Accounting

What is the Month-End Close Process?

Jul 18, 2018 | By Blake Oliver

A definition of the month-end close process for accountants

Doesn’t it seem odd that an activity that many accountants spend a big chunk of their lives on – closing the books – isn’t really explained in accounting courses?

Sure, there’s something in your financial accounting text on cut-off and matching, but there’s nothing to prepare you for this frenzy of long hours, intense collaboration, frustrating bottlenecks, and tedious manual reconciliations. And until you get to the controller’s position, or maybe the CFO spot, you really don’t get a holistic view of what closing the books means.

So just what is the month-end closing process, anyway?

What is the Month End Close? A diagram for accountants.

Let’s explore with the help of this infographic

The General Ledger, over on the left, is where it all starts. During the month, clerks, bookkeepers, and staff accountants record debits and credits as bills are paid and payments are received. Thanks to cloud software, bank feeds and automation, this tedious work is starting to be done automatically. The result is the Trial Balance, a listing of all the account balances at the end of the period.

But every month, every quarter, and every year, we need to report financial results to stakeholders such as banks and investors. That’s over on the right.

To get from the GL and TB to financial reporting, we need to close the books. This means adjusting account balances from cash basis to accrual basis and presenting our results according to Generally Accepted Accounting Principles (GAAP).

  • Cash basis – this accounting method records income and expense based on cash coming in and cash going out. Timing differences in payments can distort the economic reality of transactions, making results look better or worse than they really are.
  • Accrual basis – transactions are recorded in the period in which they occur, regardless of the timing of payments. This evens things out, but still makes it difficult to compare results between periods and between companies.
  • GAAP – Generally Accepted Accounting Principles is a set of consistent rules for accurate, consistent, and comparable financials. It is mandatory for public companies.

When the bookkeeping ends, accounting begins

Once all of the cash transactions have been recorded, the accountant’s job begins. The month-end close process can be chaotic, messy, and complex, with information from multiple systems and activities that needs to be consolidated, reconciled, and adjusted. It’s a process that requires close collaboration and sequential completion of specific tasks by each team member.

Account balances have to be reconciled to verify that all transactions for the period are recorded in the correct accounts and in the correct amounts. And we also need to draw a firm line between this period and the next so there’s a definite cutoff for each period’s activities.

The matching principle states that expenses need to be recorded in the same period as the related revenue. Some expenses are paid out after the period that they relate to, so we need to accrue for those.

For example, let’s say that SoFast, a software company, pays sales commissions the month after they’re earned. This means that the cash-basis commissions paid out in July were actually earned in June. On an accrual basis, those commissions need to be accrued as commissions payable at the end of June because they come from sales that happened in June.

Under pre-ASC 606 revenue recognition standards, those commissions are expensed as they’re incurred. But with the new standards, those commissions are amortized over the life of the contract with the customer, which may even include renewals.

If a company has subsidiaries or international operations, activities from those separate pieces of the business need to be consolidated, with intercompany transactions eliminated. The end result should reflect only the transactions that the entire company has with the outside world.

With technology, accountants can speed up this month-end closing process and start on some tasks before the period ends. This helps reduce the work that needs to be done once the period ends.

Besides the high volume of work to get done, part of the pain of the close comes from managing the process and the data. Reconciliations, checklists, documents, and schedules might be scattered across your network, and it’s hard to see who’s done what, and whether any of the numbers have changed as adjustments are made.

 

Period ends have different tasks

High-risk accounts are reconciled more frequently. These are the accounts that have a high volume of transactions, so they have a high risk of being off by a significant amount. These include cash, accounts receivable, accounts payable and inventory. Cash might even be reconciled daily. With daily reconciliation, this is normally assigned to one person as their first task of the day.

The ideal month-end close process is to reconcile as many accounts as possible every month, but this may not be feasible. Each account takes time, and there’s always a tension between getting the close done fast, and getting all the numbers right.

Sometimes an estimate will be just fine for month end, but those tiny variances can snowball until they get really big, and then it’s really tough to tease out what makes up that variance. Memories fade, and it’s hard to remember what happened a few months ago.

Then at quarter end, a few more accounts might need reconciliation. Public companies have quarterly SEC reporting, so they need to be sure their numbers are solid every three months.

At year end, in addition to the tasks for month and quarter, there’s even more pressure to get it done right and done fast. You have to make sure everything is buttoned up and you’re ready for the higher-stakes annual reporting and corresponding audit.

