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If you're in finance, you know the feeling: another month-end, another sprint to the finish line.
Finance professionals often find themselves in a whirlwind, and the monthly close only stirs the breeze. Twelve times a year, the same cycle returns, and it can sometimes feel like a recurring headache.
But here's the thing: you can't simply hit pause on the month-end close. While it might be time-consuming and relatively challenging, it's a cornerstone for every company. It's the bedrock for making well-informed financial decisions and ensuring that the company's operations run like a well-oiled machine.
Don't worry, though! With a good dose of proactive planning and the right systems in place, including a meticulously organized month-end close checklist, many companies have cracked the code to a smooth, reliable month-end close process. And we're here to tell you all about it.
Let's delve into the details of what month-end close is, the common challenges it poses, and how you can streamline your process to achieve a faster and more accurate month-end close without feeling overwhelmed.
Understanding the month-end close process
Month-end close, often referred to as financial close or month-end accounting, is the process of finalising your company's financial records as each month wraps up. It entails a series of tasks aimed at ensuring your financial statements provide an accurate portrayal of your company's financial health, performance and cash flow.
A survey in CFO Magazine reported that for the highest performing teams, the close process took on average 5 working days with slower finance teams spending 10 days or more working on closing the books.
A drawn-out or disorganized month-end close doesn't just eat into your team's time; it also hinders their ability to inform critical decisions for the business. On the flip side, it certainly pays to invest time in streamlining your close process as it can yield substantial benefits including:
Well-informed decision-making: Timely financial reporting empowers business owners to promptly spot trends, allocate resources, and strategize for growth.
Transparency: Clear financial records build trust with stakeholders, including investors, customers, and regulatory bodies. It also simplifies the process of conducting accurate audits and filing taxes.
Efficient resource allocation: When you've got a well-organized and automated close process, it opens up space for your staff to focus on more valuable tasks, like diving into comprehensive management reporting.
Reduced stress: A well-organised month-end close reduces stress on finance teams, allowing them to focus on more value-added activities.
Challenges in the close process
The month-end close process often comes with its fair share of challenges, especially for small businesses with limited resources. Here are some common stumbling blocks that you might encounter during the process:
Manual work and errors
One prevalent challenge revolves around manual work, where the pressure of meeting deadlines collides with the need for accurate data entry. The manual route, though sometimes necessary, can introduce errors into your financial records, causing potential headaches down the line.
Scattered and disconnected data
Wrangling data has its hurdles too. Having financial data scattered across various software systems and spreadsheets can lead to inefficiencies and delays in compiling necessary information.
Undefined roles and lack of process documentation
When roles aren't set, confusion steps in, bringing along double work and lots of frustration. Without smooth workflows, stress, slip-ups, and missed deadlines can tag along, taking a toll on everyone's spirits.
Similarly, think about how a lack of documented processes could add some extra chaos. Many companies, especially with small accounting teams, rely on undocumented routines, leading to last-minute scrambles, errors, and frustration.
To help you get to grips with your close process, we’ve identified the usual steps in the month-end routine to give you a starting point for creating your own comprehensive month-end close documentation that the whole team can follow.
10 must-do steps for month-end close accounting
When your finance team is up against the clock yet again, take some of the heat out of the situation by following a logical step-by-step routine that’s well-understood by all involved.
1. Communicate your close timetable
Agree, document and communicate your deadlines for each activity in the month-end closing process. When everyone is clear about what is expected of them and when, you have a much greater chance of running a streamlined, successful close.
2. Gather data and documents
Your first task happens during the last week or so of the month. Collect any paperwork (or digital versions) and data you’ll need to complete your company’s accounting including:
- Journal entries
- General ledger accounts
- Vendor invoices and payments
- Expense documents and reports
- Bank statements
- Balance sheets
- Income statements
- Financial reports
Any issues in accessing all the data you need can mean your close process is longer than it could be. Look for ways to improve data storage and retrieval to reduce unnecessary delays.
3. Review your ledgers and transactions
Start by reviewing the previous month's financial close to identify any outstanding issues, discrepancies and opportunities for improvement in the current month's close. Now, it’s time to turn your attention to the current period which means getting into the details of the transactions in the following areas:
Accounts receivable: It’s at this point that you should be chasing any outstanding payments from customers whose debts are due or overdue - good credit control is one of the most important activities for maintaining a positive cash flow position.
Accounts payable: Make sure you have accounted for all your outgoing payments for the month. Don’t forget expense claims, credit cards and loan payments as well as your trade supplies.
Payroll: Ensure all accrued holiday is included in your figures as well as exceptional payments to staff such as one-off bonuses, redundancy payments or other non-recurring remunerations.
Cash: If you still deal in cash, count any that you haven’t yet banked, including any foreign currency on hand. Include these balances in your accounts.
Inventory: Although you may not undertake a physical stock check every month, you should review your inventory balances to ensure these are as accurate as possible. Small businesses are less likely to have perpetual inventory management systems so may need to rely on historical data to account for usual stock loss levels.
Fixed assets: Ensure any new assets are capitalised and any disposals are removed from your fixed assets ledger. Assets may require adjustments to their book value if upgrades or significant changes have been made. Review depreciation to ensure correct net book values are recorded.
Lease accounting: Ensure that journal entries comply with appropriate lease accounting standards (IFRS 16 or FRS 102) and that the correct amounts are expensed to the P&L or capitalised to the balance sheet for all leased fixed assets.
Tax provisions and liabilities: Calculate tax liabilities and make provisions for VAT, income, and corporation taxes, ensuring compliance with all relevant tax regulations.
Reserves and allowances: Create reserves for potential losses or contingencies and make provisions for any bad debt. Assess potential risks to the company’s financial health.
