In a business, every decision hinges on accurate data of numbers and the financial close process majorly impacts this. Even the best of finance teams need help with getting the process done in a timely manner. Financial close is diligently followed by the accounting team at the end of every month and the fiscal year. The financial close process requires them to work on different reports and data to arrive at the closing statements. The financial close process tells us the company’s true financial position at the given date.
But why does this process matter so much? Beyond just being one of the processes of regulatory requirements, financial close is the foundation upon which a company’s strategic planning and business decision-making rely based on the financial reporting derived from the process.
Significance of the Financial Close Process for Business
- The financial close process provides a definitive snapshot of a company’s financial health, reflecting its overall financial status.
- Financial close is a comprehensive accounting process, whereas closing the books is a subset within the broader financial close procedure.
- The financial close statement is useful for stakeholders, financial analysts, business managers in line, executives, board members, investors, and lenders with reports that will help them analyze the position of the company to make informed decisions.
Essential Steps in the Financial Close Process
When it comes to financial close, there’s no one-size-fits-all solution. Every business has different needs and hence the checklist for this process varies from team to team. However, all of them involve certain basic steps:
Gathering Financial Statements
The initial step in the financial close process involves compiling all essential financial data through key statements such as the income statement, cash flow statement, and balance sheet. These statements provide a comprehensive understanding of the business’s financial position.
Collecting past-due invoices
To obtain an accurate financial picture, it is crucial to collect all outstanding invoices. This practice enhances the accuracy of financial reports by reflecting the true amount owed to the company. Best practices include establishing clear payment terms, automating the receivables process, and offering multiple payment options to encourage timely payments. Delays in collecting overdue invoices can complicate accounting and impact financial clarity.
Reviewing Payroll
A thorough review and consolidation of payroll is essential during the financial close. Payroll data should be up-to-date to ensure accurate financial reporting. Key elements to verify include total payroll, cost of benefits, tax withholdings, and year-end bonuses.
Reconciling Bank Accounts
This process involves verifying that your accounting records align with your bank statements to ensure accuracy. Regular monthly reconciliations reduce the risk of encountering complex issues during year-end financial close.
Common Challenges in the Financial Close Process
The financial close process is challenging for finance teams due to its complexity, time sensitivity, and reliance on accurate data from multiple sources. Here are some of the common challenges faced by the finance teams during the closing process:
- Manual Data Entry: Reliance on manual processes leads to errors, delays, and inefficiencies in reconciling accounts.
- Data Accuracy and Consistency: Ensuring accurate and consistent data across different systems, departments, and formats can be difficult.
- High Volume of Transactions: Managing and reconciling large volumes of transactions adds complexity, especially for global organizations.
- Time Constraints: Strict deadlines put pressure on finance teams to complete the process quickly, risking accuracy and thoroughness.
- Interdepartmental Coordination: Aligning data and processes across various departments, such as accounting, procurement, and sales, can cause bottlenecks.
- Regulatory Compliance: Keeping up with changing accounting standards and regulations adds complexity to the close process.
- Limited Visibility and Reporting: Difficulty in accessing real-time data and generating accurate reports can hinder decision-making and audit readiness.
- Lack of Automation: Without automated workflows, the process becomes more labor-intensive and error-prone.
5 Ways to Improve Financial Close
Accurate reports mean accurate financial decision-making. Financial close is a process that is not just beneficial to CFOs or accountants. It also helps multiple other internal and external stakeholders to make informed decisions. Every business opportunity be it procurement of more stock, starting a new line or product, or business expansion is entirely dependent on how the financial state of a company. While the financial close process can be time-consuming, accounting teams have to find new and smarter ways to accelerate the process while also ensuring accurate reporting. Here are 5 ways to do that:
Identifying Gaps and Inefficiencies
The first step toward improving the financial close process is to identify bottlenecks and understand their root causes. For example, evaluating whether monthly reconciliations are conducted thoroughly and identifying any missed steps can reveal areas for improvement. Reflecting on these aspects helps in refining current processes to eliminate inefficiencies.
Creating Standard Operating Procedures (SOPs)
Different teams may have varying methods of presenting data, leading to inconsistencies and challenges in standardization. Establishing a documented, step-by-step process flow for the financial close is essential to ensure uniformity. Additionally, SOPs for specific tasks, such as reconciliation methods or procedures for addressing overdue payments, should be created to ensure that all team members are aligned with the process.
Ensuring Access to Data and Information
For a smooth financial close, accounting information must be accessible to all necessary stakeholders. This ensures that they are aware of timelines and can provide the required data promptly, facilitating a more efficient close process.
Adopting Automation
Implementing automation tools can significantly accelerate the financial close process. Automation not only enhances the accuracy of reporting but also ensures that the data is presented in user-friendly formats, which is valuable for various stakeholders. By reducing the time spent on manual data entry and analysis, teams can focus more on business planning and strategic decision-making.
Post-Close Meeting and Review
Continuous improvement is key to process optimization. Conducting a post-close review allows teams to identify gaps in the process and analyze financial outcomes to determine if key performance indicators (KPIs) were met. This review process is crucial for refining and enhancing the efficiency of future financial close cycles.
How can automation help ease the financial close process?
While cloud computing and Enterprise Resource Planning (ERP) systems can streamline accounting processes, they may not be sufficient on their own to achieve overall efficiency. Enhancing ERP systems with additional tools can significantly accelerate the financial close process. For example, automating repetitive tasks like posting journal entries to ledgers can provide a solid starting point. Additionally, automating the reconciliation process can further improve efficiency.
Establishing a standardized process for month-end and year-end financial close is essential for achieving accurate and consistent reporting, which is critical for informed decision-making. To ensure a swift year-end close, it’s important to work consistently and strategically on monthly closures. Accounting teams should continually seek out solutions to enhance efficiency during the financial close.
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FAQs
1. What is the financial close process?
The financial close process ensures proper closure of all necessary accounts to arrive at the true state of a company’s finances as of that date.The close process involves reviewing, reconciling, and finalizing a company’s financial records at the end of a specific period, typically monthly, quarterly, or annually. It includes recording and verifying transactions, reconciling accounts, preparing and review.
2. How long does financial close take?
Companies that still use traditional ways of recording transactions usually take longer periods to finalize their accounts and close them. On the other hand, firms that automate various activities usually take four to six days to finish their financial close.
3. What is the difference between month-end and year-end financial close?
The month-end financial close involves reviewing and finalizing financial transactions for the month, ensuring accurate records for income, expenses, and reconciliations. It helps track ongoing business performance. In contrast, the year-end financial close is a more comprehensive process that involves finalizing all accounts for the fiscal year, including preparing financial statements, completing tax obligations, and ensuring compliance with regulations. While month-end focuses on regular monitoring, year-end ensures accuracy and completeness for annual reporting.
4. What are the financial statements required during the financial close process?
During the financial close process, the key financial statements required are the balance sheet, which shows the company's assets, liabilities, and equity; the income statement (profit and loss statement), detailing revenues and expenses to reflect net profit or loss; and the cash flow statement, which tracks the inflows and outflows of cash from operating, investing, and financing activities. Additionally, the statement of changes in equity may be required to show shifts in owners' equity over the period.
