They say an accountant’s job is never done. Or, at least, not while the business is still afloat. And one of the most important accounting responsibilities is that of the month-end close process. So, let’s take a look at how month-end closing works, and how you can make it more efficient.
What Is A Month-End Close?
The name “month-end close process” is actually pretty self-explanatory. At the end of each month, business accountants crunch the numbers. They go back over the past month’s financial activity. Money in, money out, where it came from, what it was for, and so on. It’s about ensuring your financial records are consistent, with no unexplained transactions.
Of course, different businesses have their own needs. So, the month-end close of one company might look quite different from that of another. But every business can benefit from making their close more efficient. Consider how Artificial Intelligence could speed things up, for example. Companies are using AI solutions for insurance, market research and scientific study. But one of its most consistent uses is improving the turnaround time on busywork.
How To Do A Month-End Close?
As you might expect, a company’s month-end close process can get pretty granular. And, as such, they can vary significantly between businesses. But there are several core elements you’ll have to hit upon. So, let’s take a look at the six different parts of your month-end close.
Preparation
It’s important to be ready for your month-end close process. That means chasing up receipts to ensure compliance, and checking in with sales reps. Close preparation is about making sure you’ve got all the relevant information ready to go. And about double-checking anything that’s been done manually to eliminate human error.
Here’s what a Reddit user had to say on r/Accounting:
Basically, you pick a reasonable day at the end of the month to set as the entry cut-off. Before that, you make sure you put in your adjusting and recurring entries, do your bank recs, tie out your mortgages, and pay off the predictable monthly expenses.
Be aware that post-month adjustments and mistakes will happen, but you do your best to catch it all and then draft financial statements with the best available information. Be kind to yourself and your co-workers. Most accounting departments are understaffed, and things get missed in the month. Try to design your month-end to catch them.
Accounts Receivable
Simply put, this is any income your business has received throughout the month. You need to verify the amounts you’ve received, whether it’s cash, loans, invoice payments, or anything else. If you’re still missing any invoices after the prep stage, this is your last chance to chase them up.
Accounts Payable
In opposition to receivable accounts, you have payable accounts. In other words, anyone who’s been paid by your business in the last month. That means any company purchases, bills, employee salaries, etc. Keeping a detailed list of anything your company has bought or funded is important.
That means creating and tracking expense reports, checking the bills for employees’ company cards, and making notes of all outgoing invoices.
Fixed Assets
As the name suggests, fixed assets are physical things a company has that it will use for a long time. These assets aren’t easily replaceable, hence why they’re fixed. But they can lose value over time to things like damage, repair, or general depreciation of an asset. So, you’ll need to track the estimated value loss over time.
It’s important to review fixed assets to ensure the accuracy of your month-end close process. Here’s a list of everything your Fixed Asset Reviews can include, according to KPMG:
- Tangible Property Regulations Compliance: Stay ahead of the curve and avoid costly penalties.
- Structural Composition & Disposition Studies: Make informed decisions about your assets' future.
- Fixed Asset Depreciation Review: Optimize your depreciation strategy for maximum tax benefits.
- Cost Segregation: Unlock hidden tax savings by identifying short-lived assets.
- Bonus Depreciation Review: Leverage this powerful tax incentive strategically.
- Reverse Sales & Use Tax Review: Ensure you're not overpaying sales tax.
- Ghost Asset Identification: Eliminate phantom assets and streamline your accounting.
- Placed in Service Date Verification: Get it right from the start to avoid future issues.
- Tenant Allowance Review: Ensure accurate lease accounting and avoid disputes.
- Construction in Progress Account Review: Gain clear visibility into ongoing projects.
- Energy Efficient Building Systems Analysis: Maximize energy savings and environmental impact.
- Fixed Asset Database Management & Reconciliation: Keep your records accurate and organized.
Inventory
Your inventory is anything you sell or actively use during day-to-day operations. So, for example, a restaurant’s inventory would consist largely of meal ingredients and beverages. But also things like cleaning supplies, coasters, seating, fire extinguishers, and first-aid supplies.
Tracking the general level of inventory each month is one thing. But it’s also essential to note the rates of things like spoilage or breakage. Otherwise, your month-end close calculations won’t be accurate.
Statements
Your statements include all the documentation we’ve mentioned up until now and more. Your invoices, profit/loss statements, ledgers, revenue and expense sheets, and the statements for any company credit or debit accounts.
Having all this present and accounted for as part of your month-end close process is important. For one thing, it ensures accuracy. But it’s also evidence that you’re on the right side of the law should your company ever be audited.
