What’s a Month End Close and Why Does it Matter?
It’s important to have a monthly snapshot of your business’ financial outlook to achieve goals
The goal of any business is to be successful.
Effective management plays a crucial role in guiding a business towards this goal — however, it is important to start with a solid financial foundation. Without doing so, information may be overlooked, and management can unintentionally steer the company away from its goals.
The Month-End Close Process and Why It Matters
A well-executed month-end close is the start to building a solid financial foundation as it provides timely and actionable insights as well as necessary information to create relevant statements and reports. As a result, management can use this information and ask themselves, “How did we perform this month?” and “How did we perform year to date?”.
Answering these two key questions allows management to put company performance on a timeline, compare it, and decide what must be done moving forward to achieve their goals.
Below is a three step guide to mastering the month end close process with descriptions as well as tips to improve your efficiency when performing them.
Step 1: Collect Data
The month-end close begins with gathering all relevant financial data. This includes invoices, receipts, total revenue, bank statements, and more.
- Use Automation: Implement software to automate data collection, reducing time and minimizing human error.
- Centralize Data: Ensure all financial information is easily accessible in one place.
Step 2: Reconcile Accounts
Next, review and reconcile transactions to ensure they match the records.
- Starting Early: Reconcile transactions as they occur to prevent last-minute stress.
- Automating Reconciliation: Alternatively, implement a code into your company’s system to automatically match transactions.
Step 3: Make Adjustments
After reconciling accounts, address any discrepancies and update the records.
- Foster Team Collaboration: Keep open communication about adjustments and plans.
- Identify Recurring Entries: Set up recurring journal entries for consistent adjustments like depreciation and amortization.
- Review Adjustments: Ensure all corrections are double-checked before finalizing.
Real-World Scenarios:
Now that we discussed the importance of the month-end close and outlined the steps to efficiently perform one, lets discuss some applications of this process in the real-world.
Many times, clients become overly concerned with metrics that are important, but this causes them to overlook the two key questions: “How did we perform this month?” and “How did we perform year to date?”. Although it may seem straightforward to maintain focus on these questions, putting ourselves in these situations often make it more complex.
Here are a few real-world scenarios depicting these challenges:
Scenario 1: You are discussing financials with your client who is fixated with the cash balance that was calculated at the month end. They are concerned with only this number and ignore the remaining balance sheets accounts, leading them to narrow their perspective from the whole financial picture of the month.
Scenario 2: The client has a large billing month but does not realize that the cash from the billing might not come in for several months. Meanwhile, current liabilities are due, and there are no other cash reserves to satisfy them. Again, we find that it is important to review the balance sheet, which we derive from the monthly-end close, in its entirety and not just the cash account.
Conclusion
While the month-end close process can be daunting, following these steps can improve its efficiency and effectiveness. By investing time in this crucial process, you’ll create a strong foundation for your business, leading to better management decisions and ultimately, a company on the path to success.
Frederick Schildwachter contributed to this Alex Hart article.
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