Of all the processes the finance team covers, the month end close process especially deserves your attention. If you work in an accounting department you know that financial statements certainly matter, but just as important is a consistent, up-to-date record so no invoices, receipts or other important documentation get left behind.
Accounting teams should review the monthly closing process, develop a checklist of tasks to ensure it goes smoothly and correctly, follow best practices, and use the software tools available to them. This guide is intended to help you jump start this journey.
What Is the Month End Close?
Businesses care about filing their financial statements on time because it helps maintain a healthy cash flow, facilitate financial planning, assist in making strategic business decisions, and measure progress towards long-term goals.
At the end of each month, companies often make sure their books are closed so that the records are set in stone. This task, known as the month end close process, results in:
- A reliable and accurate accounting system
- More informed business decisions
- Stronger visibility into the financial health of your company
- Easier financial auditing
- Simplified tax filing
You can be sure at the end of each month that any transactions have fully occurred either before or after the closing and that your month-end balance is accurate and up-to-date. A fully completed set of financials from the previous month can also be used as a foundation for next month’s business decisions, as a closing period highlights areas where you can improve.
In other words, you are doing a complete review of financial activity and performance for that entire month and have the confidence that the record for that month is unlikely to change in the future. The exact information you’re “closing” here includes:
- Balance sheets, which need certification and an assurance of no discrepancies.
- Intercompany trade and all the transactions you make with other companies.
- Recurring journal entries to be validated, approved, and posted.
- A full checklist that we will talk about later.
Other relevant documents include un-entered invoices, bank or credit card statements, mortgage entries, and insurance bills. Data collection is clearly a large part of the process, and some of the information to collect includes:
- Total revenue bank accounts
- Financial statements and balance sheets
- Fixed assets and inventory levels
- Bank account information
- Income and expenses
- Petty cash fund
- General ledger data
The exact approach to the monthly closing process differs depending on the type of business and its specific accounting methodology. And some firms practice the annual version known as the year-end close.
The month end close process, to review, is the act of adjusting entries to correct accounts for the closed period. It’s known alternatively as “record to report.”
The Steps of the Month End Close Process
The financial close doesn’t have to be a headache for the accounting team. Following the right set of steps when dealing with financial records at the end of each month will result in a positive impact on the organization as a whole.
Closing the books is a data-intensive task. Start by collecting various data points regarding the accounting period in question:
- Inventory count
- Income statement accounts
- Accrued expenses
- General ledger
Always have a record of daily operational transactions, ideally the moment they’re made rather than waiting until the end of the month.
Combine the Parts of Accounting
Accounting systems aren’t homogenous entities; they usually come in modules covering specific purposes such as an accounts payable and an accounts receivable department. Part of the closing process is reconciling all these components together.
Ensure that the accounts payable balance, for instance, falls in line with the general ledger. To that end, organize the receipts and write down all your purchases. Cross-check your records during this step to make sure everything has been paid.
For accounts receivable entries, look at all the sources of revenue from loans to invoice payments. Has a customer not finished a payment yet, or have you forgotten to send an invoice? Get those entries sorted out before the end of the month.
Reconciling all your accounts is a main step of the closing. Cross-check your account statements with your receipts, bank forms, and other outside entries. Accounts that need this treatment are:
- Cash, checking, and savings
- Prepaid accounts
- Other balance sheet accounts
- Petty cash
Reconcile your cash accounts first, which are easier to process since discrepancies and mistakes are apparent when you’re dealing with cash. This step also makes you aware of how much cash you have on hand as a business.
From there, move on to reconciling balance sheet accounts. Don’t forget to review the revenue and expense accounts as well to make sure all entries have been accurately reflected.
Consider Inventory and Fixed Assets
Not everything of value in the organization can be set to a cash amount. Fixed assets—which can include equipment, property, and vehicles—add long-term value to your business. Keep in mind that they may depreciate in value over time.
In a similar vein, perform an inventory count every month as part of the close. Are you in need of replenishing stock. If so, how much? Are any items perishable or need replacement?
Write Up Financial Statements
Once the general ledger has been updated, the next step is to prepare the financial statements, which can be done either with compiled data in a spreadsheet or automation tools. Topics covered in these documents are typically a summary of the general ledger, profit and loss statements, and balance sheets.
The mere act of going over your financial statements can give you intel into what you’re buying and whether you’re getting a proper return on your investment. They are also an indicator of overspending and other budgetary issues.
Organizing the statements is just as important so that you aren’t scrambling to find them in the last few days of the month. Most forms of accounting software have features built-in for this purpose.
All related documentation is sent to upper management for review. The person reviewing the closing documents is not directly tied with the closing process up until this point and has a chance to look at everything with fresh eyes.
The month end closing ends when the previous month has been set in stone and no new transactions are recorded on it.
Prepare For the Next Closing
What have you learned over the course of this process, and what can you apply to make next month easier? When you get a fresh start next month, dedicate yourself to building a financial calendar to keep up with the books. Write down deadlines for:
- Collecting all the transactions
- The receipt and recording of new reports
- Posting all income and expenses
- A general timeline for adjusting the ledger
Communicate your plans to other team members involved in the month end closing process to get everyone on board. You can tweak the calendar as time goes on to fit it around your schedule.