Flux Analysis helps controllers spot problems early on

Besides all the reconciliations and adjustments, a crucial step in ensuring the ongoing health of your company is looking at changes over time in the numbers. Some of those small changes are early warning signs that there’s trouble ahead. Maybe there’s fraud, maybe labor costs suddenly spiked, or maybe someone simply forgot to book a monthly accrual. By identifying those signs early, you can fix things before they become major problems.

But doing a thorough job of flux analysis means hours and hours of tedious manual data entry in gargantuan linked spreadsheets. It means aggregating data from multiple sources and then spending even more time figuring out which fluctuations matter, and what’s behind them. It’s no wonder that in the pressure to close quickly, flux analysis drops off the list of top priorities. And because it’s so time-consuming, you might not get the answers you need until it’s too late to take action.

But what if there were a tool that automated the data collection and calculated the variances that really matter? Better still, what if that tool did this automatically and dynamically so that you could respond in real time to what’s happening now? Having your finger firmly on the pulse of your company is a must in today’s always on, 24/7 global economy.

Enter our new Flux Analysis tool, currently in beta. Flux Analysis uses the data you’re already using to close the books so you can see dynamic fluctuations between the current and prior period.

A built-in notes function lets you easily document your findings right there, in real time, keeping everything in one place for easy reference. Team members can comment on variances on the account or category level for all users to see. This increases transparency and lends more visibility to the financial statements as a whole.

With this new tool, flux analysis is faster and easier, giving you the information you need so you can act on issues before they become problems.

On to the final frontier of reporting

Now with the accounts reconciled and verified, it’s time for reporting. For small businesses, cash basis reporting is probably adequate, so they can skip the adjustments to accrual basis. And their year-end financials will likely serve as the basis for their tax return.

Seal of the United States Securities and Exchange Commission

But for other companies, reporting is crucial. Different stakeholders and interested parties have different requirements. Banks and investors want to see GAAP basis financials, especially for the startups they’re funding. Public companies have additional SEC reporting to comply with, and commonly one person is assigned to that work. And then there’s the tax return to worry about as well.

An extra step before these reports go to outside parties is the audit. Auditors examine the financials and the supporting documentation to make sure the close was done right, and to ensure the financial statements are presented in accordance with GAAP. Those pesky auditors  always seem to ask for that one email or invoice you can’t find. And you can depend on them to point out that your Excel masterpiece no longer ties to the GL.

Where does FloQast fit in?

We help companies manage the month-end close process between the GL and reporting. Our approach blends technology, collaboration, strategic planning, and tactical implementation. Using FloQast, companies close the books by an average of three days faster, more accurately, and with everything in place to be audit ready.

See where FloQast fits into the "Holistic Close" tech stack, filling the gap between your ERP and FP&A applications.

Now at FloQast, we don’t do reporting, but we partner with Corporate Performance Management (CPM) developers such as Host Analytics to give you everything you need to go from the GL to your reporting. For a live demonstration of FloQast used in conjunction with Host Analytics, watch this video from CEO Dave Kellogg’s keynote at Host Analytics Perform 2018.

Our holistic approach to the financial close means we look at the big picture, so that we’re continually working with our customers and partners to improve the process. FloQast is easy to set up and easy to use. The pain of the month end close becomes a distant memory.

FloQast provides a platform that brings it all together

  • Trial Balance data from your accounting system or ERP is automatically matched to your Excel workbooks for streamlined reconciliations.
  • Supporting documentation is just a click away, making it easy to find for your team and your auditors.
  • A central dashboard lets everyone see what needs to be done, and what the status of each task is.
  • Review notes keep documentation and communication between team members organized and easy to refer to.
  • Everything is tied out and audit ready.

You do want your life back again, don’t you?

Help with reconciliations is where we really shine. Put an end to multiple versions of spreadsheets so you know the one you’re looking at is the right one. Get alerted automatically if a journal entry throws a reconciliation out of whack. FloQast is so easy, many of our customers find they can reconcile more of their account balances in the same or less time each month. That makes quarter-end and year-end a piece of cake.

Ready to find out more about how FloQast can help you tame the beast of the close?

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Blake Oliver
Blake Oliver, CPA, is an entrepreneur, accountant, writer, and speaker who specializes in cloud accounting technology. In 2016 and 2017, Blake was named a “40 Under 40” in the accounting profession by CPA Practice Advisor. He is the Senior Product Marketing Manager for FloQast.

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