Understanding the Financial Closing Process

January 04, 2022

Standard policies and procedures for closing the books is essential in creating comparable month over month reporting. Learn what to consider when constructing a formalized quarterly and annual financial closing process.


Kevin Nardone: One of the most important parts of organizing your accounting and finance team is gaining an understanding of the financial closing process.  No matter how large or small, complex or straightforward, it is really a best practice to have policies and procedures in place for closing the books to provide guidance and organization, and assign responsibilities.   Very often when speaking with companies about how long it may take to close a reporting cycle, there is a range given rather than a definitive answer on when results can be reported.  This is almost always the result of a lack of a formalized closing process.

Many businesses fall into a monthly close cycle or “trap” if you will, always feeling like they’re one month behind on financial results and playing catch up with their time being consumed by data entry.  Consequentially, accounting and finance teams end up investigating why cash on hand is low – or why revenue dropped on certain products or services well after the cause has become embedded in the financial results.  This prevents accounting and finance departments from having a proactive approach to business fluctuations and ratio analysis.  You may find your depreciation, interest, or insurance costs are higher than expected because the reconciliation of these accounts was erroneously omitted from closing procedures caused by a lack of formalized procedures.    Executing a closing checklist will keep the process moving and increase efficiencies, reducing your rate of error in the closing process to ensure completeness and accuracy and comparable month over month results.

Part of this exercise may also be identifying how often a hard close needs that to be performed.  You may find that your monthly close can look different than your quarterly close or annual close.  If your operating expenses don’t fluctuate significantly from period to period, you may not need to take a deep dive into every account each month.  If the majority of your employees are salaried, for example, or if your overtime for hourly employees doesn’t significantly fluctuate month to month – you may be able to skip out on that payroll accrual until the end of the quarter.  This is usually referred to as a soft close.

Most people you speak with want to or are concerned with, improving efficiencies and making the most out of the resources available.  The first step in achieving this is having a play by play of how the books are closed – what entries are posted and when – and what accounts require analysis or updated support schedules.  Sit down with the team, look at your financials, and identify the work that is being done with each month end.  Then  lay out a plan for what needs to be done. You can identify when the required information is available and schedule out the monthly close in an efficient manner as the information becomes available.  You’ll find this formalization of the closing process will allow you to start to shrink the closing window and also not leave you scrambling when a member of the team is out on vacation or home sick or even worse, when a member of your team moves on to another opportunity.  Any work can be easily reallocated and reassigned.

Once this process is finalized, businesses can work through more in depth account analysis and take on smaller projects that may aid or assist in overall efficiencies in the accounting department and can even provide budget relief and cost savings.  You may be able to take a dive into accounts receivable more timely, making sure cash collections are staying on target, following up with that one customer that may be falling behind on payments before too much time has passed and amounts become uncollectible.  Some clients that I have spoken to have seen real returns on staying on top of accounts receivable noting that they may not need to draw down on an available line of credit as often which can lead to reduced interest expense and ultimately less write offs or deductions as well. 

You can also take a look at operating ratios and provide more meaningful analysis – identifying when inventory may be building up and turns are slowing, triggering investigation by purchasing.  You may find gross profit may be slipping, enabling the team to adjust pricing or triggering constructive discussions before too much time has passed.  The important part is that your team will have the time to take a look at these operating relationships and feel more accomplished, contributing in a larger way to the overall success of the business.

There are resources available to help with this process.  The American Institute of Certified Public Accountants has published many articles and tools outlining sample checklists and ways to improve your process.  These are available on the AICPA website.  It’s important to understand, however, that there isn’t a one size fits all or “template” closing checklist.  The closing checklist should evolve as the business evolves and be updated and customized in real time as improvements are identified.  Of course you can always reach out to us for help or guidance as well.

Closing each reporting cycle in a formalized and accurate way will remove any guess work and lead to a more effective accounting and finance team.  Many businesses rely on budgeting and forecasting and with a functional closing process and comparable month over month reporting, you will always have the best information available for budgeting and forecasting.

About Kevin Nardone

Kevin Nardone is a Director in the Private Client Services Group. He has experience in employee benefit plan audits, 401k audits and defined benefit plans for single and multiple employers and knowledge and experience surrounding multi-employer benefit plans.

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