Closing the Books. Is it that time again?
Like the laundry, an accountant’s job is never done. It seems like you just closed the books for the month and it is time to close them again.
Closing the books is the process of collecting the relevant accounting information, recording necessary journal entries, reconciling accounts, and reviewing the outcomes. It can feel feel like déjà vu, back to back closes with not much time in between. This can be due to the need for numerous manual tasks with little or no automation, disparate systems, lack of resources, and fragmented data adding unnecessary time and effort to the process.
Does the close have to be monthly? I would answer “Yes” if you want an accurate account of your company’s financial position at any given month and not risk big surprises at quarter or year end. Financial statements are most valuable when they are timely and accurate. Reporting on financials from three months ago is called “historical reporting” and does little to help with the strategic decisions ahead for the business, or even just understanding current activity. In addition, most organizations have stakeholders (Board, investors, lenders, vendors) who rely on timely financial statements to determine the economic health of the company.
The faster a company can close their books the better. Every minute spent closing the books is time taken away from the “value add”. Templates and checklists can be the key to a consistent, timely, and accurate process, especially if your company does not currently automate the tasks required to close the books. In addition to cutting days off your monthly close, well-designed templates and checklists can help standardize operations and make sure you are not missing crucial steps.
While closing the books as quickly as possible can give you more time for analysis and get your accounting team onto more important projects, be careful not to trade speed for accuracy. The review stage is critical. My prior Big Six accounting experience taught me to audit the balance sheet, and the profit and loss statement will almost take care of itself. Reviewing and reconciling each balance sheet account monthly can help reduce your exposure to errors, risk and fraud.
You can also choose between a Soft close process and a Hard close process.
A SOFT CLOSE:
With a soft close, you skip many of the month-end close reconciliations. You let the books stand closed without further investigation on variances, or perhaps even identifying them. With a soft close, the month’s books get locked down quickly and stand as is. While this method is quick and allows you to move onto the next month and other business tasks, it risks presenting financial statements with material errors and omissions.
A HARD CLOSE:
With a hard close, you treat the monthly close almost as if it were “year-end”. You leave the books open longer, reconcile all balance sheet accounts with large balances or significant activity, perform variance analysis, and investigate significant differences. You accrue for invoices or charges that are known, but have not yet been received. Leaving the books open a bit longer and accruing for period expenses should result in financial statements that are more accurate and reflect a full accrual basis. Thus, management and stakeholders can make better informed decisions. You can take them to the bank, so to speak.
You can also do a combination of a soft close in some months and hard close in other months, depending on your stakeholder requirements or internal needs. Looking for help with your financial close, or developing proper processes and procedures? Feel free to contact us, stop by our office or visit our website. Our advisors are equipped with real-world industry experience, an extensive network, and above all, a passion for helping companies like yours reach their goals.
About the Author
Ana Klein is a Principal at Morrison. To get in touch with Ana, please find contact information for Morrison here.