Now that we are a few months into the new year, most companies have wrapped up their books and records for 2021 and sent them to their accounting professionals for tax and audit preparation. While the inclination can often be to consider the clean-up of accounting records to be an annual process, there are real benefits to a business in a month-end close process.
There are several straightforward steps a company can take to keep their books in order year-round with monthly bookkeeping:
- All bank and credit card accounts should be reconciled within a couple of weeks after the month-end. This includes posting activity and reviewing the details to make sure transactions are correctly classified. These are important for several reasons:
- Proper activity classification will make the monthly financial statements as accurate as possible when 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.
- It is essential to review the books and records for any current month activity that may not be reflected in cash or credit card account activity. This can include revenue that has been earned but not yet invoiced or received, and expenses that have been incurred for, but which a bill has not yet been received or paid. To reflect the complete monthly operations, it is often a good idea to make accounting adjustments to reflect these items.
- 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 booked and standard work papers to update. Journal entries would consist of depreciation, prepaid expenses and payroll accruals. Having a definitive list will help ensure that nothing gets missed.
Once a company has created a month-end close process for closing the books, they will be able to see how useful this can be in running a business. 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 helpful.
When reviewing an income statement, it is vital to review the current month and analyze trends every month. If costs in a particular category begin to rise, it is easier to control if caught early. Significant fluctuations can also indicate 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 spent.
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 broken out for review on this basis. This will identify which areas are profitable and which are losing money. It can lead to important decisions about what should be kept, changed or sold.
Timely financial reports can also attract new investors, lenders or business partners. Third parties often want some comfort in knowing that a business is profitable as they do not want to get involved with a failing company. Even though internal records are not the same as obtaining an audited financial statement, they are still a valuable resource 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 firm 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.