Month-End Close Process: Importance, Checklist & Best Practices
This blog post will discuss the importance of the month-end close process and provide a checklist of best practices to ensure a smooth and efficient close. The month-end close is a critical activity for any finance team, and it is important to have a well-defined process in place to ensure accurate financial reporting and compliance with regulatory requirements. By following these best practices, finance teams can streamline the month-end close process and reduce the risk of errors or delays.
What Is the Month-End Close Process?
The month-end close process is a procedure that accounts for all of the previous month’s financial transactions. Your accounting team reviews, records, and reconciles all relevant account information.
The month-end close method is different from one business to the next. Each business has its own set of processes and tasks to do when it’s time to close. But the following things are usually done by all groups at the end of the month:
Record all un-entered invoices
- Credit card and bank card account reconciliations
- A count of the items in stock with reconciliations of any differences
- Compare the company’s real spending to what was planned.
- Mortgage and insurance entries
- Investors and managers are given data analysis and report writing
The accounting software for the company has reached the end of the accounting term.
Your finance and accounting teams’ ultimate goal is to make accurate financial statements for the month.
Why Is the Month-End Close Process Important?
The month-end close process lets you keep track of all the transactions your business makes during the month. This is important for making sure your accounting data is as accurate and complete as possible. For example, your year-end close is easier if you have accurate monthly reports to work from.
The rewards of the month-end close can be summed up in the following:
- You keep correct and up-to-date records of your finances.
- As the owner of a small business, you can make better choices based on how your business is doing financially.
- Because your financial records are in order, you save time when you file your taxes.
- Audits become simpler because your reports streamline the process.
- The financial close process highlights areas that require improvement.
Steps to Complete the Month-End Close Process
The month-end close process is done by taking certain steps. If you follow them, the process will be as easy as possible.
Step 1: Write Down your Monthly Costs and Income
In an ideal world, your company should keep track of costs as they happen. Here are some important costs to keep track of:
- Insurance
- Payroll
- Making payments to vendors
- Bills for utilities
- Travel fees
- The cost of loans from banks
Also, check your general ledger to make sure you put in the right credit and debit notes.
For income, you need to keep track of all the ways money comes in, such as:
- Money from investments
- Sales revenue
- Debts paid back to your business
- Any other money you make, like rent, is called “other income.”
You should also look at your income statement to make sure that you have billed all of your customers for the month.
Step 2: Update your Payables and Receivables
Check your accounting tools to make sure you pay your bills on time. Use this time to look for mistakes, like extra bills that could cause you to be overpaid.
For accounts receivable, make sure your customers pay you within the credit amounts you’ve agreed upon. You might find more ways to improve yourself here. For instance, you may find that you can change the terms of payment for the next financial period. This move could help your business make more money.
Step 3: Make sure your Accounts are in Order
Reconciling your accounts can help you find mistakes in your financial reports. You can also look at your account records to see if they show any signs of fraud.
Match up your financial records with what you have in your bank accounts. Check your bank and savings accounts, accounts for loans and credit, and digital accounts like PayPal. Check your account amounts, deposits, and withdrawals to see if there are any differences.
Step 4: Check your Petty Cash Account
It’s easy to forget to write down purchases made from the small cash fund. That can cause differences that show up on records at the end of the year.
Make sure your petty cash amount is what you expect it to be by comparing the money you put in and what you get back. Checking this fund once a week might be the best way to keep track of your small payments.
Step 5: Check your Inventory
Do a count of your stock and compare the numbers to what you have in your books. If you find differences, this is a sign that you need to change something about how you do things.
Review how you store your stock, how much stock you have, and how you pay for it.
Step 6: Check the Fixed Assets
Your company’s long-term assets are its fixed assets. Vehicles, houses, and machines are all good examples. You also need to think about things like your rights and brand name, which are intangible assets.
Keep track of how these things are doing and write down any costs that come up because of them. When you look at fixed assets, you should also take purchases into account. In this step, you should also look at amortization and the loss of value of an object.
