The Financial Close Process – insightsoftware

Fast and clean. These two words define the ideal financial close process. This standard is held up as a measure of a finance or accounting department’s effectiveness.

Companies are expected to get the financial close process done within a standard business week. This demonstrates competence, resource efficiency, and good management.

An efficient financial consolidation and close process does two vital things:

  • It frees up time for management to spend on other tasks.
  • It gets the latest, time-sensitive financial reports into the CFO’s and other executive’s hands faster.

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This doesn’t happen by chance. Companies that consistently close fast and clean only get that done by implementing the right tools and methods. The ones that don’t, end up with days added onto their average processing time.

Achieving fast, clean closes takes comprehensive financial close management that unifies teams, departments, and programs.

Financial Close Management

The core financial close process might need to get done in under a business week. But that’s not when things should begin or end. It’s far more effective to get things done along the way, rather than letting things pile up for one intense accounting period.

This is the driving principle of financial close management – a new approach to closing the books. It orients a finance department towards faster, more accurate, and more efficient financial closes. You can look at it as a subsection of the continuous accounting approach that distributes accounting procedures throughout the month.

Operational financial transactions and other statements can be recorded daily. And account reconciliation can be done on a weekly basis.

Financial Close Process Preparation

The financial consolidation and close process takes a variety of financial statements and documents. Get those together first before beginning.

You will need:

  • Total revenue/income
  • Bank account information
  • Bank statements including loan and credit card statements
  • Total petty cash fund amount
  • Balance sheets
  • Total fixed assets
  • Income and expense account information
  • Inventory levels and totals
  • Expense receipts and supplier invoices
  • Financial statements
  • Accounts receivable
  • General ledger information

These should be the latest monthly statements and financial information.

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The Financial Close Process

1. Find the Initial Trial Balance

This step is only used for double-entry bookkeeping. Skip it if using single-entry accounting.

The initial unadjusted trial balance shows a general ledger’s account balances at the end of a reporting period. It lists all the accounts in a general ledger before any adjustments are made.
Those accounts are the permanent balance sheet and temporary income statement accounts.

Balance sheet or permanent accounts have the balance is carried forwards from one period to the next. These include cash, accounts payable, fixed assets, etc.

Income statement or temporary accounts have the balance is closed with every accounting period and transferred into an equity account. These include revenue and expense accounts.

The trial balance must have the sum of the debits equal to the sum of the credits.

2. Record the Month’s Incoming Funds

Begin by recording all funds received during that month. This means all forms of sales revenue, income, loan or investment funding, debt payments, and cash.

Record in detail:

  • Income amount, payment source, date paid, and date due
  • Income due, but not paid

Check the following:

  • Sales revenue
  • Investment funding and loans
  • Invoice, customer credit payments, other debt payments

Check every potential customer payment source, including:

  • Cash payments
  • Checks
  • PayPal, online transfers, etc.
  • Credit card payments
  • Loan payments

Then double-check the following:

  • All invoices were sent out and delivered
  • All invoices sent out were paid
  • All customer invoices were entered into accounting software
  • Every purchase order was invoiced, payment status, and fulfillment
  • Cross-check invoices and bank statements for accuracy
  • Each customer payment was applied to the correct invoice
  • All due payments were made – spot any outstanding customer accounts
  • Send reminders for late payments
  • Late fees are added where necessary


3. Record the Month’s Expenses

Follow the same process for the month’s expenses. Record all outgoing payments made within the month.

Record all:

  • Banking and financial fees
  • Loan interest
  • Payroll
  • Travel expenses
  • Utility bills
  • Insurance
  • Supplier payments
  • Any debt repayments

Make sure to include all payments made by check, cash, and online transfers, along with debit and credit payments.

Double-check that:

  • All vendor bills are recorded in the software.
  • All vendor statements are reconciled to the corresponding accounts payable balance.
  • Outstanding bills and invoices are paid.
  • All regularly scheduled payments were made.
  • Payment records include payment methods and date.

4. Verify Entries as Either Debit or Credit

After recording the monthly income and expenses, go back over each entry and verify that everything was correctly entered as either a debit or a credit.

