Closing the books is a critical accounting process for many reasons. Namely, doing so leadsto the creation of all-important financial statements that guide strategy and help anorganization's leaders measure progress against business goals, calculate cash flowprojections and make budgeting decisions. Key stakeholders outside of the company —such as analysts, investors, auditors, lenders and regulators — also look to thesestatements to understand a company's financial position.
But as any accounting will tell you, the financial close process is a painstaking process. Atmany companies, finance teams gather at the end of the month, quarter and year to wrangletransactional details to arrive at a single version of the financial truth.
What Is the Close Process?
The financial close process involves recording all of a company's financial activityover a given period of time. The close process takes place at regular intervals —typically at the end of the month, quarter and year. The end result is a series of financialstatements that provide an accurate picture of an organization's financial health.
Businesses often feel pressure to close the books and create financial statements quickly,but the desire for speed must be balanced with the need for accuracy. Some companiesstruggle with dispersed or inaccessible data, manual processes and lack of standardization,which can complicate and drag down the close process. However, the most effective companiescreate standardized procedures and take advantage of automated accounting software tostreamline the financial close process and improve accuracy.
Key Takeaways
- The financial close process is an essential business activity that produces timely,accurate records of an organization's financial performance during a particularaccounting period.
- The close process takes place at regular intervals — usually monthly, quarterlyand annually.
- Key internal and external stakeholders rely on the financial data resulting from thefinancial close process to perform analyses and make strategic decisions.
- Financial software and other automation tools streamline many of the tedious aspects ofthe close process, reduce errors and free up accounting teams to focus on higher-levelwork.
Close Process Explained
The financial close is acritical business process that leads to the delivery of financial statements, which reflecta business's financial position during a given accounting period. The purpose of theclose process is to set financial records in stone.
Closing the books at a regular cadence — monthly, quarterly or yearly — isnecessary for effective business management and success. The financial statements producedduring the close process are especially valuable when they provide accurate and timelyinsights, which demands painstaking attention to detail within a narrow window of time. Fororganizations that don't use effective technology and streamlined processes, closingthe books can be a labor-intensive, inefficient and fragmented exercise.
Why Is the Close Process Important?
Closing the books is an essential activity for any business, since it creates a consolidatedand accuraterecord of financial activity over a particular reporting period. Both internal andexternal stakeholders rely on the financial statements that the close process generates:
- Business leaders, board members and managers require regular, accurate accounting offinancial activity to conduct financial analyses, forecast expenditures, manage budgets,generatekey performance indicators (KPIs) and benchmark their companies' financialperformance against competitors.
- External stakeholders, such as investors, lenders and analysts, look to the financialstatements produced during the close process to assess a company's financialperformance. And government agencies can require companies to provide certain financialinformation during the close process to comply with regulations.
The financial close process is so important to many businesses that they track the cycle timefor closing the books as a KPI for the finance group. The goal is not only to provide thiscritical information in a timely manner to inform decision-making, but also to free upaccounting resources to perform higher-value work.
10 Steps for the Close Process
The specific tasks involved in the month-end close process can vary from company to company,depending on the type of accounts and transactions involved, plus industry standards andregulatory requirements. However, the process generally follows a common workflow thatcomprises these 10 steps.
Record all revenue and incoming cash.
As a first step, the accounting team will record any money that's earned duringan accounting period, taking into consideration all revenue sources —everything from product sales to consulting services — and looking for anyloose ends to tie up. For example, if the company failed to invoice a customer forwork done during the accounting period or a client has neglected to make a payment,those issues will need to be addressed and properly recorded.
Update the accounts payable.
In conjunction with recording revenue, the accounting team will also need to recordany expenses that were incurred during the accounting period, including payroll,contractor payments, notes payable interest expenses and taxes. At this stage, theteam will make sure to cross-check these liabilities with those recorded in the general ledgerand ensure every expense has been accounted for.
Review balances and adjustments from the prior period.
In addition to making sure all financial activity from the current period has beenrecorded, the accounting team will want to examine balances and adjustments from theprior period for incurred expenses and prepaid assets. For example, if a businesspaid its six-month insurance premium in January, it is recorded as a prepaid assetand amortized through June.
