A complete month-end close process for FP&A teams in 2024

Prophix ImageProphix Feb 8, 2024, 5:00:00 AM

Few finance processes are as frequent and labor-intensive as the month-end close.

While it may be tempting to use estimates to save time, an accurate month-end close creates a foundation for healthy financials. This, in turn, gives leaders the information they need to make better decisions. Without a solid month-end close process, your organization could overestimate its earnings while underestimating the impact of its expenses.

Here’s how you can get a handle on this crucial process.

In this article, we’ll cover:

By the end of this article, you’ll have a detailed understanding of month-end close, the perfect 10 step process, and best practices and common challenges.

What is month-end close?

Month-end close—or closing the books—is a finance process through which the finance and accounting teams go through all of an organization’s transactions for the month to get accurate numbers for all accounts as of the last day of that particular 30 or 31 day period. This allows leaders throughout the organization to have an accurate understanding of how much was spent, how much revenue came in, and how close to its forecasts the organization is.

It can be a long and difficult process for a few reasons:

  • Data has to be aggregated from multiple departments and data sources.
  • Most organizations still do most of the work manually.
  • The volume of data involved can be tough to manage.
  • In larger organizations, parsing through and reconciling conflicting records can take a significant amount of time.

But despite these problems—and more—the month-end close is still a crucial process for every organization.

Why is the month-end close important?

While the month-end close process can be lengthy, it brings quite a few benefits that make it more than worth the effort:

  • It’s the best way to have accurate account statements: Without month-end close, account statements are updated on an irregular basis, meaning it’s tough to know when they’re accurate and when they need significant updates.
  • Inaccurate expenses can affect your bottom line: Imagine that you are leading a department, and the only information you have about your expenses from the previous month is an estimate that’s off by 15%. If you spend your budget according to that estimate, you could find yourself accidentally overspending.
  • It saves time for every other financial process: How many of your finance processes depend on accurate account balances and expense reports? Regularly closing your books with accuracy gives you a headstart on other processes, like financial consolidation and your year-end close.
  • It helps streamline audits: Audits are time-consuming and can bring important projects to a screeching halt as resources are re-prioritized. The more estimates auditors have to work with, the slower the process. With regular month-end closes, you can save everyone time and effort.
  • It helps identify opportunities for improvement: The best way to improve something is to know it needs improvement. The more accurate your month-end close, the better your chances of spotting potential problems and finding the right solution.

How is a month-end close performed?

After a month-end close, you’ll have an exact idea of how much revenue your organization generated and how much money went to operating costs and costs of goods sold. Doing this involves closing the relevant accounts (i.e. going through and validating every transaction), reconciling any duplicate or erroneous transactions, processing accrual amounts, and more.

We’ll cover a detailed step-by-step process for the month-end close later in this guide. For now, let’s go over all the financial data you’ll need to analyze for this process.

What financial information does the accounting or FP&A team need?

The goal of the month-end close is to review incoming revenue, outgoing expenses, and even the status of important assets. Here’s what you’ll need to analyze on every month-end close.

  • Overall revenue: One of the most important pieces of information for the month-end close is how much revenue the business brought in. You’ll need to review all accounts bringing in revenue, which is why this can get time-intensive.
  • Expense accounts: Knowing exactly how much money is going out of your organization on a monthly basis is essential for making the best financial decisions. All expense accounts are usually reviewed during the month-end close.
  • Accruals and prepayments: If your organization uses accrual-based accounting, then your month-end close process will involve reviewing all transactions before any actual money is received or dispensed.
  • Bank account information: Does everyone who needs access to this information have access to it? Are all of your organization’s bank accounts necessary or can some be consolidated? Reviewing this periodically can lead to cost savings and better processes for the organization.
  • Inventory: Many businesses use the month-end close process as an opportunity to review their inventory as well. If you deal in physical products, having an accurate record of your monthly inventory can lead to a better understanding of the organization’s financial health.
  • Petty cash total: It’s all too easy to lose track of your petty cash over time. You can avoid this by reviewing your petty cash transactions as part of your month-end close.
  • Total fixed assets: Having an accurate record of your assets and their value is crucial. Making it part of your month-end close process means anyone responsible for making decisions regarding acquiring, liquidating, or transferring assets is equipped with the latest information.
  • General ledger and financial statements: The month-end close usually involves investigating just about every financial document available, including statements and ledgers.