5. Record Other Financial Information in Monthly Journal

Add in other financial information that isn’t covered under revenue or expense transactions.

This can include:

  • Accrued expenses
  • Amortization
  • Depreciation
  • Any other activity or information

6. Review and Manage Accounts Receivable

Start by going over discounts, credit notes, and returns. Then move on to debt management.

Financial close management is more than tedious entries and entry-checking. This step is about actively working to manage, control, and reduce customer debt.

Review accounts receivable for customers who’ve fallen behind on payments. Then record each customer and structure a systemized way to collect.

  • Create an Aged Debtors Report: add delinquent or late-paying customers to an aged debtors report.
  • Systemize A Follow-Up Method: your company needs a way to follow up on customers who consistently pay late. Anyone who has exceeded credit terms or fallen outside the payment agreement should be contacted regularly.
  • Note Bad Debt: update the monthly books to reflect any bad debt that will be written off.

Note: This is another reason why active financial close management is critical. Implement these activities throughout the month.

7. Go Over Accounts Payable

Start by making sure that accounts payable is fully updated. Then, examine the records for duplicate invoices or duplicate payments.

Once that’s done, make sure your accounts with suppliers and vendors are in good standing. Go through accounts payable to find any missed or late invoice payments.

You can flip the accounts receivable process.

  • Find Overdue Invoices: find any outstanding invoices that can be immediately paid.
  • Create an Aged Creditors Report: compile a report with continued creditors.
  • Negotiate Payment Plans: if needed, contact the supplier and work out a better payment plan.
  • Renegotiate Credit Terms: if needed, contact suppliers who will provide ongoing credit and try to work out better terms.

Once duplicates are found and late payments are taken care of, look over the month’s latest spending.

Was everything on track or according to budget? Financial close management lets you know when and where money was spent, for more effective control.

8. Reconcile, Reconcile, Reconcile

Ready to reconcile? Once all the entries are in, it’s time to start the reconciliation process.

A comprehensive financial close process can include reconciling:

  • Bank balance sheets
  • Accounts payable and receivable
  • Accrued and prepaid accounts
  • Cash and petty cash
  • Subsidiary ledgers and any accounting modules

List all company accounts, sub-ledgers, and accounting modules. Then go through them systematically.

9. Reconcile Bank Balance Sheets

Start with reconciling the bank balance sheets – or cash accounts. This has to be done first before moving on to other account ledgers.

This includes:

  • Checking accounts
  • Savings accounts
  • Credit cards

Match the accounting books against all the receipts, bank statements, bank forms, and other financial documents you have.

Look for any red flags while doing this.

  • Does the company have as much cash on hand as expected?
  • Were any entries missing, incorrect, or duplicated?
  • Did the month’s cash flow look unusual or were there aberrations?

If a monthly transaction reconciliation takes too long, consider doing this financial close process on a weekly or daily basis. With the general ledger’s cash and credit bank balances verified, move on to reconciling accounts payables and receivables.

10. Reconcile Revenue and Expense Accounts

Then reconcile expenses and incoming revenue against the bank accounts.

  • Have receipts, invoices, bills, and any other transactional documents on hand.
  • Make sure the records have the correct date assigned.
  • Take note of any outstanding debts.
  • Include accrual and prepaid accounts.

11. Reconcile Accounts Payable

This step ensures that any money owed to vendors or suppliers is paid – in the right amount and on time. It also makes sure that the company doesn’t overestimate how much cash is available to spend.

You will need:

  • General accounts ledger
  • Aging accounts payables report
  • Current accounts payable ledger

There are a few methods used to reconcile accounts payable. However, you almost always want to verify that the accounts are complete and accurate, then add this information to the general ledger.

  • Reconcile all vendor, supplier, or credit statements to accounts payable.
  • Make sure this accounts for all payments that were made.
  • Now reconcile the beginning of this accounts payable period to the prior period.
  • Reconcile accounts payable with the general ledger.
  • Use receipts and other records to double-check.

12. Reconcile Accounts Receivable

Accounts receivables usually represents a major chunk of the company’s assets. Every form of customer debt must be precisely tracked, monitored, and recorded.

