As an executive, if you don’t receive accurate and timely end-of-month financial reports, your business could suffer in a multitude of ways:
- You’ll be unable to identify errors in a timely manner, allowing the inaccuracies to balloon.
- Year-end reporting will take longer than necessary.
- Fraud is more difficult to detect.
- And, you’ll lose the ability to capitalize on key performance indicators.
The ABCs of the Monthly Close Process
At the end of each month, the accounting department must reconcile the books with supporting documentation. Management then uses these statements to make decisions. These statements allow for quick looks at budgets v. actual revenue and spending. If these financial statements aren’t completed accurately and on time, managers can lose a valuable tool needed to smartly run their business.
Unfortunately, it’s not uncommon for executive managers to fail to receive the information and transparency needed from their controllers to make informed decisions. Perhaps your process is inefficient or is not systematized. It’s the controller’s responsibility to manage the financial reporting process.
It’s important that companies – large and small – have standard monthly close procedures, which should include a checklist and a strict timeline for completion.
Timing for the Close Process
We recommend that a close happens as close to month-end as possible. If accounting systems are integrated and everything is running smoothly, and the reports are computer generated, few manual entries or adjustments should be needed.
For some businesses – especially hotels and others in the hospitality industry – the close can be done quickly, say three to five days after month end. This process for other businesses with more complex revenue streams or accounting issues can take longer. But, all monthly closes should occur within the first 10 days of the month.
When Problems Arise in the Close Process
As expected, problems do arise. I recently spoke with an individual who expressed frustration he wasn’t getting enough information from his accounting team. The financial statements were delayed several months, he didn’t know where their line of credit balance stood and whether accounts receivables were being collected timely. He asked whether he might need more accounting staff. And, he asked for best practices to make his monthly close more effective and efficient, so he had the necessary information needed to make good management decisions. One suggestion is to create a Cash Management report scorecard/dashboard for management to see every Monday. This would include key performance indicators including cash balances, accounts payable and accounts receivable aging reports and line of credit balances. Another suggestion is to review the current financial reporting system and determine if it is being utilized to its full potential. Is a significant amount of transactions being processed manually? Any accounting procedure that can be integrated with the accounting system will facilitate an efficient monthly close process.
Tying It All Together
An accounting team should be a high-performing part of any business, providing data to help managers make intelligent business decisions. A lax system creates risk for internal control problems, and poor monthly close processes mean data may not be available until the end of the year, leaving managers in the dark. Critical areas such as financial analysis, budgetary control, and cash flow can all be negatively impacted. Managers are unable to quickly identify errors and then make decisions based on inaccurate financial information. Year-end audits or other outside compliance reports take longer because managers must go back several months to identify what happened. Any past errors must be identified – and when they are – fixes come later than they should.
A good monthly close process is an important internal control step. It’s not just busy work. Without it, managers can’t make well-informed decisions. Make sure your monthly closes happen regularly and on time. Let us know if we can help.
© Clark Nuber PS and Developing News, 2019. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Clark Nuber PS and Developing News with appropriate and specific direction to the original content.