4. Reconcile accounts
This step involves reconciling various accounts, such as bank accounts, accounts receivable, and accounts payable.
- Check that the total amounts on supporting documents such as sales and purchase invoices match general ledger (GL) accounts.
- Identify and resolve any discrepancies to ensure accuracy.
- If you have intercompany accounting transactions, ensure that both sides of the transaction are accurately recorded in the correct ledgers, at the correct amount so that group accounting books are balanced.
- Reconciliation may involve currency conversion and exchange rate adjustments.
5. Fine-tune your accounts with accruals and prepayments
Recognise revenues and expenses that might not yet be reflected in the financial records. Accruals and prepayments ensure transactions are recorded in the correct period, irrespective of when cash changes hands. For SMEs operating across European borders, this step is crucial for accurately capturing cross-border transactions at the correct exchange rate.
6. Make final adjustments with journal entries
Record any final adjustments, corrections, or reclassifications using journal entries. Document the reasoning behind each entry for future reference. Journal entries may be required to correct postings to the GL that have not been accurately coded. If you are operating in multiple jurisdictions, ensuring compliance with regional accounting standards while making these entries is essential.
7. Craft your financial statements
Generate your financial statements - the P&L statement, balance sheet, and cash flow statement. These statements provide a snapshot of your company's financial position and performance - vital for decision-making and demonstrating financial health.
8. Conduct a final review and get sign-off
Thoroughly review the financial statements and supporting documentation. Seek approvals from relevant stakeholders, such as senior management or the CFO. This step ensures accuracy and transparency in reporting.
9. Complete post-close entries
Closing entries prepare your company for the next period by clearing out balances in certain accounts that should not transfer over to the next period. Clearing the balances in revenue, expense and dividends accounts means you can compare performance across periods and these accounts are ready to accumulate balances in the next period. Revenue and expense accounts for the period are to be transferred to the income summary which is then transferred to retained earnings on the balance sheet.
10. File all relevant documents
Organise and store all month-end close documentation in a well-defined filing system. Proper documentation is not only essential for audit purposes but also for historical reference and should be filed digitally if possible. Keep records for at least seven years for tax purposes. Any documents that are no longer required should be securely destroyed.
Tips for streamlining the month-end close process
If you can make your month-end process slicker, everyone benefits. Staff are less stressed, stakeholders are more confident and your business saves money as well. Here are just a few ideas to make your month-end run like clockwork.
Map out your processes in detail
Precision is paramount in finance. Documenting your month-end close processes might seem like an additional step, but its impact is profound. It ensures consistency, streamlines workflow, and minimizes errors, all of which are crucial for a flawless month-end close. The benefits are undeniable: transparency, ease of delegation, and the ability to swiftly address issues.
A key tactic is creating a comprehensive month-end checklist. This compass-like guide outlines steps and expectations for your finance team. Begin by outlining the process collectively, assigning tasks and due dates. As you go through a month-end close cycle, make note of any challenges or areas that require special attention. Refine the checklist after each cycle to include these insights for an even better process next time.
Upgrade your tech stack
Tired of drowning in spreadsheets, grappling with manual data entry, and reconciling endless figures? This is where modern technology steps in.
Imagine a scenario where these tasks are automated, freeing your team from hours of tedious work, integrated systems orchestrate seamless data flow, waving off discrepancies and errors. Built-in checks and balances? They're here to slash non-compliance risks and potential penalties.
In many ways, embracing a shift to more automated processes, collaborative and integrated tools, along with next-gen data analytics, can unlock doors to heightened efficiency, and accuracy. Particularly for smaller finance teams grappling with limited resources, this transition can lead the way to a streamlined and precise month-end close.
Ready to take action? Explore our in-depth guide, "How to build a modern finance tech stack," to dive into the nuances of creating a tech stack tailored to your business needs.
Consider continuous accounting
In the pursuit of a seamless month-end closure, the paradigm of continuous accounting also emerges as a game-changer for many finance teams. Unlike traditional month-end crunches, continuous accounting distributes tasks throughout the month. This means daily journal entries and reconciliations, translating to a perpetually updated general ledger. The benefits are twofold: real-time financial insights and a lighter load during the 'hard close.' This innovative approach aligns financial operations with the pace of business, allowing for informed decisions at any point in the month.
Look for opportunities for continuous improvement
When you’re constantly firefighting and grappling with inefficient processes and systems, it can easily become demoralising when month-end close rolls around again just after you’ve put the last one to bed. Although you might feel like you don’t have time to reflect on what went well and what didn’t, the only way to make things better is to actively carve out time to review what happened, looking for potential improvements. A lessons-learned exercise is almost always a useful addition to your close process.
However, don’t try to run before you can walk – it’s better to make small incremental improvements while hitting deadlines each month than to try to make big changes which lead to issues with the accuracy or timeliness of your accounting close.
The bottom line
In a world where finance teams are called upon to break free from their traditional number-crunching roles and rise as strategic business partners, it becomes essential to uncover ways to supercharge their efficiency in routine tasks like closing the books to free up time for more value-added work. By planning ahead, setting clear workflows, and embracing technology to automate and reduce manual work, you can unlock remarkable benefits for your business.
Is your company dealing with currency transactions? At iBanFirst, we’re well aware that this can add an extra layer of complexity to your accounting processes. This is why our users can:
- Connect iBanFirst to their accounting and treasury software for a streamlined experience
- Keep track of all their iBanFirst account balances on a single dashboard
- Synchronize their bank accounts to the iBanFirst platform to get a 360° view of their company bank accounts, regardless of their bank and currency
- Export full account and fee statements in one click in multiple file formats
Talk to our experts to learn more.
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