Why The Month-End Close Matters
For any company accountant, the month-end close process is a simple fact of life. To keep everything clear, you’ve got to wade through a river of invoices, wage slips, and employee receipts. But why is it so important?
It Ensures Your Records Are Accurate And Up-To-Date
One of an accountant’s main responsibilities is to monitor the business's financial stability. Without them, you’ll be stuck guessing. And even small errors or inconsistencies will cause your assessments to become less accurate over time.
And, as noted, it’s about avoiding legal issues. But not just for the business. Remember that accountants can be held liable for negligence, even if they aren’t directly responsible. So, it’s about keeping yourself covered too.
It Helps Organize Tax Returns And Your Annual Close
According to APQC findings, businesses' median year-end close time is 18 days. Those in the 75th percentile took over a month (35 days) to complete it. Only those in the 25th percentile could complete it in 10 days or less.
In other words, it’s a very drawn-out, time-consuming process. On top of that, you’ve got things like tax returns and all the other end-of-year loose ends to tie up. However, an accurate month-end close process can help to expedite things.
A Monthly Opportunity To Evaluate Areas Of Improvement
Your month-end close is also a great opportunity for organizational self-reflection. Financial efficiency, after all, is another of an accountant’s responsibilities. Going through the paperwork every month may be dull. But it’ll help you identify problem areas, like unnecessary expenditure, wastage of utilities (gas, electricity, internet, etc.), or inventory.
What Information Does Accounting Need for Month-End Close?
Accountants typically need the following info for the month-end close:
- Sales figures: How much money came in?
- Bank details: What's the cash situation?
- Inventory count (if relevant): How much stock is on hand?
- Petty cash sum: How much small-dollar spending happened?
- Financial reports: The overall financial picture.
- Balance sheets: What's the company's worth at this point?
- Value of fixed assets: How much are long-term investments worth?
- Income and expense details: Where did money come from and go?
- General ledger: The master record of all financial transactions.
How Long Does the Month-End Close Process Typically Take?
The average month-end close process typically takes between 5-10 days.
The time it takes to complete the process will depend on several factors, including the size of the company, the volume and complexity of transactions that need to be recorded and reconciled, and the accounting systems used.
Why Is It Important to Optimize the Month-End Close?
Optimizing the month-end close is important for several reasons, including:
- Getting financial numbers into the hands of leadership sooner can help them make better decisions about the business.
- Better discipline and more structure can help ensure that the process is completed accurately and efficiently.
- Improved controls can help reduce the risk of errors and fraud.
- More visibility into the company's financial performance, which can help to identify areas for improvement.
- Reduced risk by ensuring that the financial statements are accurate and timely.
What Are Some Common Challenges in a Month-End Close Process?
Here are some of the most common challenges faced by businesses in the month-end close process:
Data-related challenges:
- Inaccurate data: Manual data entry, missing information, and inconsistent formats can lead to errors in financial statements and audit issues.
- Lack of real-time data: Reliance on outdated or incomplete data hinders timely and accurate reporting.
- Discrepancies: Reconciling accounts between different departments or systems can be time-consuming and prone to errors.
Process-related challenges:
- Manual processes: Repetitive tasks like journal entries, reconciliations, and reporting consume valuable time and resources.
- Lack of standardized procedures: Inconsistent workflows across teams and departments lead to confusion and delays.
- Limited visibility: Without clear communication and tracking, monitoring progress and identifying bottlenecks is difficult.
Resource-based challenges:
- Time pressure: Tight deadlines put immense pressure on accounting teams, leading to stress and burnout.
- Global teams and time zones: Coordinating across different locations and time zones adds complexity to the process.
- Lack of training: Inadequate knowledge about specific tasks or systems can slow down the process and increase errors.
Technology hurdles:
- Outdated software: Outdated systems lack automation, integrations, and real-time capabilities, hindering efficiency.
- System crashes and glitches: Technical issues during peak periods can cause significant delays and disruptions.
- Security concerns: Data security breaches can have severe financial and reputational consequences.
Tips For A Faster Month End Close
Before you go, we wanted to give you some parting advice. Your month-end close process might be able to save you some time in the long run. But even a monthly close can be time-consuming by itself. You’re looking at several days when accountants must focus on it over most other duties.
So, here are our tips for running your month-end close more efficiently.
Document And Back Up As You Go
Documentation is at its most inconvenient when you have to do it retroactively. And, sometimes, things get corrupted or accidentally deleted. So the best way to save yourself a headache is to incorporate a documentation and back-up process into your workflow.
The first thing you’ll need is a checklist. You’ll refer back to it as part of your month-end close process. But, in the meantime, it’ll ensure you don’t miss anything during the month.
