Financial Close Process Guide - Finance Silos

Financial Close Process Guide

Guide to the Financial Close Process

The process of closing accounting books holds significant importance within the field of accounting and finance for various reasons. First off, the financial close process culminates in the generation of vital financial statements that play a pivotal role in shaping strategies and aiding the assessment of an organization’s advancement toward its business objectives. These statements not only facilitate the calculation of cash flow forecasts and budgetary decisions, but they also serve as a reference point for the company’s leadership.

Furthermore, these statements are of great interest to external stakeholders, including analysts, investors, auditors, lenders, and regulators, who rely on them to gain insights into the financial standing of the company..

However, it’s worth noting that the financial close process is a meticulous and labor-intensive undertaking, as anyone well-versed in accounting knows. In many companies, finance teams convene at the conclusion of each month, quarter, and year to meticulously reconcile all of the transactions, striving to arrive at a singular and accurate representation of the financial reality.

Explaining Financial Close Process

The financial close is an important business task that results in creating financial statements showing how a business is doing financially during a specific time. The main aim of this process is to finalize financial records.

Regularly closing the books – either every month, every quarter, or every year – is crucial for effective business management and success. The financial statements that come out of this process are extra valuable when they give accurate and quick insights. This requires careful attention to details within a short timeframe. For businesses that don’t use efficient technology and streamlined methods, closing the books can become a time-consuming, inefficient, and disorganized effort.

Simplified Financial Close Phases

Creating a customized financial closure checklist is crucial, as a one-size-fits-all approach isn’t adequate for every business’s unique requirements. Moreover, distinctions exist between the procedures for month-end financial closure and year-end financial closure.

The main differentiation lies in how the month-end closure process concentrates solely on the activities that occurred within a single month’s business operations. Conversely, the year-end process involves consolidating data spanning 12 months.

To establish a robust foundation for devising a financial close checklist, whether for the culmination of a month or the culmination of a year, consider the following steps:

1. Compilation of Financial Statements 

Your financial statements provide a comprehensive understanding of your business’s overall health. Consequently, this empowers executives to make more informed decisions. At the very least, you should assemble the following financial statements:

These three statements, derived from the three-statement model, are not only pivotal for both month-end and year-end closure procedures, but they also hold significant value during the tax season.

2. Retrieve Outstanding Invoices

This step carries heightened significance within the year-end financial closure procedure. Put forth your utmost effort to recover funds that are owed to you prior to the year’s conclusion.

Consider incorporating the following actions into your collection strategy:

  • Defining clear payment terms
  • Issuing regular payment reminders
  • Establishing structured payment plans
  • Providing the option for various payment methods

The longer overdue invoices remain unresolved, the more challenging their retrieval becomes. Furthermore, retaining these outstanding invoices across successive years has the potential to create accounting complexities.

3. Gather Essential Forms and Data

The specific forms and data required are contingent upon the nature and scale of your business, as well as its organizational structure. Data encompasses various elements, including cost of goods sold, employee expenditures, revenue figures, and the valuation of assets and liabilities.

4. Examine Payroll

Accounting and payroll documentation form a substantial component of any financial closure procedure, irrespective of the time within the year. It’s imperative for your payroll records to be precise and current, facilitating a seamless transition into the forthcoming month or new year.

Exercise meticulous care when assessing particulars like:

  • Aggregate payroll expenditure
  • Comprehensive benefits expenditure
  • Amounts held back for taxes
  • Year-end bonuses

Elevate this process by crafting a dedicated checklist for year-end payroll processing.

5. Reconcile Accounts for Financial Close

The act of reconciling bank accounts involves verifying the accuracy of your accounting records by comparing them against your bank statements. The most effective approach involves juxtaposing the information presented in your bank statements with the data in your accounting records. Does the balance indicated in your bank statements align with that in your accounting records? If disparities exist, what underlies these differences? By engaging in monthly bank account reconciliations, the risk of encountering intricate complications at year’s end diminishes.

Pointers for Enhancing the Financial Close Process

At this juncture, you possess a lucid comprehension of common challenges encountered during the financial closure process. However, comprehension alone isn’t sufficient; the implementation of remedies is imperative. Fortunately, numerous avenues exist for addressing the aforementioned challenges, while concurrently enhancing your overall closure process.

