Month-End Close: Steps, Checklist, and Best Practices

Introduction

Imagine wrapping up a thrilling mystery novel where every clue fits perfectly into place—that’s what a well-executed month-end close process feels like for finance professionals. It’s not just about crunching numbers; it’s about ensuring every financial detail is accurate and up-to-date. 

The month-end close process is essential for maintaining accurate financial records and making informed business decisions. In this guide, we’ll provide you with a month-end close checklist, break down the steps for effective financial closing, and share best practices to streamline your month-end close. Whether you’re a seasoned accountant or a business owner, this resource will help you navigate the process with ease.

What Is The Month-End Close Process?

The month-end close process is a crucial accounting task conducted at the end of each month to ensure accurate and timely financial reporting. It involves several steps, such as reconciling accounts, reviewing transactions, adjusting entries, preparing financial statements, and analyzing performance.

Specifically, the month-end close process includes reviewing the company’s balance sheet, intercompany trades, month-end journal entries, and other documents (like bank statements, income, and expenses) and reconciling them.

This process serves as a mandatory fiscal reporting requirement for public companies, ensuring compliance with financial regulations and standards. Additionally, it plays a vital role in helping businesses maintain accurate and reliable records throughout the year, which is essential for making informed financial decisions and facilitating smooth operations. The month-end close process helps in tax filing, preventing accounting errors, and getting an overall picture of the company’s cash flow scenario.

What is the purpose of the month-end close process?

The month-end close is a critical accounting process that finalizes and wraps up all financial activities for the previous month. This involves systematically reviewing, documenting, and reconciling every financial transaction that occurred during that period, ensuring that the financial records are accurate and complete.

Businesses that wait until the end of the year to prepare their financial reports often find the task tedious and daunting. To ease the process, most businesses prepare monthly financial statements. This provides an ongoing view of their financial KPIs and makes the year-end process smoother. 

What Are The Steps In The Accounting Close Process?

There are five steps to the month-end close process. These steps give a general overview of how most businesses review and reconcile their books at the end of every month:

1. Collect all financial information
2. Verify and reconcile the data
3. Assess fixed assets
4. Make financial statements
5. Conduct a final review

1. Collect all financial information

The first step in the month-end closing process is to collect all the relevant financial information. This includes income statement items (e.g., accounts receivable), expense records (e.g., accounts payable), and other daily transactions.

2. Verify and reconcile the data

After collecting all the data, it needs to be cross-checked with receipts, bank statements, and other sources of information that the business might have.All accounts on the balance sheet, like cash, savings, and checking, must be reconciled. It gives the business a clear idea of its cash flow.

3. Assess fixed assets

All fixed assets that a business might have, like equipment, technology, storage, housing, vehicles, etc., need to be assessed. It is also essential to account for asset depreciation, and the depreciation amount needs to be categorized under expenses.

4. Prepare financial statements

Now that you have all the information in place and have verified them, it’s time to prepare your financial statements. These include the balance sheet, income statement, and cash flow statement. Make sure the entries are recorded correctly and that there are no discrepancies between the financial statements. 

5. Conduct a final review

The month-end closing process is critical for every business. So, a final review is always done before completing the closing process. This review is done by the top management or someone who wasn’t involved in the closing process to get a fresh perspective on the data. This ensures that the monthly financial statements are error-free.

Financial Close Bottlenecks

The month-end closing process is a routine activity for every business. Before we talk about its best practices, it is essential to identify the challenges involved in completing the month-end closing process. Let’s look at some of the common roadblocks businesses face during the month-end close and their solutions.

1. Lack of a centralized repository of data

If the financial documents required for the month-closing process are stored in different locations, it will be cumbersome to access them quickly. So, a centralized repository is recommended to ensure the smooth collection of data.

2. Errors in spreadsheets and other manual records

If reconciliation documents are available to all, keeping error-free records is challenging especially when changes are made in an unorganized manner. Having a system where only authorized employees are allowed to access the documents is essential. 

3. Insufficient knowledge about the closing process

The month-end closing process is complicated and might vary for every business. Without adequate training, employees may find it challenging to carry out the process efficiently. 

4. Status tracking

If multiple teams are involved in the monthly closing process, then keeping track of the task status is going to be a significant pain point. HighRadius’ Accounting Solution gives real-time visibility into the different financial tasks and ensures activities that involve multiple stakeholders don’t get slowed down.

Importance of a strategic financial close system

Month-end close is a crucial activity for every business spearheaded by the finance department that requires the books to be closed quickly and accurately. Needless to say that forecasting cash flow predictions accurately, making strategic business decisions, and financial planning, all depend on a successful financial closure.

The month-end close process is important to businesses and results in the following ways:

1. Accurate and reliable information on which to base business decisions:
   • Having precise and trustworthy financial data allows businesses to make informed and strategic decisions, ensuring long-term success and stability.
2. Visibility into the company’s financial health:
   • Clear insights into financial status help identify strengths and weaknesses, enabling proactive management and planning to maintain financial health.
3. A basis for planning the future:
   • Reliable financial records serve as a foundation for forecasting and strategic planning, aiding in setting realistic goals and allocating resources efficiently.
4. Managing cash flow:
   • Proper financial closure helps track and manage cash flow effectively, ensuring the business has sufficient liquidity to meet its obligations and invest in opportunities.
5. Ensuring confidence among stakeholders:
   • Accurate and timely financial reporting builds trust and confidence among investors, creditors, and other stakeholders, supporting better business relationships and investment opportunities.
6. Preventing accounting errors:
   • A thorough month-end close process helps identify and correct errors promptly, reducing the risk of inaccuracies in financial statements and maintaining compliance.
7. Preparing for a simpler and smoother tax filing process:
   • Organized and accurate financial records streamline the tax filing process, making it easier to comply with regulations and avoid penalties.

