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Month end close is the accounting process that results in closing the books for the accounting period.
This process is notoriously cumbersome as many accounting teams lack the systems and tools to handle these workflows smoothly. But, this doesn’t have to be the case. Here’s how.
The month end close is one of the most important accounting processes for businesses of all sizes. But just because it’s vital doesn’t mean it’s always done well.
This is problematic because when it comes to the month end close, getting it right efficiently and accurately is crucial.
In many cases, accounting teams unfortunately lack the coordination, automation, and data management capabilities that make for a smooth accounting close. A disorganized monthly closing process takes a toll on decision-making, budgeting, and forecasting.
But, you don’t have to settle for the chaos. You can make the month end closing process more manageable and accurate by focusing on:
In this article, we’ll explore the importance of an optimized monthly closing process, highlight where trouble arises for accounting teams, and offer five best practices for a smoother accounting close.
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Month end closing, otherwise known as “financial close,” is the accounting process that results in closing the books on the previous month.
The goal of this process is to produce financial statements that company leaders and other stakeholders can use to analyze trends, compare different accounting periods, set budgets, assess key performance indicators (KPIs), and make strategic business decisions.
All told, the month end closing process is what helps you produce a reliable picture of your company’s financial health.
To carry out the month end close, an accounting department will complete a number of tasks, including:
The month end closing process is somewhat more complex for companies with multiple subsidiaries, like a chain of hardware stores that owns several specialty home building stores for example.
In these cases, the monthly close may also incorporate tasks like consolidating multiple financial statements and analyzing intercompany eliminations.
The month end close is important because it’s what enables you to produce the financial statements you need for analysis and decision-making. Any delays in completing the monthly close can have downstream effects on your business’ ability to complete critical functions like budgeting and forecasting.
The accounting close process also provides a comprehensive understanding of your business’ financial situation to anyone who needs it. Anyone from investors, lenders, to public regulatory agencies require these financial records, so it’s important to avoid any potential for error.
For many organizations, the month end process is stressful and time-consuming. Here are four common challenges that might be preventing your accounting department from operating as a well-oiled machine:
During month end accountants face strict deadlines, made worse by having to perform repetitive, manual tasks to account for all transactions.
Without automated processes, accounting teams spend a lot of time each month entering data and double (and triple) checking for errors in calculations. This compounds the stress placed on a swamped accounting team, leading to unwanted errors.
The bottom line is this: the more your month end closing process relies on manual data entry, the more likely errors are to creep into your financial statements.
It’s common for a company’s financial data to be housed in multiple places like enterprise resource planning (ERP) software, accounting software, and bank statements. For many finance teams, that data tends to live in multiple spreadsheets.
Without integrations that connect the data between your systems, it can be difficult—and in fact downright chaotic—for your accounting team to collect and find the correct values they need.
Even once your accounting team has aggregated that data, chances are they’ll still have to format it, find and fix any errors, and fill in any missing information. All this creates unnecessary steps in the month end close process, delaying your ability to close the books.
For the month end close to go smoothly, all members of your accounting team should know what role they play and have the support they need.
If you don’t establish these lanes for your team members at the outset, they might get confused about what tasks they need to do and end up repeating work unnecessarily.
Without appropriate support to streamline month end workflows, your team can feel frustrated, stressed, and dissatisfied. And working in this environment only leads to more errors and missed deadlines.
For some companies, the month end close process gets done “as we’ve always done it,” without a clearly documented plan or protocols. This is more likely to be the case at companies with smaller accounting teams, where the urgency for documentation hasn’t been as strong.
But, keeping critical knowledge in your head instead of on paper won’t help the business in the long run.
If that’s how it is in your workplace, chances are that this lack of systematized, documented process is leading to muddled workflows, tasks left to the last minute, frequent errors, and general confusion and frustration.
In-depth resources covering everything from finance basics to the latest in new accounting standards.
With the right procedures, documentation, and tools, your monthly close can go from stressful and chaotic to simple and consistent. Consistency is the key here so that you can ensure you’re getting your financial reports right every time.
Here are five best practices that successful accounting teams follow for an efficient and accurate close:
Your accounting team needs financial data from many sources like inventory, accounts receivable, and accounts payable to complete their month end close. Companies often have separate software systems to manage these distinct functions. To minimize the work of sourcing data, it’s helpful to integrate as many of these systems as possible.
Establish which system should be your team’s single source of truth (for many finance teams it’s their enterprise resource planning system), and make sure you’re feeding data (like outstanding invoices and incoming payments) from your other systems there.
Consider how you can also reduce your reliance on spreadsheets by making use of tools like data warehouses.
Reducing manual data entry and increasing automation wherever possible are key strategies for simplifying the month end close process.
One example of this is integrated payments software, which allows you to process payments directly from your accounting system. This means you can automatically post incoming cash to its corresponding invoice(s) as it comes in, saving you the task of doing this come month end.
This reduces not only the manual work your team has to go through, but also errors, bottlenecks, and delays in the financial close.
Systematizing your month end close by establishing a protocol or checklist can help ensure your team documenting all information correctly.
For instance, you can document how your team should be creating journal entries, making sure they include:
Be sure to establish a standard operating procedure (SOP) for your finance team that includes detailed instructions for all steps in the monthly closing process, including the timeline and responsible party for each step.
Written documentation that's easily accessible to everyone helps keep the process moving smoothly and sets expectations for each team member. When problems arise, the SOP can point to who should handle the issue and what actions they should take.
Your accounting team should be working in lockstep to ensure that all parts of the month end close process are done effectively and on time. Especially given that many teams have remote workers these days, it’s essential to put collaboration processes and tools in place to keep everyone abreast of what tasks are done and what’s left to do.
Designate a month end close ‘owner’—ideally your Controller—to be responsible for coordinating all its moving parts.
Continuous accounting practices, also called continuous close, distribute the workload of the month end closing process across the whole month. Instead of waiting until the end of the month to post journal entries or do account reconciliations, team members can instead do these daily as they occur.
Keeping the general ledger continuously up-to-date allows your team to do a “soft close” on any day of the month to get a snapshot of the company’s current financial health. This method also reduces the accounting team’s workload during the “hard close” at the end of the month.
Using modern accounting software that integrates deeply with your ERP or financial management system can substantially improve the month end close process. When combined with continuous accounting practices, automation software can turn the financial close from a difficult, tedious process to a relatively simple one.
Accounts receivable is an area finance teams should especially focus on when seeking out improvements to the month end close process. AR is an area that’s typically wrought with manual, inefficient processes as it hasn't received much attention. 69% of CFOs admit they’ve prioritized other departments ahead of AR for digitization.
AR-related tasks that involve a lot of manual work for accounting teams at month end include:
With Versapay, accounting teams can match payments to invoices and post them to their ERP automatically as they come in, which saves the time and trouble of having to do this during the month end period. With Versapay’s collaboration tools, accounting staff can also better coordinate how they follow up with customers on past-due invoices and how they apply payments.
Reducing the time it takes to get the monthly close done gives your accounting department more time for strategic work and professional development.
Learn how you can automate manual AR work, reduce errors, and improve your customers’ payment experience with Versapay’s collaborative AR automation solution.
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