Below is a remedy for each of the aforementioned issues:

1. Establish Financial Procedure

If a clear procedure is absent, now is the opportune moment to formulate one. The fundamental actions to undertake are as follows:

  • Determine the individuals to engage in the concluding phase.
  • Compile a record of duties and obligations by charting out workflows.
  • Institute reliable internal controls to avert errors.
  • Incorporate technology to enhance efficiency and alleviate difficulties.

2. Embrace Automation to the Fullest

The realm of automation technology spans nearly every conceivable industry, and this certainly holds true for financial experts. In financial institutions where automated capabilities are lacking, tasks frequently face delays, particularly in cases where a key team member is away on vacation or sick.

It’s human nature to be hesitant about adopting technology, especially if you’re accustomed to your existing system. However, if your aim is to advance in terms of efficiency, transparency, speed, and precision, incorporating automation technology — powered by Vena — becomes indispensable.

3. Introduce a Consistent Data Collection Framework

Scrambling to gather data at the close of the year isn’t exactly enjoyable. The stringent deadline leaves little room for waiting around. The predicament arises because those possessing the required information might also be engrossed in year-end undertakings.

The resolution to this quandary lies in implementing a standardized data collection system, such as granting pertinent employees access to a shared spreadsheet. In essence, the goal is to ensure uniformity across your entire organization, with everyone adhering to the same approach when providing data.

Having one person send you an email, other shares a spreadsheet, and others use Slack is not ideal. This places undue pressure and strain on you, as you are then tasked with consolidating the data before any further action can be taken.

4. Establish a Well-Defined Team

Assistance proves beneficial for your year-end financial closing procedure. Nonetheless, it’s essential to bear in mind that greater numbers don’t always equate to better outcomes.

An excessive number of contributors can lead to conflicts and differences of opinion. Moreover, it heightens the probability of redundant efforts, consuming valuable time that could otherwise be devoted to accomplishing additional duties.

All pivotal participants, particularly those in the accounting domain, should possess distinct, well-defined roles and responsibilities. Their contributions should consistently enhance the overall process.

If you observe a situation where multiple individuals are steering the closing process in divergent ways, take a moment to assess your team and identify the pivotal contributors.

5. Develop a Post-Close Evaluation Process

The substantial amount of time invested in navigating through the actual closing process can sometimes lead to neglecting what follows. The post-close review procedure stands as a crucial element for your upcoming accomplishments. Absent this step, discerning what transpired favorably or unfavorably, and how to effect improvements, becomes challenging.

Tailor the post-close review in accordance with your team’s performance and future objectives. Below outlines a potential structure for this process. In preparation for subsequent years, the following aspects are vital:

  • Establishing the optimal commencement time for the closing process.
  • Gaining clarity on the requisite data categories.
  • Determining the appropriate participants for the closing process.
  • Reevaluating and redistributing duties as necessary.
  • Arranging closing documents systematically for future consultation.

A thorough post-close review procedure serves to enhance your readiness for the forthcoming year, guaranteeing the availability of dependable and precise groundwork for progress as the current year draws to a close.

Financial Close Process Challenges

Closing the books can be a tough task as it demands accurate and timely results that adhere to internal rules, accounting norms, and regulations. Businesses without standardized processes or automation tools often face heightened stress during this process. Some key challenges in the closing process include:

  • Lack of Standardization and Teamwork
  • Ensuring Accuracy
  • Time Constraints
  • Data Problems
  • Disparate Systems
  • Limited Resources

Final Thoughts

Closing accounting books is a critical process that needs essential financial statements, strategies, assessment, and providing a reference point for an organization’s progress. These are invaluable steps for calculating cash flow forecasts, and making budgetary decisions, and are of great interest to external stakeholders. However, this process is intricate and painstaking, requiring thorough attention to detail.

While the process of financial closure offers tons of benefits, it has its own challenges. Surpassing these hurdles and applying effective strategies leads to a more streamlined and efficient financial closing process, ultimately contributing to better financial management and decision-making within an organization.

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One response to “Financial Close Process Guide”

  1. Avatar Tyrone Thorpe says:

    This was an insightful read.

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