5 Keys to an Awesome Financial Close!

We all know financial statements are important.

Really important.

But why and how do we get there?

We believe that financial statements are important because they can be used to help you make smart decisions to build and grow your business.

It is really that simple.

But getting there is where we see most businesses struggle.

The bridge to getting timely and accurate financial statements is the month-end close process.

Most entrepreneurs and business owners don’t realize there is actually a process. And why should they since they are not accountants?

For those that do, there are a bunch of reasons why the process is not working which we will get into later in this post.

So the end game is getting timely and accurate financials using an awesome month-end close process.

Before we move on, for more background information on financial statements check out these quick posts “3 Key Financial Statements to Leverage for Growth” and “5 Ways to Understand Your Financials to Get Closer to Your Goals”.

Now back to the financial close process.

In this article, you will learn about:

The financial close process
5 keys to an awesome close process
Top 3 Takeaways

Let’s dive in.

Demystifying the Financial Close Process

Full disclosure, we just set up a ChatGPT account.

We are excited 🙂

Here is how ChatGPT defines the month-end close process.

The financial close process, often referred to simply as “the close,” is a series of steps undertaken by organizations at the end of an accounting period to ensure that all financial transactions for that period are accurately recorded and reported. This process typically occurs monthly, quarterly, or annually, depending on the reporting requirements of the organization.

The financial close process involves several key activities, including:

Reviewing Transactions: Accountants review all financial transactions recorded during the period to ensure accuracy and completeness. This includes verifying that transactions are properly classified and documented.

Adjusting Entries: Any necessary adjustments are made to account for items such as accruals, prepayments, depreciation, and other timing differences. These adjustments ensure that the financial statements reflect the true financial position of the organization.

Reconciliation: Various accounts, such as bank accounts, accounts receivable, and accounts payable, are reconciled to ensure that the balances reported in the financial statements match the supporting documentation.

Closing Entries: Temporary accounts, such as revenue, expenses, and dividends, are closed to the appropriate permanent accounts, such as retained earnings. This process resets the temporary accounts to zero in preparation for the next accounting period.

Financial Reporting: Once all adjustments and closing entries have been made, financial statements are prepared, including the income statement, balance sheet, and statement of cash flows. These statements provide an overview of the organization’s financial performance and position during the period.

Review and Approval: The finalized financial statements are typically reviewed by management and may require approval from stakeholders such as the board of directors or external auditors.

Archiving Documents: All supporting documentation related to the financial close process, including journal entries, reconciliations, and reports, are archived for future reference and audit purposes.

The financial close process is crucial for ensuring the accuracy and integrity of an organization’s financial reporting. It allows stakeholders to make informed decisions based on reliable financial information and helps maintain compliance with regulatory requirements. Additionally, a well-executed close process can identify potential errors or discrepancies early, allowing for timely corrective action.

Darn, that was pretty good. Thanks Chat GPT!

Our simple and high-level definition is:

The Financial Close process is a series of steps to help ensure that each month the financial statements are delivered in a timely and accurate manner.

Entrepreneurs and business owners need the financial statements for the following reasons:

Access if the business is on track with its financial goals
Determine the financial health of the business
Have data to make smart decisions

Now we have an understanding of this process and why it’s important.

Let’s jump right into 5 Keys to make it awesome.

5 Keys to an Awesome Financial Close Process

Here are 5 important considerations to create an awesome close process.

Key #1 – Make sure there is a month-end close checklist.

We love checklists. They provide clarity around the steps that need to be performed to get the desired outcome.

For the desired outcome to be accurate financial statements then some steps need to be performed to accomplish that desired outcome.

Let’s look at Chick-fil-A as an example, since we love their chicken sandwiches.

Whether you go to a Chick-fil-A in Rhode Island or California your spicy deluxe chicken sandwich will taste the same, take the same amount of preparation time, and be delivered with a smile.

Why?

They have checklists covering the various components of preparation and service. And they do this at scale.

So relating to the month-end close here are a few examples of items that should be on that checklist.

Bank Accounts

Ensure all transactions are properly flowing into QBO
Ensure all transactions are properly coded to the proper GL account
Ensure that the bank reconciliation is prepared
Ensure that the reconciling items are identified around outstanding checks
Ensure that the reconciling times are identified around deposits in transit

Fixed Assets

Ensure that assets purchased over $1,000 are capitalized
Ensure depreciation is booked on all assets each month
Ensure that assets no longer being used are removed
Ensure that your depreciation schedule agrees with your balance sheet
Ensure that your depreciation expense agrees with your profit and loss statement
Ensure that repairs and maintenance are properly expensed in your profit and loss

An accountant at the staff level should be able to perform the above procedures to ensure that the accounts are properly stated on any balance sheet.

