important? When your revenue and expenses are matched in the same period, you can have better confidence in the numbers and you will start to see what are “normal” margins or income amounts. Then, when something deviates from those norms, you have a place to look and troubleshoot. When you don’t match, there’s always what I call “mental math” trying to explain month after month why there are variances. That’s a lot of effort with little return.
Here are areas where you can implement matching:
- Make sure pre-payments and customer deposits are not recorded as revenue. This is common. Many companies recognize these as revenue, but in fact, you haven’t earned the money yet or performed the service. When you book pre-payments and customer deposits as revenue, it makes you look more profitable than you are.
- Spread annual costs like insurance and membership dues over 12 months. Big bills can skew a month’s results, but often times these expenses cover the whole year. It makes sense in most cases to defer this expense and only recognize 1/12th every month.
- Accrue expenses that you didn’t receive bills for at month-end. Most businesses have certain recurring monthly expenses. Just because you didn’t receive a bill from the vendor doesn’t mean you didn’t incur this expense. Put it on the books for this month via a reversing Journal Entry so when the bill does come in you’ve already recognized the expense in the proper period.
- Book depreciation expenses throughout the year. A lot of companies wait for their CPA to give them the year-end journal entries, of which depreciation is one of them. What often happens is that the entire year’s worth of depreciation expense is booked in the month of December causing December to look unfavorable. Ask your CPA for their estimated depreciation at the beginning of the year so you can recognize a bit each month.
Matching isn’t just an accounting exercise– it’s an exercise in management. By putting everything in the right month, the conversations go from explaining big swings to really honing in on the underlying issues. Matching takes time– you may not get it right out of the gate– you may need to adjust upstream systems to release revenue and expenses into the same period. Once you do get matching to work, you’ll start to see underlying trends that will make it easier to spot trouble.