Say you finish an expense report. You quickly check it off the list, save it, and then save it again (this time on the cloud). All that shouldn’t even take a minute. But it can save you hours of frustration down the line if things go wrong.
Standardize Your Procedure
People might go about managing their expenses in different ways. And you might think this isn’t an issue so long as the information is set down. But this can be a real sleeper headache for accountants if left unchecked.
If people take different approaches to financial documentation, it leaves room for inconsistencies. A missing date here or different invoice numbering there. All this makes it easier for stuff to slip through the cracks. Or you might end up wasting time with accidental duplicate documents.
So, figure out the best accounting procedure for your company. Then communicate it clearly.
Automate Expense Management With Fyle
What’s the one thing you can do to ensure your month-end close is a breeze?
Automating your expense management with Fyle. Why?
Because with Fyle, you no longer have to chase your employees for receipts. Your receipts come to you. How?
Text-Message Receipt Collection
Whether it's a credit card swipe or a reimbursement, you can snap a picture and text your receipts to Fyle. Fyle will automatically check for a matching card expense and instantly match it with the transaction.
Plus, Visa, Mastercard, and Amex users get real-time spend alerts right after their card is swiped. Employees just need to reply to this message with a picture of the receipt, and it’s automatically matched!
Accountants rejoice! Fyle speeds up your receipt collection by 5x, eliminating endless emails and reminders.
Our text-to-submit magic ensures you have complete, organized records at your fingertips making closing books a breeze.
But that’s not all, here’s everything Fyle does to optimize your month-end close process.
Real-time Spend Visibility
Fyle's live spend dashboard is a game-changer for accountants. See every employee's credit card expense in real-time, sliced and diced by category, merchant, project, employee, or department. No more digging through spreadsheets! This crystal-clear view empowers you to:
- Spot risks instantly: Identify suspicious activity before it becomes a problem.
- Boost efficiency: Pinpoint areas for cost optimization and streamline operations.
- Curb overspending: Proactively address potential budget breaches.
Fyle doesn't just save time; it equips you with the insights needed for a smoother, faster month-end close.
Making The Most Of Your Month-End Close
Ultimately, most of our advice boils down to not letting your company’s month-end close process sneak up on you. It’s much less of a headache if you take the time to get organized in advance.
And, with automation, it’s likely you’ll see monthly closing become even more of a triviality. As employees are able to submit reports and have them processed by software, accountants will be able to spend more time working constructively. Less worrying about the paperwork and more about how to help your business keep growing.
Month-End Close Alternative: A Soft Close
Many businesses dedicate significant time and resources to the monthly close process, often spending weeks on aggregation, analysis, reporting, and preparation for the next month. However, a softer approach, known as the soft close, can offer several benefits.
What Is a Soft Close Approach?
A soft close approach offers a more flexible alternative, allowing organizations to tailor their financial reporting to key performance indicators while reducing the time and cost associated with the traditional process.
Benefits of a Soft Close
- Enhanced timeliness and accuracy: A soft close can provide more timely and accurate financial information by eliminating unnecessary steps and focusing on critical data.
- Improved decision-making: With more current and relevant data, finance teams can better identify trends, anticipate future challenges, and make informed decisions.
- Increased efficiency: By reducing the time spent on the closing process, finance teams can allocate more resources to strategic analysis and value-added activities.
Are You Ready to Transition to a Soft Close?
To transition to a soft close, you'll need to continuously improve your processes and track their performance. Start by identifying what causes delays in your current closing process, such as waiting times, data aggregation, accounting rule applications, reviews, and corrections.
Use the following checklist to assess if your process includes time-consuming elements.
Does your closing process involve any of the following time-consuming activities?
- Complex calculations
- Inaccurate data
- Manual tasks for routine transactions
- Duplicate data entry
- Re-entering corrected data
- Manual processing of recurring entries
- Delayed allocations
- Post-month-end accounting adjustments
- Open receivables or payables for late transactions
- Time-consuming reconciliations
- Manual updates and comparisons
- Multiple approval steps
Transitioning to a Soft Close
To successfully transition to a soft close, organizations should implement the following changes:
Redefine the Closing Cycle
- Identify activities that can be eliminated, deferred, or moved outside the closing period.
- Use estimates for accruals and allocations where appropriate.
- Separate forecasting from the closing process.
Eliminate Interim Cycles
Focus on month-over-month changes rather than detailed period-to-period comparisons.
Collapse the Level of Detail
Post allocations to a higher level of cost centers to reduce reporting complexity.
Best Practices for a Successful Transition to a Soft Close
- Raise the materiality level: Focus on material transactions and eliminate unnecessary entries.
