Accounting: Plan Ahead with Allowance Accounts
BY Donna Fenn
This offers a look at how a CEO set up allowance accounts to account for large, predictable expenses each month.
Matt Hession, CEO of $3.2-million Key Medical Supply, in Thibodaux, La., came up with an innovative accounting solution to a thorny problem. "We incur various large expenses at the same time every year. And even though they're predictable, they used to make certain financial statements look terrible."
His solution: "We set up 'allowance accounts' that permit us to accrue predictable expenses on a monthly basis." It's an extension of a practice most companies follow with quarterly tax bills. Although they actually pay taxes only once every four months, they list an estimated payment as an expense on each month's financials.
"There's a line on each monthly report stating how much we've accrued to date toward our spring conference costs, anticipated bonuses, and retirement contributions," says Hession. "We're a growth-oriented company, and we want to keep our bankers happy and go public one day. So it's really important for our financials to convey predictable costs as well as growth."