This can be replicated each month and over many types of accounts.

You get the point, the checklist allows for scalability just like the chicken sandwich in different states at different store locations. Yummy.

Key #2 – Make sure you create accountability and set due dates.

This one is very important.

It is simple yet at the same time complicated.

Take the above example and apply it to bank accounts.

We can simply create accountability by assigning those steps to Tom with a due date by the end of the second week.

That’s pretty clear and straightforward. The complexity comes into play when Tom gets sick or information is not ready.

The key here is to manage well, be flexible, communicate new due dates, and hold the line on accountability.

Here are some of the challenges we see that are easily avoidable:

No one is a named owner of the task
There are multiple owners of the task, thus no owner
There is no set due date
If expectations change, there is no new due date set
There is no conversation around accountability for missed deadlines

Keep in mind how important this is.

The reason for our month-end close process is to deliver timely and accurate financial information and if Tom is not timely, our goal will be missed.

The answer here is to lead, manage, and hold Tom accountable.

Key #3 – Establish a quality control review of the financials.

Ok, so the checklist is complete and Tom has met all his deadlines.

Now we are onto the quality control process.

Remember, Tom is a staff accountant. His work needs to be reviewed and checked by Jerry the Quality Control team member.

Since we are using financial statements to make smart decisions, we want to make sure the financials are reviewed by an experienced team member.

This goes back to steps #1 and #2.

A checklist should be prepared for the quality control reviewer to perform.

Further, Jerry should have deadlines as well and should be held accountable so that we can meet the desired outcome.

It could create some real pain around cash flow if an entrepreneur makes bad decisions due to relying on bad financial statements.

A quality control review is a good investment in making good decisions.

Key #4 – Establish a month-end close meeting where the financials are reviewed.

This is one of our favorite meetings at New Economy.

Here we get to focus on our core value of delivering awesome service.

We schedule 30-minute monthly zooms to provide our entrepreneurs with financial results from the month and LOTS of knowledge that we derive from the financial statements is spoon-fed to our customers.

Here are some examples of what we discussed during the close meeting:

Budget versus actual results by line item with a narrative
Cash burn for the month
Reporting on KPIs with the narrative
Focus on spend management
Connect actual results to financial goals

It’s pretty fun to tease this information out of the financial statements.

We are providing visibility and information on changes needed in the next month, based on the learnings.

Key #5 – Apply what you are learning during the financial review.

Don’t get me wrong.

There is a lot of work in steps #1-#4.

But the real magic happens here.

After that month ends, the big question is “What did we learn?”.

Maybe we learned in our budget versus actual analysis that we are overspending on software costs. This is causing us to be off track from our goals.

Our advice is to dig in.

Is this overspending going to keep happening? Do we have to shut it down? Was it a one-time thing and it will fall back in line next month with some underspending?

I think you get the point.

There is a lot of learning in the financial statements that have action items that can improve the financial performance of the business.

This is gold for any entrepreneur.

And you don’t need a full-time accountant to pull this off.

Learn more in our blog post on outsourcing your accounting to a part-time remote accountant.

3 Key Takeaways

At New Economy, we want to help you gain control of your finances to make smart decisions. Part of that is understanding your finances and how to drive business performance.

Here are 3 key takeaways.

Make sure you have a monthly close checklist. It should be written and updated quarterly. This will help you get to the desired outcome. Further, if you and your accountant should part ways you have a road map for performing the month-end close specific to your business.
Make sure you are clear with deadlines and hold your team accountable. This is key to getting timely financial results. And you are also striving for accuracy so setting up a monthly quality control review is important.
Once you get your financial statements, use them. Learn how to read them. Learn what they are telling you about your business. And then go take that learning to improve the financial condition of your business.

There you have it 🙂

New Economy Team Members are Experts in Accounting for Entrepreneurs

If identifying ways to decrease your taxes is not in your skill set or you want to gain control of your finances to make smart decisions to build and grow your business, New Economy is an excellent partner.

We’ll help you get your accounting and taxes done, and done right.

Schedule a time to meet with our Founder, Jeff, and discuss how we can add value to your situation.