- Separate and integrate systems: Use separate systems for cost accounting and billing and integrate information systems functions.
- Evaluate readiness: Assess your organization's readiness for a soft close by analyzing current processes, systems, and data quality.
- Implement process improvements: Identify and implement process improvements in areas such as procurement, disbursements, revenue, receipts, and administration.
Accounts Payable Best Practices
To streamline accounts payable processes and improve efficiency, consider implementing the following strategies:
- Automate: Use technology to automate tasks like expense reporting, payments, and matching.
- Centralize: Combine accounts payable functions into a centralized department.
- Digitize: Convert paper documents into digital formats for more accessible storage and processing.
- Direct entry: Allow for direct input of receipts and other data.
- Eliminate manual processes: Reduce manual tasks like writing checks and processing expense reports.
- Standardize: Use standard account codes and procedures.
- Outsource: Consider outsourcing parts or all of the accounts payable function.
- Pay on receipt: Pay suppliers based on receiving goods or services.
- Electronic billing: Receive and send invoices electronically.
- Reduce Approvals: Streamline the approval process for invoices and payments.
- Simplify: Reduce the number of suppliers and standardize processes.
- Use electronic payments: Utilize wire transfers, ACH payments, and stored value cards.
- Monitor Credit Card Purchases: Use technology to track and monitor credit card spending.
- Automate travel policies: Integrate corporate travel policies with expense reporting systems.
- Shift billing to EDI: Receive invoices electronically.
- Implement negative assurance: Use a system where invoices are approved unless exceptions are identified.
- Require supplier information: Ask suppliers to provide their supplier numbers on invoices.
- Offer online invoice submission: Allow suppliers to submit invoices through a website.
- Eliminate cash advances: Avoid providing cash advances to employees for travel expenses.
- Verify tax forms: Withhold payments until necessary tax forms are received.
- Schedule check signing: Establish regular meetings for signing checks.
- Protect checks: Incorporate security features to prevent check fraud.
- Provide remittance details: Include remittance information with ACH payments.
Also Read:
Costing Best Practices
To improve cost accuracy and efficiency, consider the following strategies:
- Audit: Regularly review bills of materials and labor routings.
- Eliminate: Remove unnecessary overhead allocation bases and labor variance reporting.
- Review: Conduct periodic reviews of inventory obsolescence.
- Implement: Use activity-based costing or management to allocate costs more accurately.
- Set targets: Establish target costs for products or services.
- Control changes: Restrict changes to units of measure.
- Monitor trends: Analyze cost trends over time.
- Review scrap: Assess material scrap levels and identify areas for improvement.
- Revise reports: Modify traditional cost accounting reports to provide more relevant and actionable information.
Also Read
Payroll Best Practices
To streamline payroll processes and improve efficiency, consider the following strategies:
- Automate: Use technology to automate tasks like faxing forms, accruing vacation time, and processing deductions.
- Simplify: Avoid using payroll systems for job costing and eliminate personal days.
- Centralize: Combine multiple payroll systems into one.
- Prevent prepayments: Disallow prepayments for expenses.
- Provide access: Give employees access to their deduction data.
- Integrate: Connect the 401(k) plan and payroll systems, as well as payroll and human resources databases.
- Minimize cycles: Reduce the frequency of payroll runs.
- Outsource: Consider outsourcing the payroll function to a third-party provider.
- Prohibit deductions: Prevent employees from making deductions for personal purchases.
- Electronic remittances: Send payment information electronically.
- Switch to salaried positions: Evaluate the possibility of transitioning employees to salaried roles.
- Use time tracking: Implement barcoded or biometric time clocks.
- Default 401(k) enrollment: Automatically enroll employees in the 401(k) plan.
- Direct deposit: Offer direct deposit for payroll payments.
- Honor system: Allow employees to self-report vacation and sick time.
- Link payroll changes: Connect payroll changes to employee events.
- Web-based outsourcing: Consider using a web-based payroll outsourcing service.
- Minimize deductions: Reduce the number of payroll deductions.
- Online forms: Post payroll forms on an intranet for easy access.
- Electronic W-2s: Issue W-2 forms electronically.
- Offer payment options: Provide employees with options like company credit cards.
- Transfer payroll: Allow employees to transfer payroll funds to credit card balances.
Key Considerations for a Soft Close
- Data quality: Ensure your data is accurate and reliable to support the soft-close approach.
- System readiness: Evaluate your systems to determine if they can handle the reduced reporting frequency and increased flexibility.
- Organizational buy-in: Gain support from key organizational stakeholders to ensure a successful transition.
For a detailed breakdown of transitioning to a soft close, refer AICPA’s Redefining the Closing Cycle.
