Often, when we start working with a new client, one of the first things we ask for are copies of your business’s financial statements. It helps us to assess what types of services your business might need from a Controller or CFO for hire. More often than not, those financial statements are incomplete or inaccurate, if they exist at all. Much of this depends on if you have a bookkeeper, how skilled and experienced that bookkeeper is, and how frequently the company’s books are “closed”.
We have found that the term “closed” has different meanings to different people. Some businesses think that if their bank account is reconciled, they are closed. Others think that if they review a few key revenue and expense accounts, that is sufficient. Others still, don’t know what it means at all.
To us, we believe that having complete and materially accurate financial statements EVERY single month is vital to the success of any business large or small. Further, and perhaps even more important, owners and key employees should perform a thorough review of those monthly financials so that informed decisions can be made around your business’s strategy and goals. This is one important characteristic that separates companies that thrive from companies that struggle or fail.
So… what does it mean to have a monthly closing process for your small business? Well, we think that a good closing process includes the following items. Depending on the nature of your business (i.e. do you carry inventory, do you extend credit to customers, do you carry debt, etc.) you may have a different closing process than another business but at the highest level, every business should incorporate the below steps as best practice.
- Set a date to be “closed” for each month AND stick to it! This means that no more financial transactions will be recorded to that month once you are “closed”. So, if you want to get something in and make sure it is correct, do it before the date you set. Good practice for a small business is any day before the 10th of a month for the prior month end date. So, if you are closing the month of June, choose a “close by” date of no later than July 10th. This allows you and your management to review those financials before the middle of the month after the month being reviewed.
- Create a checklist of closing tasks. Also, be sure to assign someone responsible for that task with a specific due date. The tasks and due dates should align so that you meet the date targeted in #1. Click here for a sample checklist in Excel. Alternatively (and preferably), you could use web-based project management tool like asana (visit asana.com for more details) to schedule and assign your monthly closing tasks and make sure you stay on schedule.
- Reconcile, review and confirm the balances in EVERY single balance sheet account EVERY month. The balance sheet can be an easy place to hide activity that requires further research and when transactions pile up in there it can be difficult to untangle them after a year has gone by and you are scrambling to get your information ready for your CPA to prepare your business’s tax return. If you think about the balance sheet as a list of things you own and things you owe, it’s not as difficult as it sounds. For example, your business presumably has at least one bank account, so make sure the balance on your balance sheet for cash is reconciled to your bank statement(s), plus or minus any outstanding deposits or checks. If your business has a line of credit with the bank, then get a statement from the bank of the outstanding balance owed and be sure this balance is properly reflected as a current liability on your balance sheet.
- Use standard journal entries. There are some entries you might do every month and sometimes for the same amount. For example, if you have fixed assets (also called property, plant and equipment), you will want to depreciate those assets on your business’s books. Use a standard journal entry for something like this. Another example would be when you prepay for something like business or other types of insurance where you pay a lump sum at the beginning of the policy period. You will want to record the initial payment as a prepaid expense (current asset on your balance sheet) and record, using a standard journal entry, the percentage of the policy used each month as an expense.
- Perform a comparative analysis of your income statement. Once you think you are complete with your monthly close, but before you prepare your financial statements, perform a comparative analysis of your income statement. Best practice would be to compare the results for the month you are closing to the results for the prior month. So for example, if you are closing the month of July 2016, compare those results to the month of June 2016. You should also compare the year to date through the month you are closing to the prior year’s year to date through the same month in that year. So in this example, compare the results for January 2016 – July of 2016 to January of 2015 – July of 2015. Any place you see large variances from one period to another, you need to investigate the cause of those variances to determine their accuracy and reasonableness. Often times, you might find that similar or the same things have been coded inconsistently to different accounts, or perhaps you have 2 months of rent in one month. There are many possible reasons why there might be variances, but review the larger one (both dollar wise and % wise) to be sure you financials are as accurate and consistent as possible.
We hope you found some value in these tips and, more importantly, that you start implementing some or all of them into your business’s accounting process. For help with developing and implementing a sound monthly closing process, contact us, as we have helped most of our clients incorporate these best practices, and put them on the road to financial discipline, stability and success.
Download your sample monthly closing checklist now and start building financial discipline in your business!