Month-End Close Process: Steps To Streamline The Process

Every company should have its finance and accounting team execute a month-end close process with the assistance of its finance and accounting team to maintain and avoid any financial problems. Even though the month-end or monthly closure takes a lot of time, any company needs to publish accurate and consistent financial accounts.

Your to-do list is already endless, and the closing process diverts your focus from strategic insights and revenue-generating business duties. You’ll be more productive and make fewer mistakes with a well-defined month-end close process. We’ll talk about ways to improve the way your month closing process is managed.

Let’s first examine what the month-end close entails and the precise actions you may be performing. 

What Is The Month-End Close Process?

An accounting process known as a month-end close verifies that every financial transaction from the previous month has been recorded. Accountants will have to evaluate, record, and reconcile all account information to make sure they are providing accurate data.

While every organization has a predetermined set of tasks and closing procedures for its own, certain common tasks must be completed, such as:

• Keeping track of unentered invoices
• Balancing credit or bank account
• Balancing any disparities found in the inventory
• Entries for mortgages and insurance
• Contrasting the planned and actual spending.

How Does The Month-End Close Process Work?

The month-end close process is an intricate process that requires you to collect, analyze, reconcile, and modify data from multiple systems. The teamwork required across several functions to expeditiously accomplish their jobs contributes to the process’s complexity. You have to balance the account and make sure that all transactions have been recorded in the correct amounts during this time.

The month-end procedure is crucial because it is a barrier between the current and the upcoming periods. In this manner, you can adhere to the matching principle, which states that all costs must be recorded and recognized in the same period as the total revenue.

For certain enterprises, this is a fiscal reporting obligation; it also aids in maintaining correct records year-round. The end of the financial year represents the most significant closure date. However, diligent money management is daily, weekly, and monthly.

Due to this, most finance teams also close the books at the end of each month, which enables them to review transactions, journals, and reports more often. It also entails verifying receipts, invoices, and other documentation to ensure that income and expenses match the tangible records. 

Why Is The Month-End Close Process So Labor-Intensive?

The company’s accounting team consumes a lot of time in completing the month-end close process. All the business executives wish to expedite and simplify the process since the month-end closure process serves as a basis for the plans for the upcoming months. You shouldn’t rush your month-end close, though just because your peers are shutting sooner. A preferable strategy would be to gradually optimize your month-end process so that errors are minimized and close times are shortened. 

Implementing a standardized checklist, automating tedious operations, enhancing team collaboration and communication, and locating and resolving process bottlenecks are ways to get the month-end close process moving more quickly. 

What Does The Month-End Closing Process Aim To Achieve?

The month-end close is an accounting process used to wrap up and close all of a business’s previous month’s financial transactions. For accounting reasons, this time is well-defined. Analyzing, recording, and balancing every transaction made during that time frame are all part of the process. Companies that put off preparing their financial reports till the end of the year are likely to find it to be an arduous and intimidating commitment. To streamline the year-end process and have a continuous perspective of their financial KPIs, the majority of the businesses prepare financial statements in monthly reports.

It is crucial to remember that the month-end close is a formal procedure used to confirm the balance sheet data. Therefore, it is unlikely that the data will need to be altered in the future. 

Why Is The Month-End Close Important And Reason To Optimize It?

A well-run business operation depends on a month-end close process accounting done correctly and consistently. Following the month-end close procedure is crucial for maintaining uniformity and dependability across the business’s divisions. 

Month-end close takes up more time than value-adding activities like analysis and business collaboration. By streamlining the month-end close, leadership may receive financial data earlier and use it to inform more timely assessments and decisions. Improved controls, more discipline, increased structure, increased visibility, and less risk are other justifications for optimizing.

What Is A Month-End Close Process Flowchart?

Depending on the types of accounts and transactions that comprise a company’s financial data, the month-end closing process may take different forms for different businesses. However, there are typically four steps in the procedure. The month-end close is the procedure for recording, reconciling, analyzing, and reporting all financial transactions that have occurred since the preceding month’s last close. The magnitude of the enterprise and the quantity of monetary exchanges executed every month. Additionally, it has a big impact on the particulars and procedures of the month-end close process.

Recording: 

• Make sure that every transaction involving income and expenses has been recorded.
• Keep track of accumulated liabilities, such as taxes, employee vacation, notes payable interest, and payroll.
• Inspect fixed assets and count the inventory.

Reconciling:

• Petty cash funds, credit card accounts, bank and savings accounts, and cash should all be reconciled.
• Make sure that both companies’ payables and receivables balance by reconciling intercompany accounts.

Analyzing:

• Data from the steps of recording and reconciliation are used in analysis to find trends and predict future events.
• Discuss analysis with interested parties.

Reporting:

• In the last stage, all data is archived and reports and statements are generated for stakeholders.
• Compile the necessary records for both internal and external auditors.

Steps In The Month-End Close Process

Get every financial data possible

Gathering all pertinent financial data is the first step in the month-end closing process. It comprises daily activities as well as elements from the income statement, such as accounts receivable, and cost records, such as accounts payable.

• Accounts receivable: First, make a note of the amount of income you receive in a given month, including cash, invoices, loans, and other sources of income. In this phase, you must also confirm that you are pursuing delinquent invoices and that you have obtained the correct sums from consumers. Each of these transactions needs to be documented in a journal entry by your finance team.
• Accounts payable: Accounts payable, as opposed to income, is the monthly amount you spend on bills and purchases. You’ll have to keep track of your spending, including through expense reports, invoice payments, and business cards, as well as by what goods and services you’ve purchased.

Keep a record of all daily operations transactions at all times; better yet, record them as soon as possible instead of waiting until the end of the month.

