Maintaining accurate and up-to-date financial records is a necessary to understanding a business’s financial health. All KPIs, analysis, and financial decision-making typically run through your financial reporting.
For most businesses, financial activity is recorded as it happens. But before generating any financial statements or using the financial reporting for tax filing purposes, a thorough review process is needed.
This process is known as the month-end close process. We’ll cover what exactly it is and ways for you to optimize it to save time and get better results.
What is a month-end close?
Month-end close is an accounting process that involves reviewing and reconciling all financial transactions from the previous month, confirming the books’ balance, and generating the usual financial statements. It is the final stage of the accounting cycle.
Every month, transactions are recorded on multiple platforms. Invoices are generated, expense reports are submitted, bank activity occurs, payroll is run, and those are just a few examples.
The month-end close process ensures all of that information is consistent and accurate in your accounting platform and general ledger. It’s essential to keeping your financial reporting up-to-date and compliant with regulations.
Depending on the complexity of your books and volume of financial activity, it’s worth considering increasing the frequency of the closing process to weekly or even daily. Having accurate and up-to-date reporting is the cornerstone of making fast, data-driven decisions that strengthen your financial health.
How to ensure an accurate month-end balance
Part of the month-end process is generating financial statements—the bedrock of a business’s financial reporting. Before you do that, you’ll want to confirm the month-end balance is accurate.
The particulars confirming the accuracy of a month-end balance can vary between businesses and accounting methods. Typically, it will involve:
- Recording any un-entered invoices
- Account reconciliations for credit or debit cards
- An inventory count
- Mortgage entries
- Insurance entries
- Comparing the budget with your actual expenses
- Preparation of reports for managers and stakeholders
- Closing the accounting period in the accounting software
Your company's monthly financial data forms the foundation for the next month's business decisions. It’s worthwhile to take the time to be thorough and maximize the value of your strategic planning.
What is the purpose of the month-end close process?
The primary goal of the month-end close process is to prepare financial statements. These provide regular insight into your company's financial data, which can help track your progress toward KPIs or identify areas that need improvement.
But before generating financial statements, you need to confirm your data is accurate. The month-end close process involves reviewing for accuracy by comparing the accounting with each data source (e.g. bank account, credit card, invoicing platform, payroll provider).
Benefits of the month-end close process
It's possible, of course, to wait until the end of the year to prepare your financial statements. However, doing so may be unwise for several reasons.
For one thing, small business owners may find it overwhelming to reconcile that much accounting data all at once. By preparing your financial reports monthly, you'll avoid this year-end crunch and reap the benefits of having all your crucial business data at your fingertips.
That's because accurate monthly data feeds many other aspects of your business, including cash flow management, accounts payable, and other essential areas. Business owners who perform this process monthly stand to accomplish the following:
- Improve the accuracy of the financial reporting
- Identify discrepancies between accounts
- Make better business decisions
- Simplify tax-filing procedures
- Measure progress toward business goals
Delaying the process will only increase stress or force you to spend hard-earned money on a catch-up bookkeeping service.
What are the 6 steps in the closing process?
You'll want to follow a series of basic steps to keep the month-end close process as simple as possible. Here are the six steps that should be included in the process.
1. Gather your financial documents
The most accurate month-end close process will result from the most accurate data. Make sure to gather information and documents such as:
- Bank account statements
- Credit card statements
- Loan and line of credit statements
- Income and expense statements
- Accounts receivable/payable
- Inventory and fixed assets
- General ledger
- Accruals and prepayments
- Monthly financial statements
Keep in mind that not every accounting team will complete the month-end close process the same way. For example, if your finance team uses cash-basis accounting, you won't rely on balance sheet accounts such as accounts receivables/payables.
2. Reconcile your accounts
Next, reconcile your bank accounts with your recorded financial activity.
Throughout the month, you should be recording transactions like:
- Payroll
- Utilities
- Payments to suppliers
- Travel expenses
- Insurance premiums
- Loan interest
The month-end process involves reviewing every transaction to confirm it’s recorded accurately in all parts of your accounting. For example, you may find an invoice that didn’t get recorded as sales revenue or a missed credit card transaction.
To complete this step in the process, review all balance sheet accounts, including:
- Checking and savings accounts
- Loan and credit accounts
- Accounts payable and accounts receivable
- Digital accounts (e.g., PayPal)
- Petty cash
If your business uses cash, you’ll need to reconcile any deposits and receipts to make sure you haven’t missed any cash payments in sales revenue or expenses. Forgetting to do so will create discrepancies in your financial reports.
Then, move on to your other cash accounts, like checking and savings accounts. Cash accounts are the least likely to have discrepancies, and once they’re reviewed, you’ll know the business’s cash- on- hand level.
3. Review fixed assets and inventory
After reconciling your accounts, review your company's fixed assets.
Common types of fixed assets can include real estate, commercial vehicles, and equipment. But fixed assets can also extend to intellectual property like branding or product trademarks.
Similarly, a monthly inventory count will ensure your products are accounted for. This can also be useful when considering when and how to reorder additional inventory.
4. Reconcile prepaid accounts with accrued accounts
Prepaid accounts refer to expenses you pay in advance. Common prepaid expenses include insurance premiums, payroll, and equipment leases. These expenses will be amortized, meaning the total amount you pay in advance will be distributed equally throughout the accounting period in which you receive the benefits.
Accrued accounts refer to your revenue and accrued expenses. Each month, you'll need to reconcile your revenue and expense accounts to ensure accuracy.
