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Financial close

The financial close is the process finance and accounting teams typically undergo at the end of each month, quarter, and fiscal year. Companies need to validate and adjust account balances at the end of each accounting period, in anticipation of a new period.

The ultimate goal is to close the books for the period quickly and efficiently, and to start each new period with accounts at zero.

This process is both best practice and also required by most regulatory agencies. More importantly, it sets out the company’s financial position and allows better decision-making for the CFO and executive leadership team.

All businesses need an effective financial close process. The best finance teams can do this quickly, accurately, and with minimal stress for all stakeholders.

What does the financial close involve?

The classic financial close process includes eight key actions:

  • Identifying transactions

  • Recording these transactions in the accounting journal

  • Updating the general ledger

  • Preparing a preliminary trial balance

  • Account reconciliation (involving debits and credits)

  • Creating journal entries to adjust imbalances

  • Running an updated trial balance and validation of new financial statements

  • Closing the books

The final step is actually the overall goal - to close the books for a given period. But what does this actually mean?

What does it mean to “close the books?”

Closing the books is when an accountant locks in the balance sheet accounts at the end of a certain period (the “close cycle”). After this point, the books are considered final and shouldn’t be altered or updated further.

The finance team then resets the income statements to zero, and begins the new close cycle fresh.

Why is the financial close important?

The primary goal of the financial close process is to give authoritative, verified accounts of the company’s financial position. Those stakeholders include executives, investors, financial analysts, board members, and even governments or regulatory agencies.

So at its most basic, the close process is important because key stakeholders require it.

But accurate financial reports are also hugely valuable in making smart business decisions. Executives use these to find opportunities for growth, and to identify inefficiencies across the company. Without verified, closed books, the data isn’t reliable and these decisions can’t be made.

Finally, a fast close is also an indicator of smooth, efficient internal processes. If you can’t find data easily, or finance teams don’t know who to go to for answers, you likely have structural problems. The faster your company grows, the more pronounced these issues become. So it pays to build rapid closing processes, and to constantly find ways to improve them.

If that’s not possible today, you likely have a few notable issues to resolve.

Key issues in the financial close process

The period-end is notorious among finance teams for being stressful and draining. Whether it’s the year-end, quarter-end, or month-end close, it’s always among the most painful accounting processes.

Which means that good financial close management can be a major asset in your business. The faster your close, the more time and energy you have for higher-value tasks.

So identifying the biggest bottlenecks should be your primary aim. Here are the most common causes.

1. Manual processes

The clichéd accountant sits at their ledger with a pencil and a calculator, scrutinizing each payment line by line. While mostly a caricature today, many finance teams do rely on manual process checks, looking through Microsoft Excel spreadsheets and eyeballing their accounts.

Any manual data entry adds time and can also lead to frequent human error. This human error is among the worst offenders at the end of the month, because the finance team first has to find and fix the error before the reconciliation can begin.

Worst of all: these processes don’t scale. If you add more transactions - as most growing businesses hope they will - it just takes longer to close the books.

If a very slow close is an issue today, removing some of the more manual aspects is the obvious starting point. This means both building automation workflows into the process, but also collecting data (including receipts and invoices) digitally by default. You shouldn’t need a human to input every data point when great technology is already faster and more accurate.

2. Poor intercompany communication

Another prevalent cliché is that the accountant is only interested in numbers, and needs no people skills. This is fundamentally false!

In fact, the best accountants know how to work closely with other business units. Finance teams rely on a steady flow of information and documents - receipts, invoices, and approvals - from all across the company. The more they can operate in unison with their colleagues, the faster the close will be.

Smart communication also usually comes down to good tools. Do you have spend management or accounts payable software that everyone can understand and use? The less you need to train other teams one-by-one, the better your chances of having clean data at the end of the month.

3. Diverse data sources

Effective payment reconciliation is critical during the financial close. You need to see that bank account statements match your internal financial reporting. But this gets tricky where you have multiple bank accounts, dozens of credit cards, and make invoice payments on an ad hoc basis.

Your ability to pull these data sources together is crucial. Ideally, you’d have your cards, expense claims, and invoices running through the same system. That way you only need to check one source for payment details.

That’s why we recommend a robust spend management system to do just that. This keeps your main payment methods in one place, alongside your budgets and approval workflows.

Many companies also use an ERP software, which combines your finance data with all kinds of broader company performance management. Having easy access to this single source of truth not only leaders to a faster close, but also helps you make smart business decisions in real time.

Benefits of a more efficient close

Many companies follow the same playbook for the period-end close. They ask their finance team to diligently go through every payment and account balance one by one, looking for inconsistencies and ensuring that financial reporting is accurate.

If you can streamline this process, you stand to gain in several key areas:

  • Scalability. Most companies intend to grow. Some plan to do so incredible quickly. As more payments come in and go out from the business, you have more account reconciliation to do. So the faster you move away from manual processes and towards automation, the more scalable your finance operations become.

  • Decision making. Meeting regulations and staying compliant is just the beginning. Good financial data helps you make smart choices. And the faster you can close the books, the sooner you can incorporate this data into forecasts and set new KPIs for the business.

  • Energy and attitude. It’s a crucial part of their work, but many accountants dread the closing process. This has less to do with the number-crunching, and more to do with the email chains and back and forth they need to have with other staff. In a tough talent market in which finance professionals are quitting often, it pays to avoid these stressful exercises.

  • Operational excellence. There’s also the simple fact that most companies and their teams want to be at the cutting edge of their work. And a long, slow close is exactly the opposite. Some CFOs judge themselves primarily on the speed with which they close. If it takes days, not weeks, that’s great. Hours instead of days is even better.

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Last update: 2 February 2022