Now that you know what you need to review as part of your month-end close process, let’s cover how it’s done.

10 steps for the perfect the month-end close process

Ready to kick off your month-end close process? We've got your back with a handy 10-step checklist lined up for you.

  1. Begin with data collection and preparation
    Start by assembling all essential data such as last month's expenses and incoming funds, including payroll, insurance, loan interest, supplier payments, revenue, and investment income. Make sure to correctly post your credit and debit entries and invoice all sales from the previous month.
  2. Revise your accounts payables
    Examine your accounts payable (AP) ledger against your AP aging report. This is an ideal time to identify discrepancies, input awaiting invoices, and post relevant journal entries.
  3. Review your accounts receivables
    For accounts receivable (AR), review the invoices sent out in the past month, focusing on any duplicate or incorrect ones. Also, verify that your customers have cleared their invoices and match these payments with your ledger balances. This step aids in enhancing customer relationships and ensuring accurate financial reports.
  4. Execute account reconciliations
    After updating your AR and AP, reconcile your bank and credit transactions with your general ledger. Spot any inconsistencies and rectify any overlooked or erroneous transactions by making the necessary journal entries.
  5. Reconcile cash
    Petty cash transactions can often get neglected if not recorded diligently. The month-end close provides a perfect opportunity to reconcile deposits and receipts and confirm that your petty cash balance aligns with your expectations. Remember to track any cash in transit.
  6. Inventory and fixed assets reconciliation
    If relevant, assess your current inventory and the number of products sold in the past month, ensuring it aligns with your records. Inventory reconciliation can help manage storage, anticipate next month’s sales, and cover additional inventory-related expenses.
  7. Reconcile payroll and operating expenses
    Align your payroll account with your payroll register, which includes bonuses, commissions, and other benefits. Confirm that your payroll entries are posted to the correct ledger and that you’ve paid the necessary payroll taxes and statutory deductions. Operating expenses encompass research and development, marketing, office supplies, and more. Reconcile these by verifying your monthly expenses, creating an expense report, and posting it to the appropriate ledger.
  8. Carry out preliminary and ASC 606 reviews
    Examine the data related to your income recognition and commissions, whether manually entered or computer-generated. Ensure its accuracy and review it with your team for consistency and clarity in all reports.
  9. Perform variance analysis and adjustments
    Variance analysis allows you to review your monthly and quarterly results at the end of each period and see how they align with the company's growth targets. Timely adjustments can prevent minor issues from escalating over time.
  10. Compile your financial statements & reports

    After reconciling all your accounts, reviewing the results, and rectifying errors, it’s time to compile your financial statements and month-end close report.

10 steps for the perfect month-end close process

Best practices for the month-end close process

The month-end close process is extensive, meant to provide everyone with an accurate understanding of the organization’s financial health month by month. But with these best practices, you can reduce the overall time and resources this process takes while improving the quality of the reports you get from it.

Conduct pre- and post-month-end close team meetings

When you’re executing your month-end close with a team, you need to ensure everyone’s on the same page. Review everyone’s responsibilities, walk through the entire process step by step, and cover any issues that may have come up during your last close. It’s a good idea to do this before you start your month-end close, whether that’s by a few days or a whole week.

While the pre-close meeting puts everyone on the same page before any of the actual work starts, the post-close meeting allows you to review any issues that came up or highlight things that went really well.

Build relationships with budget owners and account holders across the organization

If your accounting and finance teams work in silos, they can potentially miss crucial details that could make the result of your month-end close completely inaccurate. While standardized processes should direct all necessary information to teams handling the close, this doesn’t always happen in practice.

Building relationships with budget owners and account holders can give you access to some of that data that would otherwise go missing. You may also get a heads up on big incoming purchases, downturns in revenue, and other factors that could impact your close before they’re official—giving your team a headstart in handling them.

Start early: be organized and efficient

One of the best ways to save time on your month-end close process is to deal with inefficiencies in other financial processes. Whether it’s in account receivables, budget approvals, or even your accounting software, any improvements you make will pay dividends when the end of the month comes around.

You should also be doing what you can to keep the accounting and finance teams organized long before the month-end close. Are there aspects of their work that negatively impact their productivity? How can you help them stay efficient?