5. Generate your financial statements
After reviewing all of your accounts, it's time to create your financial statements for the month. These statements will include:
- Cash flow statement
- Profit and loss statement
- Balance sheet
Getting these statements in order will give you a clear picture of your company's financial health and pinpoint errors you can correct before the beginning of the following month.
6. Review and reflect
At this point, you've completed the month-end close process. Now it's time to review.
Look over your general ledger, as well as the financial statements you prepared in the previous step. This information can be invaluable in your decision-making processes, so take a moment to think about things such as:
- Your progress toward your business goals or KPIs
- Any mistakes that need to be addressed before the next month
- Adjustments to your inventory or procurement process
For example, if you notice that you're having an issue with your company’s cash flow, you may need to adopt new payment policies for your invoicing procedures. Alternatively, you might institute electronic payments to encourage a quick turnaround for your accounts receivable payments.
The month-end close checklist
Another way to simplify the month-end closing process is with a month-end checklist.
What is a month-end close checklist?
A month-end close checklist helps you stay on top of the financial information needed to complete the month-end closing process. You or your accounting team can use this checklist to gather your company's financial data so you're ready to complete all the processes outlined above.
Below is an example of what your month-end close checklist should cover. Feel free to use it in your own organization and adjust for your needs.
Your checklist doesn't have to be completed in any particular order but should cover each of these steps (if they apply to your business).
If your business is large enough, you may want to delegate some month-end close steps to finance and accounting team members to save time and improve efficiency.
For example, a month-end close process flowchart can help you manage your data and ensure that the month-end closing process is completed smoothly and accurately.
Month-end close challenges
1. Disorganization
If your accounting procedures are disorganized, the month-end close process may take longer. For example, If you don’t know what financial transactions in the expense account have been approved, you’ll waste time contacting different departments to approve every line item.
2. Chasing down receipts
Receipts are often necessary for the month-end close, but tracking down each receipt can take excessive time and effort. Or worse—the receipt you need might have been thrown away weeks ago. Consider using a receipt capture tool or store photos or scans of receipts in a cloud storage platform.
3. Outdated processes
If you’re still entering expenses manually, you’re spending more time on expense reports than you really need to. And if you use multiple software programs that aren’t integrated, you might be stuck transferring information by hand.
4. Creating everything from scratch
You don’t have to do everything yourself—there are plenty of free business templates online that you can use to save a little time.
How can I improve my month-end close process?
Given the laborious and time-consuming nature of the month-end close process, many business owners find themselves wondering if there’s any way to streamline it.
The good news is that there are things you can do to expedite your month-end close. Here are some helpful general guidelines to follow.
1. Hire an accounting team
If you don't have an accounting department, consider outsourcing. Online firms can connect you to accounting teams that can assist with your monthly closing process and even help you with catch-up bookkeeping, tax filing, and more.
2. Give yourself a deadline
Establishing an exact closing date can provide some much-needed motivation for you or your team. A good closing date might be five to seven days after the end of the month. That way, you stay focused on your goals without rushing through the month-end closing process.
3. Maintain good records
Your month-end closing process will go much more smoothly if you maintain accurate financial data on an ongoing basis. Balance sheets, account statements, bank statements, and other data can help you reconcile your accounts quickly and accurately.
4. Automate your accounting process
Automating your accounting and bookkeeping procedures will empower you to reconcile your accounts and avoid costly errors automatically.
The most advanced tools will also offer additional features to assist with invoice payments and other integral tasks––like auditing your expense reports––keeping your business operating at peak efficiency from month to month.
Streamline your most important processes with BILL
Based on a 2024 survey consisting of 5,000+ BILL customers, 67% of customers surveyed reported that their time to monthly close with BILL Spend & Expense was less than 5 days.
BILL can simplify your approvals and payment processes while providing real-time financial data. And thanks to three-way matching, your company will be protected from the danger of financial fraud.
Learn more about BILL's accounts payable software and discover how it can help your business thrive.
Month-end close FAQ
How long does a month-end close take?
Admittedly, the month-end close process can be time-consuming. That said, the most recent data shows that business owners are finding ways to improve the efficiency of their accounting procedures.
According to APQC’s General Accounting and Reporting Open Standards Benchmarking survey, the median number of days an organization needs to close out the books is 6.4.
Ultimately, the time it takes depends on the volume of transactions processed. The higher the volume, the more time it will take to review all your business transactions and check balances.
Relying on a digital accounting system will make the process much faster since all your financial information will be centralized and at your fingertips. The best accounting software can even improve your month-end close process by highlighting duplicate entries and eliminating data entry errors, making the process smoother.
Is a month-end close stressful?
Unless you have your own accounting department, you'll have to conduct your month-end closing process on your own. But that's actually all the more reason to make a month-end close process a regular habit.
After all, without a finance team, you'll also be responsible for your year-end closing process and tax filing. A month-end process will be much easier than waiting until the end of the year.
Luckily, modern software and accounting tools make the process much more straightforward. With better access to your financial information, you'll find it much easier to review your data and reconcile your accounts before beginning the next month.
How to close accounts payable in your month-end close
Your accounts payable closing process is part of the larger accounting procedure outlined above. However, most businesses will need to devote additional time to reviewing their accounts payable balances.
Start by reviewing your accounts payable records to confirm payments made to lenders, payroll, and suppliers. Reconcile the money you owe to these entities with the money you're actually paying. Doing so will help you stay current with your monthly debts and avoid penalties for late payments.
Electronic accounting systems and other business tools make this easy. They also protect your business from fraud thanks to security protocols such as three-way matching.