It requires:

  • Aged accounts receivable report
  • Current accounts receivable
  • Invoices
  • General ledger
  • Sales ledger or report

The accounts receivable ledger has to include anything owed to the company. This includes missed invoice payments and customer credit.

Find unpaid balances by checking invoices against transactions.
Reconcile the accounts receivables against the general ledger.

This reconciliation step makes sure all your books reflect the correct amount of debt owed to the company by customers and prevents any debts from falling through the cracks.

13. Reconcile Accrued, Prepaid, and Any Other Accounts

It’s time to reconcile accrued, prepaid, and any other miscellaneous accounts.

Accrued expenses or invoice accounts record activity that takes place within a month that hasn’t incurred a corresponding transaction.
Prepaid accounts record financial compensation for services not yet provided.

14. Reconcile Sub-Ledgers and Any Accounting Software Modules

Make your way through every subsidiary ledger or sub-module in your accounting software and reconcile these against the general ledger.

  • Subsidiary ledgers often include:
  • Point-of-sale
  • Event revenue
  • Charitable revenue
  • Seasonal pushes

These are different for every business and often vary at times. Yours should be listed in a checklist, along with what section of the ledger it belongs to.

15. Review and Reconcile Petty Cash

The petty cash fund should be reviewed, recorded, and reconciled at least monthly. Some companies may find it appropriate to review and reconcile this daily or weekly.

This part of the financial close process is fairly simple for companies with a single petty cash fund that isn’t used that much.

However, if your company has multiple petty cash funds – usually used for different departments or events – you may want to build out a petty cash management system with streamlined workflows.


16. Count and Reconcile Inventory

Physical inventory is a company asset. And this gives it a place in the financial close process. A monthly count provides both financial and inventory management insight.

This will show how well certain items are selling, what might be about to expire or deteriorate, what’s damaged, if anything was stolen, or what’s lost due to general shrinkage.

  • Get a total inventory count.
  • Record losses due to inventory shrinkage, theft, or product damage.
  • Reconcile between the inventory system and accounting records.

You can also note upcoming restocking costs as part of active financial close management.

17. Review Assets and Liabilities

Go over the company’s assets and liabilities – both fixed and liquid. List, count, value, and record all fixed and liquid assets.

  •  List all the assets or asset categories e.g., property, computers, IP, vehicles, equipment; this should already be compiled but watch out for any new purchases or acquisitions.
  •  Count assets within categories.
  •  Review fixed assets with cash value.
  •  Review the current monetary value of depreciable assets.

Take note of liabilities:

• Note loans, lines of credit, and current repayment status.
• Review assets that are depreciable, can deteriorate, or have an impairment cost.
• Review expense-generating assets such as any that may need repairs – note the remaining lifespan, resale value, or possible repair costs for liabilities.


18. Have the Ledgers Checked

Have another accounting-savvy person review the ledgers and books. This step can be considered optional, but it’s a great practice to include.

Ideally, have this done by someone who wasn’t involved in the process until now. Or you can take a break and look things over with a fresh set of eyes.


19. Adjust the Trial Balance

At this point, you should have all your journal entries done. It’s time to list an adjusted trial balance.

Relist all the account balances, then find the final trial balance. The sum of the debits and credits should again be equal.

This step has to be done before any reports are generated.


20. Prepare Financial Statements and Reports

It’s time for a sigh of relief. The most dreaded part of the financial close process – entries, checks, cross-checks, double-checks, and corrections – is done.

Now it’s time to generate financial statements and put the month’s financial reports together.

Basic financial statements and reports to run include:

  • Profit and loss statements
  • Balance sheets
  • Cash flow statements for accrual accounting
  • General ledger summary

Of course, most companies want to get deeper fiscal insights from more detailed and analytical reports. Keep the report generation consistent and organized, to get a broad historical look at month-on-month performance.


21. Re-Check Financial Information, Statements, and Documents

It’s time to deliver management the organized account ledgers, financial statements, and fiscal reports. This is the final step before completing the financial consolidation and close process.

Only move on once all entries, statements, and reports are verified as correct. Yes, the information has been checked and re-checked already. But this step is the final internal control measure in the monthly accounting close process.

You don’t want to find entries or transactions to add, update, or correct after the books are closed.