Examine the fund for petty cash

Perhaps you don’t think much of the petty cash fund. However, keeping track of every transaction is essential to preventing disparities in your financial information. Here’s how to proceed:

• Verify the amount in your petty cash both at the start and conclusion of each month.
• Sort through your deposits and receipts.
• Look into any disparities.

Petty cash is simple to forget, therefore it’s best to reconcile your petty cash fund once a week or daily. In this manner, you may quickly identify any suspicious conduct as well.

Get the bank reconciliation ready

At this stage of the monthly close process, each transaction is compared and validated with the associated bank, vendor, or company’s records. This process is known as accrual reconciliation. Verify your account statements by comparing them to other external entries, bank paperwork, and receipts. The following accounts require this attention:

• Checking the cash and savings accounts
• Balance sheet accounts 
• Petty cash
• Prepaid accounts

First, reconcile your cash accounts, which are simpler to handle because errors and inconsistencies are more noticeable when working with actual money. This stage also helps you become aware of your company’s cash position.

Monitoring logs

Maintaining a regular eye on inventory levels will enable you to effectively manage your working capital. If you overstock, you face the risk of wasting money and securing an unnecessary inventory. Similarly, understocking puts your company at risk for missed sales, production losses, and reputational harm.

When closing the month, take the following actions:

• Make a count of your stock.
• The inventory numbers in your books should be reviewed and updated.
• Analyze the process you use for managing inventories. That is the quantity of goods you own, the frequency of your orders, and the cost.
• Look at the ways you store things.

Balance prepaid and reconcile accrued

Only your short-term payables to creditors are included in your account payments. You may remain on top of all invoice payments and due dates within a year by reconciling accumulated expenses. Accrued accounts include:

Accrued Revenue: Revenue incurred but not yet paid in cash

Accrued Expenses: Expenses spent but not paid

What you’ve paid in advance for your prepaid expenses are those. You will record them as expenses in various accounting periods, they are an asset.

At every month’s end, businesses need to,

• Account for any revenue received and expenses paid during the month, and adjust the prepaid and accrued expense accounts.
• Prevent making duplicate payments, compare your expense accounts and prepaid accounts twice.

Pay any accumulated debts as soon as they become due. In this manner, you’ll maintain your credit standing and be able to apply for credit.

Analyze your fixed assets

Every fixed asset a company may own, including machinery, software, real estate, storage, cars, and so forth, must be evaluated. It is imperative to acknowledge that these assets experience depreciation and the amount of depreciation must be classified as an expense. Since assets are costly, you can spread out the depreciation costs over time by incurring expenses. To maintain consistency in your accounts and prevent unexpected fluctuations in profit or loss, you should document any changes in the value of these assets, including repairs and amortization.  

Prepare financial statements

It’s time to get your financial statements ready now that you have all the data gathered and validated. These consist of the cash flow statement, income statement, and balance sheet. Verify that the entries are accurately recorded and that the financial statements don’t contradict one another. For presenting an accurate picture of the company’s financial facts and guiding future strategy, financial reports and statements are crucial. Preparing the statements is equally crucial to avoid rushing to locate them on the final days of the month. For this reason, the majority of accounting applications come with built-in functions.

Perform an audit of finances

For any organization, the month-end closing process is essential. Thus, a last review is always carried out before the conclusion of the closure procedure. Top management or an outsider who was not involved in the closure process does this review to obtain a new perspective on all the data. It guarantees that the monthly financial statements are error-free.

What Are The Best Practices To Improve The Month-End Closing Process?

1. Accuracy:

Be mindful of your expectations and avoid hurrying through the task and unintentionally deleting crucial entries or remarks. Of course, deadlines are vital. It also involves getting accurate data. Ten days following the end of the month is when you have to submit your closure information.

2. Put quality before speed:

One of the most important accounting processes for any company is month-end closing. Thus, rushing through it and committing mistakes won’t assist, particularly if you intend to use these statements as a guide for your year-end close. Precise monthly financial statements facilitate enhanced transparency and enable accurate KPI tracking.

3. Data backups:

Honestly, in this day and age, paper is not something you should rely on. Get adaptable now if you still need to shift your accounting procedure online. But, it’s crucial to back up all of your data, even if you’re using internet programs or digital accounting software.

Can you imagine not being able to access any of your reports, analyses, or data? Such incidents have the potential to quadruple the month-end workload and will undoubtedly impact other accounting procedures. Make a secure backup of your data utilizing a dependable cloud-based technology.

4. Utilize checklists and templates:

Even though they may seem extremely laborious, templates and checklists for every stage of the process can save you whole days throughout the month-end close process. The main advantage of utilizing templates for your financial close is that it helps to standardize processes. 

5. Establish connections with other teams:

Increased awareness of your efforts will allow other departments to provide the necessary financial data and comprehend the direction of your efforts. In particular, senior management ought to be aware of your goals.

6. Grow progressively from your mistakes:

Every month, when you close, there’s an opportunity to build upon any setbacks from the previous month. It will take some time for new accountants to become familiar with the necessary equipment and software, so they should make the most of any training courses that are offered. 

Conclusion

The time required to finish the month-end close is the biggest obstacle. The month-end close process typically takes 5-10 working days for most of the organizations. And it’s frequently challenging for firms to cut down this time. Several company owners also undervalue the significance of the month-end closing process.

They might not understand how keeping track of events from the prior month might assist in positioning a business for future success. You would be better off focusing your time and attention on making strategic decisions rather than the closing procedure.

You can increase profits, save costs, and improve workplace satisfaction. Your company may expedite, streamline, and eliminate errors in the month-end close process with the aid of the Cflow workflow automation platform. It facilitates fault detection and provides access to real-time data. 

To make your month-end close process flawless, Sign up today for Cflow!