The Month End Close Checklist
Having read that list of steps, closing the financial records can seem a bit daunting. The financial accounting role goes beyond just transactions, covering income cash, bank loans, savings accounts, monthly expenses, and other essential parts that impact the entire organization.
How do you make sure you haven’t missed anything? A misplaced invoice or statement can result in curious losses that you won’t be able to account for. The following is a checklist to go over if you find yourself in charge of the monthly closing process.
- Cash: Adjust for any outstanding checks or deposits until your ending cash balance matches what the bank statement says. Deposit any undeposited funds from the prior month.
- Inventory and fixed assets: Properly document depreciating value and outdated/expired inventory.
- Accounts payable and receivable: Look for unapplied credits or past due balances to write off.
- Notes payable with the bank: Consider amortization schedules and properly document the cost of monthly interest.
- Intercompany accounts: Payables and receivables should match between both businesses. Check for prepaid expenses too.
- Accrued vacation and payroll: For employee reimbursement.
- Accrued taxes: Including those that apply to property, sales, and payroll.
- Expenses: Including supplies and maintenance costs.
This checklist does not have to be completed in order. In fact, some tasks might be delegated to another department. Identifying task dependencies will inevitably be an additional step for larger organizations.
On top of a laid out plan and a checklist, let’s go over some best practices to make this essential business process as smooth as it can be.
- Never sacrifice accuracy for speed: Closing the books can be time consuming, but the data you’re working with will reflect in your future business decisions. Manage your expectations accordingly by not rushing the work and accidentally leaving out important statements or entries. A good rule of thumb is to plan on finishing the process in 10 days after the month ends.
- But remember to manage your time well: Efficiency matters in the accounting department. If you have a closing date, dedicate yourself to meeting it to the best of your ability. Discuss with team members about realistic timelines and communicate properly to avoid the chance of delays.
- Slowly learn from mistakes: You close at the end of every month, so there’s always another chance to improve upon setbacks seen in the previous month. New accountants will need some time to get acquainted with the related tools and software and should take advantage of any available training programs.
- Make relationships with other teams, even those not in finance: If more people are aware of what you are doing, other departments can help contribute needed financial data and understand where the effort is going. Senior management especially should have an idea of your objectives.
- Take advantage of automation: Technology has streamlined accounting tasks greatly. Software tools can be used to collect data and run calculations quickly without the risk of human error, among other optimizations.
We will talk more about automation in the accounting space and the month end closing process specifically later. But whether you’re a seasoned professional or a new accountant taking on the task of closing the books, having these practices in mind will help you hit the ground running.
Pitfalls and Challenges
This accounting procedure is not without its challenges. One of the most glaring issues well-known to business administrators is the inefficiency of gathering all the information needed.
The problem here is that financial data comes from several disparate sources, and, once extracted, accountants must clean it up and turn it into a consistent format. Having to create multiple spreadsheets to cover labor-intensive data cleansing slows down the process and increases administrative expenses.
Another bottleneck is coordinating the work amongst all the departments involved in financial data. Larger enterprises especially have to deal with complex interdependencies that are a mess to untangle in the last few days of a month. How do you ensure you aren’t falling behind or losing track of where you are in the checklist?
This time consuming work takes away business time that could be put into more useful applications like risk management, administering internal controls, and performance analysis.
Finding the Solution with Automation Tools
Accounting software today is more than capable of accelerating many of the tedious tasks associated with the month end close, including gathering the accounting data, preparing reports, and ensuring everything is filed and reported on by the closing date. The benefits of going after these solutions are numerous.
Less Manual Work
The elimination of manual data entry is usually the first selling point accounting teams look forward to, but the advantage here extends beyond that.
Some tasks need to be scheduled according to a date or time or need to be triggered by dependencies. Thanks to automation, there will be no need to constantly monitor each task and notify responsible individuals of the next steps.
Technology can also be used to standardize account reconciliations and automate the creation and processing of the thousands of journal entries businesses inevitably work with.
Refer back to the month end close checklist. Each item on the list is often done through a separate spreadsheet by isolated individuals specific to their departments. When done the traditional way, these tasks are invisible to the wider finance function, and it can be difficult to integrate the work with the monthly closing process as a whole.
Even larger organizations struggle with fragmentation and coordinating company-wide financial work, as they are spread out across multiple geographic locations. The frustration is further exacerbated by the high number of interdependencies to take into account.
The goal of accounting software is to build a unified, digital environment where every team can collaborate towards the completion of the checklist. Dashboards and notifications additionally monitor the progress in real-time and give management an idea of what to do next. This level of visibility ensures that everyone is on the same page and that issues are spotted before they become significant problems.
Software easily records closing activities, who performed them, and what time, resulting in a convenient audit trail. Accounting professionals are able to verify that best practices are being followed and can trace back responsibility whenever mistakes are made.
A More Refined Approach To Accounting
Large hassles during the month end closing process might be an indication of underlying issues with your business’s approach to accounting. For example, if an accounts payable team fails to become involved with the purchasing process on time, it will have to play catch up at the end of the month to issue all those missed payments and double check the backlog of documents and invoices.
Automation software gives these teams awareness of financial activity throughout the firm, giving them a chance to provide input for purchasing decisions early on.