Mastering the Month-End Close Process in 7 Steps

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What is the Month End Close Process

The month end close process is a complete review of financial activity and performance for an entire month and the preparation of monthly financial statements. It supports your ability to conduct quarterly and year-end financial closes accurately and efficiently. 

Here’s a quick summary of the month end close process steps:

  • Enter all customer and vendor invoices into your accounting system
  • Reconcile all bank accounts and inventory assets in your accounting system
  • Produce financial statements
  • Carefully review all statements
  • Close the period in your financial system
  • Distribute the financial statement
  • Prep for the next closing

Understanding the Month End Close Process

The month-end close process has clear steps to follow. You organize, reconcile and report the financial activities of your company for that month. With this process, you won’t have to look back for discrepancies. You will have corrected them each month.   

The general ledger, or GL, is the tool that records your company’s financial accounts. These accounts typically include:

  • Assets
  • Liabilities
  • Equity
  • Revenues
  • Expenses

While simple in concept, the month end close process involves time-consuming work. At the end of each month, accountants and finance teams come together to address key financial functions:

  • Reviewing bank accounts and statements
  • Preparing key financial statements, including

* Profit and loss statement, summarizing revenues, earnings, and expenses

* Balance sheet detailing all assets, liabilities, and stockholders’ equity

* Cash flow statement showing  cash balance and cash inflows and outflows

This can be a monotonous task to undertake every month but ignoring it can lead to problems later on. Companies that don’t close their books each month often scramble toward end of the year to find information they need for reporting. Oversights can occur, mistakes can be made, and annual reports can be delayed or flawed.

The best-run organizations gather the information they need as part of their month-end close process. This includes:

  • Total income/revenue
  • Accounts payable and receivable
  • Expense receipts and supplier invoices
  • Bank accounts and statements
  • Petty cash totals
  • Value of inventory

Depending on your business or industry, additional documentation could be required.

How to Execute the Month End Close Process

Here’s a list of tasks to help streamline your month-end close:

·       Enter all vendor invoices for the month into your accounting system and reconcile vendor statements with the corresponding accounts payable balances.

·       Enter all customer invoices for the month into your accounting system and link to customer payments.

o   This will show you who pays on time, who pays late, and who hasn’t paid at all.

·       Reconcile all bank accounts: checking-savings, credit cards, accounts for prepaid, accrued or deferred expenses, and petty cash

·       Reconcile inventory assets with your accounting system

·       Produce financial statements that include:

o   Profit-loss statement

o   Balance sheet

o   Cash flow statement

o   Other reports specific to your business or industry

Once completed, carefully review these statements and make changes based upon additional data, calculation errors, or budget variances. If you operate off a financial plan, compare the results with your forecast. This will help you adjust the plan if you aren’t on track.

Finally, you must officially close the period in your financial system and distribute the financial statement.

Challenges of the Month End Close Process

Like any business process, if your month-end close is built on a shaky foundation, there will be problems. Incorrect recording of data, expenses not captured, or captured expenses coded incorrectly are potential problems from a poorly designed process. Without the ability to capture accurate financial data, you won’t deliver reliable reports in a timely manner.

Too much detail in your financial reporting can also lead to delays in the month-end close. That may include a bloated chart of accounts where much time is spent tracking information, but where the reporting against it provides little business value.

For business owners with no expertise in this area, you might consider partnering with an experienced accountant or accounting firm for chart of account set-up. This simple step could help you achieve an optimal balance between financial data collection and reporting detail.

Benefits of the Month End Close Process

Closing the books each month can be a tedious process, but it is vital to ensuring the financial health of your company. The month end close can help you identify deviations from your financial plan early, so you can respond quickly. Conversely, it can uncover new opportunities for business growth, and drive strategies so you can exploit them.

What it comes down to is being able to proactively monitor business performance for competitive advantage. Master the month-end close process, and you’ll do just that.

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