The Importance of a Month-End Close Process

Now that we are halfway through the new year, most companies have wrapped up their books and records for 2021 and sent them to their accounting professionals for tax compliance and financial statement preparation. While the inclination can often be to consider the cleanup of accounting records to be an annual process, there are real benefits to a business in having a month-end close process.

There are several simple and routine steps a company can take to keep its books in order year-round with monthly bookkeeping:

  1. All bank and credit card accounts should be reconciled as soon as possible after month-end. This includes not only posting activity but also reviewing the detail to ensure transactions are properly classified. This is important for several reasons:
    • Proper classification of activity will make the monthly financial statements as accurate as possible when being used to assess operating results.
    • Cash receipts can be applied against outstanding customer invoices on a timely basis to determine outstanding receivables at month-end.
    • Having up-to-date account balances summarized on the financial statements can indicate to management if there is adequate cash to cover future needs.
  1. It is essential to review the books and records for any current month activity that might not be reflected in cash or credit card account activity. This can include revenue that has been earned but not yet invoiced or received, as well as expenses that have been incurred for which bills have not yet been received or paid. In order to reflect the complete monthly operations of a business, accounting adjustments should reflect these items.
  2. It is good practice to create a month-end close checklist or process flowchart of tasks that should be completed and closed each month. This would include both standard monthly journal entries that need to be recorded, as well as standard workpapers to update. Journal entries would include items such as depreciation, prepaid expenses and payroll accruals. Having a standard list will help ensure that all necessary adjustments are recorded.

Once a company has created a month-end close process for closing the books, management will benefit from timely and reliable information. Up-to-date accounting records and monthly bookkeeping can provide management and other decision-makers with a current picture of how the business is performing. If a company waits until the end of the year to review financial data, the information is often stale and much less useful.

Benefits of the Month-End Close Process for Companies

When reviewing an income statement, it is important to not only review the current month but also to analyze trends on a monthly basis. If costs in a particular category begin to rise, it is easier to assess and control if caught early. Large fluctuations can also be an indicator that specific vendor costs are rising or departments are overspending in certain areas. If an income statement is only reviewed annually, it is harder to identify these fluctuations, and significant amounts will have already been expended.

Reviewing monthly financial reports can assist company management in making important decisions about the future of the business. If a business has multiple locations, products or business lines, reports can be detailed for review on this basis. This will identify which areas are profitable and which are losing money, and can also lead to important decisions about what should be kept, changed or sold.

Timely financial reports can also be used to attract new investors, lenders or business partners. Third parties often want some comfort in knowing that a business is profitable and that they are not getting involved with a failing company. Even though internal records are not the same as an audited financial statement, they are still useful resources to third parties. In addition, having accurate and organized accounting records presents a picture to potential partners that the company takes its books seriously and has a strong handle on its finances.

While often considered an afterthought, accounting records should be a priority for any business. If a company does not have the expertise in-house to handle a regular month-end close, it should consider creating a position internally or outsourcing the role to an accounting professional.

Take Me To the Cloud Podcast: Ensuring A Smooth, Successful Month-End Close

Many small to medium-sized businesses experience pain points in their financial close processes. In this episode, Withum’s Management Consulting team members Melissa Holton and Chris Higgins discuss the value of being mindful of your resources. They also share their tips and tricks to ensure timely completion every month.

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For more information on this topic, please contact a member of Withum’s OASyS team.