Best Practices To Improve The Month-End Closing Process

Your month-end close process should include recording incoming cash, checking your AR records, and reconciling all accounts, including petty cash. It is essential to track all your business transactions, to ensure accurate records and mitigate fraud risks, guaranteeing the financial well-being of your organization.

Here are some best practices to follow during the month-end closing process:

1. Choose quality over speed

Month-end closing is among the most critical accounting processes for every business. So, rushing through it and making mistakes won’t help, especially if these statements will be referred for your year-end close. Accurate monthly financial reports improve transparency and track KPIs correctly.

2. Find areas of improvement

Since month-end closing is a routine activity, it is important to note any roadblock or problems you encounter to address them effectively. For example, if collecting data takes more time than planned, try to keep everything organized throughout the month. 

Businesses should also look at investing in automation solutions that support data aggregation and segmentation. HighRadius’ Record to Report solution provides financial close automation, which offers project templates, close task management, and accounting anomaly detection.

3. Meet deadlines

Even though you must not sacrifice quality for speed, you must also plan ahead to meet your month-end financial reporting deadlines. If you are required to complete the closing process within a week and you know that the timeline is unrealistic, then communicate this beforehand. 

Sticking to a consistent schedule for releasing financial statements every month can help you better organize your team’s time and activities. Further, adopting automated accounting solutions can help you make day-zero financial close through immediate and accurate decisions.

4. Automate the required processes

Automation is the key to reducing the time and effort required for the month-end closing process. From collecting data to reconciling accounts, automation can drastically speed up workflows. It also helps reduce errors and simplifies the financial statements sharing.

What is a Month-End Closing Process Checklist?

A month-end closing checklist is a list of tasks that need to be completed before closing the monthly financial books. It is crucial to have a checklist, as you need to aggregate data from multiple places to create and review the financial statements. 

Here are some records that you need to check:

1. Balance your cash account Ensure that your cash balance matches the bank statements, and check if there are any discrepancies or undeposited funds.
2. Keep an accurate expense record Record and cross-check the company’s expenses for the period accurately.
3. Manage due payments Check the status of due payments and whether any bad debts need to be written off.
4. Track supplier payments Verify the payments that you made to suppliers during the month.
5. Monitor inventory and asset value Document the depreciation value of fixed assets and track your inventory.
6. Review accumulated tax liabilities Check for the accumulated tax for the period concerned.
7. Calculate employee compensation Calculate employee payroll for reimbursement.
8. Manage bank loan payments Calculate the monthly interest costs payable to the bank and the amortization of loans.

How Can Highradius Help Global Record-to-Report Teams Close 30% Faster

One of the main challenges in month-end closing is the amount of time it takes to complete the process. Most organizations take around 5-10 working days to complete the month-end close, and businesses often find it difficult to reduce this time. HighRadius’ Record to Report solution can help your business make the month-end closing process faster, smoother, and error-free. Our AI-powered transaction detection system gives access to real-time data and helps spot errors. It also automates manual tasks like financial data collection and reconciliation.

HighRadius’ Account Reconciliation software ensures that all balances are accurate and consistent across your financial statements. By automating reconciliation, businesses can reduce errors and improve efficiency. Transaction Matching enables rapid comparison of large volumes of transactions, significantly speeding up the reconciliation process and ensuring discrepancies are identified and addressed swiftly. Substantiation provides robust documentation to verify the accuracy of financial entries, enhancing compliance and reliability. Journal Entry Automation streamlines the creation, approval, and posting of journal entries, drastically reducing manual effort and potential errors.

Together, these tools from HighRadius transform your financial closing procedures, enabling a seamless, efficient, and accurate month-end close process. Businesses can achieve a zero-day financial close and reduce their month-end close time by up to 40%, ensuring timely and precise financial reporting.

FAQs

1) What are the month-end close activities?

Month-end close activities include reconciling accounts, reviewing transactions, generating financial statements, adjusting entries, analyzing variances, ensuring compliance, and preparing reports. These tasks ensure accurate financial records and informed strategic decision-making.

2) What should your month-end reports contain?

A month-end accounting close report typically includes a summary of financial statements, KPIs, variance analysis, cash flow analysis, inventory analysis, AR and AP aging reports, and other relevant information for the preceding month. The specific content of the report varies depending on the organization.

3) What are month-end reports?

Month-end reporting is the process of preparing and analyzing financial reports at the end of each month to summarize a company’s financial performance. It includes reviewing financial statements, such as income statements, balance sheets, and cash flow statements, and identifying key performance indicators.

4) What is accounting close?

The accounting close process is a series of procedures undertaken at the end of an accounting period to finalize a company’s financial statements. It involves reconciling accounts, adjusting entries, and preparing financial statements to ensure accurate and complete financial reporting.

5) What is the month-end close policy?

It is the process of reviewing, reconciling, and verifying that all financial transactions and aspects of the company ledgers from the past fiscal year add up. This involves calculating the business expenses, income, revenue, assets, investments, equity, and more.

6) Why does the month-end close take time?

The month-end close takes time due to the need for meticulous reconciliation of accounts, thorough review of transactions, adjustments for accuracy, compliance checks, and the preparation of detailed reports. This process involves collaboration across departments to ensure financial accuracy and transparency.