What is Month End Close and Why Is It Important?
You’ve heard the term “month end close,” but what is month end close? How does it help your business and is it even important?
A month end close offers you:
- Clear, accurate financial information
- Peace of mind if you’re audited
- Better decision-making
- Easier tax filing
- Much more
We’re going to explain month end close, how long it takes and why your accounting team should focus on this process.
What is Month End Close?
Reviewing and reconciling your accounts is an integral part of business. You can’t know where your company is heading if you:
- Have inaccurate data
- Don’t account for all transactions
Your month end close involves a thorough review of your financial transactions, documenting each transaction and reconciling them.
Why?
A month end close is a way for your business to account for all transactions during the last month and start a new month with fresh records. Your month end close finalizes one financial period and ensures you enter the next with accurate financials.
To close the monthly books, you’ll need to have all of your data. Some of this includes:
- Petty cash total
- Total revenue numbers
- Financial statement information
- Total fixed assets
- Expenses and income
- Accounts payable and aging report
- Accounts receivable and aging report
- Inventory levels (if applicable to your business)
Having all of this data on hand will help speed up and streamline the month end closing process. The exact information neded for the close process will depend on the nature and complexity of your operations.
While every company is different, there are some common steps to take when closing the month end books. These include:
- Recording incoming cash and AR (accounts receivable)
- Reviewing accounts payable and expenses
- Reconciling accounts
- Reviewing fixed assets
- Gathering and analyzing financial documents
- Drafting financial statements
- Reviewing all data to ensure accuracy
If you are a business that sells physical products, you will also need to track inventory. Service-based businesses won’t need to go through this step.
The month end close may seem straightforward, but it’s actually quite complex and is an important part of the accounting process.
Why is it Important?
Inaccurate financial data leads to poor decision-making. Your business will struggle to be a forward-thinking company if your decisions are made on the basis of data that is inaccurate. Before a close, data can be:
- Incomplete
- Full of errors
A month end close supports business evaluation so that errors do not lead to costly mistakes for your company. Consistency and accuracy build confidence in your financials and will support strategic planning and financial investments.
If a company seeks investors or lending, your month end close will provide a clear understanding or your current financial status.
Beyond your current financial status, the month end close will help management have a clear view of:
- Business progress
- Emerging trends
If the business is starting to show signs of declining revenue or financial distress, the month end close can show this data to management. Detecting and addressing issues early on keeps stakeholders happy and businesses running smoothly.
How Long Does Month End Close Take?
Every business is unique, but on average, month end close takes 5-10 days. The length of time it takes will depend on several factors, including:
- The size of your business
- The volume and complexity of your transactions
- The accounting systems you use
Closing faster does have its perks. Data tends to be more accurate when you close quickly. However, speed can come at the cost of accuracy.
Using estimates, for example, can speed things up, but when it comes time to close out the fiscal year, the actuals will still need to be determined. That process can add days to the year-end close process. Essentially, you’re saving time now but just making your work more difficult in the future.
Finding ways to optimize the process without compromising on accuracy is one of the many challenges of the month end close.
Common Challenges and Pitfalls of DIYing the Process
Business owners wear many hats, and more often than not, that includes the “accountant” hat. But when it comes to the month end close, taking the DIY approach isn’t ideal.
Here’s why:
- If you’re working with your team, they may not know what needs to be done or which tasks have already been completed.
- A lack of standardization or unclear processes can lead to disorganized chaos.
- Inaccurate data or discrepancies between numbers can lead to costly errors.
Your business is your area of expertise, not accounting. A virtual accountant can take care of your month end close and other accounting tasks to save you time, reduce the risk of errors and help you stay compliant.
To learn more about our virtual accounting services or how we can help you with your accounting needs, schedule a consultation now!
