Small business owners often try to do it all: run their companies, chase their dreams, and do their own bookkeeping. If you are a doer and a dreamer who is not sure exactly what gets “closed” in a “month-end closing,” this article is for you.
Don’t worry: You are not alone. A lot of the business owners we work with at Fourlane are learning about business finance from the ground up. These three questions are the ones I answer most about month-end closings.
1. What is the month-end close process?
The process of month-end close includes several layers of tasks, from making sure all transactions are created in the correct period to creating monthly entries to account for things such as prepayments and expense accruals. The goal is to balance each of your accounts each month.
When we work with clients, we start by getting their books cleaned up and updated. We then provide ongoing support to ensure every month is closed accurately. Through the ongoing relationship, we are able to identify when workflows or processes aren't working. That gives us the chance to problem-solve and work directly with management teams to customize financial reports, so they are a useful tool for decision-making.
2. Does it matter whether I close my books every month?
Clients ask this a lot. What they ultimately want to know is why we say it is important to do a monthly closing.
With the state of today’s economy, it is important that businesses can trust their financials. Having instant insight into their financial standing means companies can make quick, informed decisions to switch how or what they are doing to keep their doors open.
Companies can also forecast for cash flow needs by closing the financial accounts each month. This lets them track that the business is trending in the expected manner.
They can also easily identify which areas of the business might need changes in spending. By reviewing all account balances each month, you can stay on top of any changes and make data-based decisions instead of wild guesses. No one wants to find unpleasant or unexpected surprises down the road because you didn’t have an accurate picture of your business.
3. When should this monthly process start?
The month-end close process should be started on the last day of the month to make sure all activity is in the accounting file. The following days will be spent reviewing and reconciling each account. On average, a larger company spends the first 10 days of the next month completing all the month-end process steps. Then they can create customized financial reporting for each department.
The 12-month process culminates with a year-end close. I tell my clients that you never want the stress of trying to remember everything that happened throughout the year to make any needed adjustments at year-end.
Retain a process for your books
If you walk away with one takeaway from this article, it would be to establish and maintain a process to handle your monthly closings in your business. Don't delay ... get organized today.