22. Close the Month’s Accounts

It’s finally time to officially close the month’s accounting period. The final financial close process involves making a final closing entry in the general ledger and resetting or zeroing out any temporary balances while transferring those sums into permanent ones.

This is a four-step process:

  • Close the revenue accounts into an income summary by transferring the balances (debit the revenue accounts and credit the income summary).
  • Close the expense accounts into the income summary (credit the expense accounts and debit the income summary).
  • Close the income summary account to a retained earnings account (debit the income summary and credit the retained earnings).
  • Close the dividend accounts to the retained earnings account (credit the dividend and debit the retained earnings).

You have now completely closed the accounting period.


The Post-Close Process

The post-close period is time to review the information, implement new insights, and prepare for the next close.

It’s also time to revisit the financial close schedule and adjust anything that didn’t work or could be made better.

  • What team members need to be brought onboard?
  • Were all the transactions gathered and recorded effectively?
  • How frequently do financial activities need to be reconciled throughout the month?
  • Did any receipts go missing during the month?
  • What SAPs need to be created to prevent documents from being lost or going missing?
  • What are the final dates when team members need to send in documents?
  • What scheduled task dates need to be adjusted?

Manage this through financial close management software. One that integrates with cross-departmental software, automatically brings in statements and reports, tracks deadlines, provides guided workflows, and keeps everything organized.

A fast close takes rigorous departmental discipline and robust financial close management software. The two have to go hand-in-hand. It’s the only way to prevent errors and consistently hit deadlines.

Use yours to implement these steps. It will help unify departments, keep everyone working well together, and streamline the entire financial close process.

Financial Consolidation and Close Checklist

Working through this process can be mind-numbing. It’s easy to lose track, misplace deposits, or skip a step or two.

This checklist is a condensed look at what needs to get done before, during, and after the financial close process.

Ongoing Monthly Activities

  • Review financial statements for errors and mistakes
  • Record financial statements every day
  • Record daily operational transactions
  • Reconcile bank balances every day
  • Periodically review and correct sub-ledgers
  • Compare invoices to shipping or fulfillment records
  • Review uncashed checks
  • Update the assets register as needed
  • Record and reconcile petty cash daily

Right Before Closing

  • Finalize employee and independent contractor time records
  • Cutoff inventory
  • Enter in all late supplier or vendor invoices

Pre-Close Information Prep List

  • Receipts
  • Financial Statements
  • Invoices and past-due invoices
  • Forms and data
  • General ledger
  • Accrued expenses
  • Inventory counts

The Close

  • Find the initial trial balance (if using double-entry bookkeeping)
  • Record the month’s incoming cash
  • Record the month’s expenses
  • Check that all entries were correctly noted as debit or credit
  • Record other financial changes like amortization and depreciation
  • Review accounts receivable and actively manage any outstanding debt
  • Error check accounts payable
  • Reconcile bank balance sheets
  • Reconcile revenue accounts
  • Reconcile expense accounts
  • Reconcile accounts payable
  • Reconcile accounts receivable
  • Reconcile accrued, prepaid, and any miscellaneous accounts
  • Reconcile sub-ledgers
  • Review, record, and reconcile petty cash
  • Review, record, and reconcile assets and liabilities
  • Have another person check the ledgers
  • Adjust the trial balance (for double entry only)
  • Prepare the financial statements
  • Review the information
  • Close the accounting
  • Prepare for next month’s close


A Final Look at the Financial Close Process

This outline is a suggestive guideline only. There isn’t one close process that’s ideal for every business, department, or team. It has to be tweaked at each successive corporate level.

Figuring out how to bring everything together, pinpoint the right deadlines, and keep everyone on schedule can be overwhelming. Use this outline as a helpful tool to jumpstart or error-correct yours.

Some financial managers have given up on the close process, preferring to outsource these tasks to professional firms rather than burden their accountants or tending to skip it altogether.

That’s understandable but completely unnecessary. And it’s where financial close management software comes into play again.

The right solution will be a practical tool that’s easy for relevant team members to use, along with a management asset that facilitates analysis and process optimization.

It’s the final piece in facilitating an efficient, error-free, fast and clean financial close process.

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