Step 7: Balance your Paid-in-Advance and Paid-in-full Accounts
Your savings accounts cover costs that you pay for in advance. Accrued accounts show your costs and income that have already happened.
Balance the two to show what you spent and what you earned for the month. Also, compare your prepaid accounts with your spending accounts to avoid making the same payment twice.
Step 8: Make a Financial Report
Now that you’ve looked at all of your accounts, it’s time to make financial records so you can look at the following:
- Value
- Profitability
- Flow of cash
Your cash flow statement, balance sheets, and profit and loss statement are all part of these statements. These reports should be made immediately by the software in your accounting system.
Once the records are made, you should show them to a CPA. They can look at the numbers, check the journal entries, and give you some information about the financial health of your business.
Step 9 – Review
During these account reconciliation steps, you’ll have to sort through a lot of financial information. There may be mistakes that make findings wrong.
So, it’s a good idea to have someone who wasn’t involved in making your accounts look at them. Have this person look over your general ledger and all of your financial records.
Step 10 – Implement Lessons
Now that you have your financial records, you can decide what to do with your business. Part of good financial planning is taking steps to fix problems. It helps you keep track of the money you spend and the risks you take, which is good for the company’s finances.
Consider these questions:
- What did the company do right and what did it do wrong?
- Do I need to change any of the things I do at the end of the month?
- What do I need to take care of right away?
- Is the company doing a good job of getting closer to its long-term goals?
- What do you think will be hard in the future?
Remember that you are not the only one who has to answer these questions. Most accounting teams can answer questions because they are involved in every step of the process. Don’t be afraid to get help from other people.
Month-End Close Checklist
You know the most important steps to take. Now you need a list to make sure you have all the information you need to finish those steps. This month-end plan helps you make sure you have everything you need before the end of the month.
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Track Money That Comes In
You need to keep track of the money no matter where it comes from. That means making sure you’ve sent out bills and making sure you know which ones have been paid.
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Check your records of what you owe
Where does your business put its money?
If you don’t keep track of your accounts payable amount, you won’t know what to do. Use accounting sowftware to keep track of how much money you spend.
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Sort out your finances
This is covered by the steps we told you about before. Still, it’s worth bringing up again and again. The entries on your financial statements must match the entries from your bankers, vendors, and other organizations.If they don’t, something is wrong.
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Never Forget Petty Cash
The petty cash fund is used to pay for small things that are easy to forget. Make processes that make it possible for petty cash transactions to be processed and recorded automatically. You could enter the information by hand. Just know that this makes mistakes more likely.
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Gather your financial information
You don’t want to be in the middle of a monthly close and find out that you’re missing important papers. Make sure you have:
- Balance sheet
- Account book
- The profit and loss report
Together, these papers can be used to make a trial balance. This is a list of all of your account amounts at the end of the day.
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Think ahead
Don’t start your month-end close process at the end of the month.
Start making plans now.
Ask where you can use automation tools to speed up your processes, for example. Set dates for when reports are due. Lastly, make sure your accounting and finance teams have everything they need by setting up systems.
Best Ways to Close the Books at the End of the Month
When it’s time to close your books every month, it can feel like a busy time. But if you do things the right way, you can make the month-end close process easier:
- Close quickly is never more important than being right. After the end of the month, you have 10 days to give your close information. Before your closing date, use that time to make sure your info is as correct as possible.
- Keeping track of time helps you get things done on time. Set daily and weekly goals for your teams so they can help with the process of closing out the month.
- Don’t let silos make your month-end process worse. Your business’s accounting team needs to know everything about it. That means they have to know who is in charge of what so they can always talk to the right people.
- Adding on to the last point, the ties within your business are important. When you have good relationships, it’s easier to ask people in your business how they collect data and report on it. They also make it easy for you to suggest changes when they are needed.
Conclusion:
In conclusion, the month-end close process is critical for businesses to accurately report financial results and make informed decisions. By following a comprehensive checklist and best practices, organizations can streamline the process, reduce errors, and improve efficiency.
