In Part 2 of our 4-Part series: Process Workflows, we highlighted the importance of process workflows, how to properly implement them to your team, and software recommendations to track and grow with the captured data. If you haven’t been able to check it out Part 1 or Part 2, we encourage you to give them a read.
This week, we are taking a look at the importance of the monthly close and how to streamline this process for efficiency and accuracy.
What is a Month-End Close?
In accounting, the monthly close is a series of steps and procedures followed so that a company’s monthly financial statements comply with the accrual method of accounting. [1]
Complying with the accrual method of accounting ensures that your firm’s revenues match expenses in the same accounting period – sometimes called the matching principle. Accrual accounting allows your firm to conduct more useful business analysis since you are accounting for revenue and expenses in the right period. The accrual accounting method can often better anticipate revenues and liabilities, as well as assist your team in identifying and monitoring cash flow or profitability issues.
Importance of the Monthly Close – Financials by the 15th
ABC – Always Be Closing… the Books!
Closing monthly ensures that your financial and accounting processes stay on course. Your books are the core of your operations. If not closed monthly, strategic decisions will be made on dated information that will inevitably hurt your business.
Imagine your business is a car driving down the highway at 100 miles an hour. If you’re closing books quarterly, this would be akin to your speedometer reading 40 miles an hour driving past a police officer. Three miles further down the road, suddenly the speedometer reads 100 MPH. It is way too late at that point since you’re definitely pulled over for speeding by then! We suggest closing your books by the 15th of the following month as best practice.
Four Major factors for Month-End Close
Consistent Chart of Account (COA) standard
A standard chart of accounts is a numbered list of the accounts that categorize and classify all of a company’s transactions according to the category they affect in the general ledger. [2] Your company’s financial health starts by utilizing a standard COA to separate and record all transactions. The Chart of Accounts should be organized in a way that properly organizes expenses, cost of goods sold, and gross margins. This consistency allows the business to identify the correct drivers of the business and develop core key performance indicators such as customer acquisition costs and lifetime customer value.
Accurate Data
Once a standard Chart of Accounts has been established, ensuring transactions are accurately categorized is extremely important. Miscategorzing incurred expenses leads to misrepresentation on monthly financial statements. Thus, the more specific and categorized your COA is, the clearer your business financials will be at the end of the month.
Timeliness
If you are not closing your books monthly, your company is operating on dated or potentially inaccurate financial information. Closing monthly provides you with the opportunity to review last month’s transactions and ensure accuracy. Additionally, it also allows you to make adjustments that accurately reflect your business’ activity for the month. Typically, books closed by the 15th of the following month are an excellent benchmark to target.
Relevance
After you have closed accurately and on time, the next step is to utilize and plan based off of this accurate data. Accrual accounting most accurately represents your business, providing the opportunity to analyze your financials to set goals and trends for the future.
With accurate data in hand, take time to identify your company’s KPIs, and track them month-over-month to ensure you are aware of every step your business is making.
How Compass East Can Help
As it relates to Month End Close, Compass East serves as your full-scale accounting department, providing Controller level oversight ensuring accurate and timely monthly financials. This is a critical base to our focus on supporting your strategic growth. Compass East works with organizations to create scalable financial operations, deliver timely financial reports, and create dynamic forecasts and dashboards. We help you navigate through growth, acting as an extension of your team and freeing you up to focus on higher-value activities focused on serving your customers.
Sources
[1] https://www.accountingcoach.com/blog/what-is-the-monthly-close
[2] https://strategiccfo.com/standard-chart-of-accounts/