Reconcile all accounts.
Next, it's time to reconcileall business accounts, including cash, checking and savings accounts, creditcards and prepaid accounts. Cash is often the easiest to process, since shortfallsor overages can be quickly identified and corrected. At this stage, accountants willcross-reference statements with receipts, bank records and any other outsidesources. Some businesses may have intercompany accounts, soit's important to ensure that payables and receivables match between thevarious business entities.
Manage fixed assets.
Fixedassets, such as equipment, vehicles and property, add long-term value to thebusiness, so accounting will need to record any depreciation or amortization relatedto these assets.
Review inventory.
Similarly, inventory must be factored into the financial close process. Periodically,the inventory noted in the accounting records will need to be reconciled with a physical count ofitems.
Assemble financial statements.
The next step in the financial close process involves preparing financialstatements. This can be done with a spreadsheet or, ideally, by usingautomation software. Financial statements include an income (or profit and loss)statement, cash flow statement and balance sheet.
Conduct a pre-close review.
Financial statements should be reviewed by the accounting team and key stakeholders.To ensure that the assessment is unbiased, reviews should be conducted by those notactively involved in the close process.
Finalize reports.
Once the proposed financial statements have been reviewed, the accounting team cancomplete any necessary reporting for management and pull together any documentationrequired for auditing and regulatory reporting.
Prepare for the next close.
The accounting team will close the books to reset income statement accounts to zeroand lock in balance sheet accounts at the end of the period. The finance team canaddress any issues or concerns that arose during the close in order to improve andstreamline the process for the next accounting period.
Close Process Challenges
The financial close can be a grind, given the requirements to deliver accurate results ontime and in compliance with all internal policies, accounting standards and regulatoryrequirements. Businesses that have not created standardized processes or invested inautomation software typically find the process especially stressful. Some of the majorchallenges of the close process include:
Lack of standardization and interdepartmental cooperation.Accounting teams need accurate data to create reliable financial statements. If abusiness has not developed clear processes to produce that data companywide, then,for example, finance teams charged with closing the books may have to chase downinformation from other departments.
Ensuring accuracy. Financial statements are only as reliable as thedata used to produce them. Organizations with more manual processes for tasks likecustomer invoicing and expense reporting may be more likely to encounter errors whenclosing the books. Moving away from error-prone spreadsheet calculations and usingautomated processes can improve accuracy.
Time pressures. Closing the books can be a time-consuming process,yet the sooner the organization's leaders have access to financial insights,the better. Managing the tension between meticulous review and the need for speedcan be tough to balance.
Data issues. Missing or low-quality data can plague the financialclose process. Inaccurate invoices, unrecorded payments, duplicate or incompletedata can cost a business time during the financial close.
Disparate systems. Many organizations use a variety of softwareprograms in different parts of the organization, creating challenges for theaccounting team in tracking down the data required to close the books. Lack ofintegration among systems increases the likelihood of errors and delays.
Insufficient resources. The close process involves severalrepetitive tasks, including double-checking data. Businesses that lack the righttools to streamline tedious tasks will experience more strain during the closeprocess, and the resulting financial analysis could be at risk for more errors anddelays.
Close Process Best Practices
Creating an effective financial close process is important. Companies can adopt a number ofbest practices to elevate their performance and streamline the process.
Never forego accuracy for speed. Closing the books can betime-consuming, and finance teams face significant pressure to produce an analysisquickly. However, financial statements are so integral to decision-making thataccuracy must be a top priority. While the financial close process can take a weekor longer, organizations that automate most tasks close their books within four tosix days after the period ends — and they don't sacrifice accuracy forspeed.
Focus on efficiency. Accounting teams should streamline the closeprocess as much as possible to stay on schedule. To make the process more efficient,businesses can set realistic timelines, proactively offer solutions to commonchallenges and remove roadblocks. They can also embrace process improvements, likecontinuous accounting, using technology to perform close tasks on a daily or weeklybasis, rather than completing all transactions at the end of the accounting cycle.
Create and enforce standard accounting procedures. Creatingwell-documented, step-by-step procedures ensures that the financial close processgoes smoothly. This should include a standardized process for collecting the datathat feeds into the financial close, including inventory valuations and expensereports.