Use accounting automation where possible

The month-end close process can be one of the most labor-intensive finance processes out there since it depends on reviewing so many transactions. That’s why automating as much of this work should be your first priority.

With the right platform, you can eliminate hours—even days—of manual work. You can reduce the risk of costly human error and turn your month-end close into a smooth, secure process that only takes a day or two.

Common challenges in the month-end close process

The month-end close process, like many of your organization’s essential processes, can be inherently challenging. But with the right mindset, the right tools, and a little know-how, you can not only work around them but eliminate them.

Inaccurate or incomplete data

The larger your organization, the more data you need for the month-end close process. That data can come from dozens of different sources, from proprietary tools to spreadsheets and even manually entered invoices. Your team will often need to hunt for missing data, double-check dubious figures, and reach out to affected departments.

Lack of standardization

You can’t assume that you’ll find standardization in how currencies are handled, how common processes are run, or even how revenue is recorded. Your team may need to research or establish a way of bringing together disparate data and processes.

Undefined processes and task management

The month-end close process may be an essential, recurring process, but in some organizations, it may just be a mad dash to the end. Everyone tries to get things done as quickly as possible while making the fewest mistakes they can, and then they close the books until next month. Finance teams often inherit this kind of process, and modifying it into something that works more seamlessly can feel like a huge undertaking.

Discrepancies between numbers

Financial reconciliation—reviewing transactions to deal with discrepancies—is a huge part of the month-end close. After all, when you’re getting data from so many sources and so many departments you’re bound to get conflicting figures. Your teams will have to investigate these numbers to get to the bottom of things.

Poor communication

While inter-departmental communication may not be as difficult as the days of walking to another part of the building to get some face-time with a director, it can still be tricky. Emails can go unanswered and Zoom calls can be tough to schedule. Getting answers to important questions can end up being just as difficult as gathering the data you need to ask questions about.

Delays due to errors, adjustments, or reclassifications

The month-end close process is time-sensitive, but the data it needs to collect isn’t always timely. Delays can create an unfortunate “hurry-up-and-wait” type situation where your team works frenetically to close as much of the books as they can, only to have an account stay stuck as they wait for the relevant numbers.

FAQs about the month-end close process

Here are some of the most common questions finance leaders have about the month-end close.

How long should it take to close the books?

The actual time it can take to close the books can vary widely depending on the accounts you have to close, the size of your organization, and the size of your team. Generally speaking, however, the month-end close process shouldn’t take longer than 10 days.

How do I close the books faster?

The single best way to close the books faster is with the right tools. While you can always try to find ways to help your team work more quickly, using software that automates as much of the process as possible—while maintaining accuracy—is essential.

What is the correct order for closing accounts?

Here’s how you should be prioritizing your accounts for the month-end close:

  1. Closing revenue accounts.
  2. Closing expense accounts.
  3. Closing income summary accounts.
  4. Closing dividends or withdrawals accounts.

What reports should I run at month-end?

While every organization has its own requirements for month-end reports, here are some of the most common options:

  • Income statements
  • Balance sheets
  • Cash flow statements
  • Accounts receivable aging report
  • Accounts payable aging report
  • Inventory report
  • Budget vs. actuals report
  • Tax liability report

Conclusion: Close the books faster with finance software

Month-end closing is a painstaking process for many organizations, but it shouldn’t have to be. With the right platform, you can eliminate hours of manual work, reduce the risks caused by human error, and even find opportunities for optimizing your process.

When it comes to financial performance management, Prophix is your best option.

Prophix is a fully-integrated financial performance platform for all of your finance team’s needs. Streamline operations, optimize processes, and make your month-end close a breeze.

Watch the demo and see how you can close your books faster with Prophix.

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Ambitious finance leaders use Prophix to drive progress. By improving the speed and accuracy of decision making, Prophix’s Financial Performance Platform elevates the talents of finance teams to do their best work. Crush complexity, reduce uncertainty, and illuminate insights with access to best-in-class AI insights and planning, budgeting, forecasting, reporting, and consolidation functionalities. Prophix is a private company, backed by Hg Capital, a leading investor in software and services businesses. More than 2,500 active customers across the globe rely on Prophix to achieve organizational success.

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