Month-End Close Priorities
Your month-end financial close process is critical to your accounting department’s success as well as the success of the company. The more efficient your month-end close process, the more accurate and timely the financial statements will be for your company to make decisions based upon.
In this article, we will describe the critical components of a successful month-end close process as well as helping you prioritize the steps chronologically to achieve a more accurate and efficient close process.
Critical Month-End Close Tasks
While every company is different with specific types of reports and systems we believe there are generally common month-end tasks that most companies share. We provide a month-end checklist as well as a month-end calendar template in our stores.
The critical month-end close tasks in approximate prioritized chronological order is as follows:
Bank account reconciliations - Cash position is known right at the end of the month due to online banking and is also one of the most critical items driving the financial statements.
Recurring entries - these are known entries, such as prepaid amortization or expense accruals so they are quickly done at the start of the close.
Payroll entries - your payroll system should already have provided the reports needed to book payroll during the month and all that should be remaining is the payroll accrual to fully accrue payroll expenses through the end of the month.
Sales recognition - depending on what billing and collecting system you are using, producing and posting sales reports could range from simple to complicated. If you are on a cash based sales process this should be ready as soon as the bank reconciliations are completed. If you are on a revenue recognition procedure such as percentage completion for large products this could take some time to update the project estimates, etc.
Accounts payable system close - the AP close can be one of the trickier issues during your month-end as several vendors may be very slow to send your invoices for services or products purchased during the month. This is an area that could require substantial estimated accruals if you are trying to shave days off of your close process.
Inventory and cost of sales reports - in order to properly match your company’s cost of sales with the sales, you need accurate inventory related cost of goods sold or service costs to book to cost of sales. You may also have warranty accruals and depreciation that hit cost of sales.
Balance sheet account reconciliations - as described in our article “Know What’s On Your Balance Sheet”, and also described in our balance sheet reconciliations procedures, this step is absolutely critical to produce accurate financial statements. Unrecorded expenses and unsupported assets can hide on the balance sheet so each balance sheet account must be understood each month. Click here for Bal. Sheet Recon Procedures and Click here for our Bal. Sheet Recon. Worksheets.
Income statement trend analysis - At this point of the close, you should be able to start reviewing the P&L (profit and loss) statement trends to look for any odd fluctuations in sales, cost of sales, payroll, general and admin. expenses and other expenses. It is very possible that activity has snuck through your system that needs correction. For example, if a large expense was posted such as an annual insurance policy and was therefore expensed all in the current month, you will need to reclass 11/12ths of the expense back to the balance sheet as a prepaid expense asset and then amortize it out over the next 11 months.
Balance sheet trend and cash flow statement analysis - Similar to the income statement trend, you may also find large changes on the balance sheet trend that could indicate items that should not have been posted to the balance sheet and should either have been expensed or booked as income. You should have seen these changes if you completed all of your balance sheet account reconciliations in the step above, but you will want to understand the fluctuations and note them on the financial statements so the reader can understand the balance sheet better.
Manual adjusting entries - After the above items are reviewed, it should lead to any possible adjusting, correcting or reclassification entries at this point in the close. These entries could also lead to new recurring entries for future months that you will need to add to your recurring entry list and/or template.
Extra-ordinary item write-up - Now you are prepared to define any irregular or extraordinary items affecting your monthly financial statements. The guideline here is to keep these explanations as clear and concise as possible so that even the “lay-person” reader can generally understand them.
Financial statement production - With all of the above complete, you are ready to publish your financial statements at least for your CFO to review. Once you refine the package with he or she, you are ready to produce the appropriate reports (as agreed) to the CEO, the board of directors, the bank and any other audience.
If you follow the above steps and chronology and customize it to match your specific company’s needs, you should be able to shave days off of your close process and be confident in your financial statements. Granted, you can’t shave days off your close if your underlying data is not available timely due to poor software systems or other procedures that slow down the process but we have other articles that define ways to use the proper software to assist your company. Here is a link to our article on guidelines for choosing the right GL and reporting system for your company here.