Invest in automation. The more manual steps a company takes, thelonger the process takes and the more opportunities for human error while enteringdata or making calculations in spreadsheets. Finance teams can take advantage ofadvancements in financial software that enable them to collect data, performcalculations and produce reports more quickly and accurately.
Streamline data access. To close the books, the accounting team willneed access to data from across business units. Giving authorized users on thefinance team secure access to this data will allow them to gather information whenthey need it.
Consider continuous accounting practices. Many organizations haveseen value from implementing continuous accounting to perform several transactionsin the financial close process throughout the accounting period, rather than waitinguntil it ends. Tasks like reconciling accounts are integrated into day-to-dayactivities. This more evenly distributed workload can reduce stress for employees,decrease errors and provide managers with more up-to-date financial informationthroughout the accounting period.
Create a collaborative working relationship with other departments.Finance leaders can foster strong partnerships within the organization to ensurethat other departments understand the importance of the financial close andcooperate with providing the necessary data.
Improve the close process over time. Holding team meetingspost-close can be helpful to review which procedures worked and which didn't.The team can assess its performance, relying on KPIs like cycle time, and discusswhat can be done to improve the efficiency of the process in the future.
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Close Process Checklist
Just like the old carpentry proverb says to measure twice and cut once, it's importantto check and recheck data to make sure nothing gets missed. The close process is complex,and completing all the necessary steps in a matter of days can create significant pressure.The checklist below can help to ensure that no tasks are inadvertently skipped along theway.
Confirm all transactions.
The accounting team will want to ensure that all timesheets and expense reports have beensubmitted and approved, verify that all accounts payables (AP) bills and accounts receivable(AR) invoices are compiled in the accounting system, generate all recurring invoices, recordall invoice payments and post all credit and debit card transactions.
Post closing entries in general ledger.
The general ledger consists of raw accounting entries that record all business transactionsin sequential order by date. The accounting team will post depreciation, amortization orother expenses and revenue; include accruals, deferrals and reversals; review revenuerecognition; and ensure the accuracy of all records.
Close any subledgers.
The accounting team will close all subsidiary ledgers.
Perform reconciliations.
The accounting team will reconcile all bank statements, charge accounts, prepaid accounts,fixed assets, deferred revenue accounts and inventory. They will need to reconcile AP agingand AR aging reports with the subsidiary ledger, as well as reconcile the subledger with thegeneral ledger.
Run review reports.
Before finalizing the financial close, the accounting team will run the financial statements,including the income statement, balance sheet and cash flow statement, and perform avariance analysis to review the difference between planned and actual numbers.
Tips to Make the Close Process More Efficient
Organizations often struggle through an ineffective and disorganized financial close processevery month. However, businesses can take steps to eliminate some of the challenges fortheir accounting teams and enable the quicker delivery of financial statements. Here aresome actions that companies can take to streamline the close process.
Identify the bottlenecks.
The first step is to look at the current accounting procedures to identify pain points. Isthe accounting team waiting until the end of the month to perform accountreconciliation? Do employees and vendors have to complete multiple manual tasks tosubmit invoices and expense reports? Once the organization has pinpointed the mainbottlenecks, it can begin to address them by, for example, adopting continuous accountingpractices or instituting standard operating procedures to handle invoices and expensereports.
Use templates and checklists.
Assuming everyone knows what their responsibilities are and what tasks must be completed canbe a recipe for a rough financial close. The most effective financial close process includesstandard accounting procedures and clearly defined roles. Accounting leaders can documentthe steps in the process, then assign responsibilities and deadlines to employees. Creatingtemplates and checklists to ensure everyone involved in the close process follows specific,clear processes can increase productivity and reduce errors.
Consolidate all transaction categories.
Closing the books requires data from every department that influences revenue, from sales toshipping, as well as information on fixed assets and inventory. Waiting for information fromother departments and gathering data from disparate systems can lead to delays andfrustration. Organizations can reduce this friction by:
- Centralizing transactions in a single location. Accounting softwaresolutions can pull data from different systems and consolidate transactions in oneplace. Using a single system makes it easier for the accounting team to obtain necessaryfinancial information on demand, generate reports and close the books more quickly andaccurately.
- Opening access to information.M Organizations can also give authorizedaccounting users direct and secure access to systems where transactional data is storedso they don't have to rely on other departments for information.
Back up the data.
Loss of financial data can have a devastating impact on the financial close process.Paper-based financial processes can exacerbate this risk. Using digital accounting softwareprovides greater protection, and companies can back up data securely in the cloud.
Implement account period cutoffs.
Accounting teams should specify a date that signifies the end of the current accountingperiod, so any transactions that occur afterward are carried forward to the next period.Communicating and enforcing these cutoff dates companywide prevents situations where theaccounting team has to wait on late-arriving invoices, expense reports and other documents.
Automate your accounting cycle.
Automating as much of theaccounting cycle as possible is a powerful way to save time and prevent errorsduring the close process. Accounting software can automate numerous tasks, including journal entries, account reconciliations,variance analysis and intercompany transactions.
How to Close With NetSuite
Accounting teams that are tired of chasing down information, manually entering andre-entering data, and wrangling with spreadsheets every month can take advantage ofenterprise tools that remove many of the headaches involved in the financial close process.With NetSuiteFinancial Close Management, businesses can significantly improve the financial closeprocess by implementing business accounting technology, like cloud-based financialmanagement software that can integrate with other enterprise resource planning (ERP)software, including NetSuite ERP.
NetSuite financial management and accounting softwareautomates much of the financial close process, which eliminates major pain points and alsohelps to increase the timeliness and accuracy of financial reporting. The accounting teamcan manage revenue recognition, depreciation and other key accounting procedures within asingle system, improving access to the data they need, as well as facilitating the flow offinancial information across the organization. In addition real-time dashboards provideup-to-date financial information to inform business strategies.
Businesses need to be meticulous about the financial close process to make sure the data isaccurate, yet at the same time companies are eager to complete the process swiftly, sincethey rely on the resulting financial statements to make strategic decisions.
Finance leaders can create a more efficient financial close process by taking advantage ofleading-edge technology, process automation and best practices. Accounting software, as partof an integrated ERP system, can accelerate the financial close process, increase theaccuracy of the analysis and free up the organization's accounting professionals tofocus on higher-level planning and analysis.
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Close Process FAQs
What is a monthly close?
A business's monthly financial close refers to all the financial and accounting tasksthat take place leading up to, and including, closing the books for the preceding month.
What is important in a monthly closing process?
The financial close process creates a consolidated and accurate record of financial activityover a particular accounting period that many stakeholders rely on to make decisions. Theaccounting team must perform these accounting procedures and produce the resulting financialstatements in a timely and reliable manner. As such, the most critical aspects of themonthly reporting process are accuracy, efficiency, speed and repeatability. If tensionexists between accuracy and speed, then accuracy must win. However, accounting procedurescan be streamlined and automated so that accounting teams are less likely to have tosacrifice one for the other.
How long should a month-end closing process take?
How long it takes to close the books depends on the business and industry, the complexity ofits financial situation, the size and experience of its accounting team, and the softwareand tools it uses to perform the associated accounting procedures. A financial close cantake a week or longer to perform, but organizations that automate most tasks close the bookswithin four to six days after the period ends.
What are the 10 steps in the closing process?
The specific tasks involved in the month-end close process may vary from company to company,depending on the type of accounts and transactions, industry standards and regulatoryrequirements. However, the process generally follows these 10 steps: recording allsales/revenue and accounts receivable transactions, updating accounts payable, reviewingbalances and adjustments from the prior period, reconciling all accounts, reviewing fixedassets, recording inventory valuations, assembling financial statements, conducting apreclose review, finalizing reports, and closing accounts and preparing for the next close.
What is the goal of the closing process?
The goal of the closing process is to set in stone a single version of the financial truthfor a company. The financial close includes the accounting procedures involved in recordinga company's financial activity over a given accounting period. The close process takesplace at regular intervals — typically at the end of the month, quarter and year— and produces financial statements that provide an accurate picture of anorganization's financial health.
