Financial close, as we know, is the process of reviewing, reconciling and finalising a company's financial records at the end of a specific accounting period. It can be a month, a year or some pre-defined specific period. The process ensures accurate records and financial statements.
The key processes are identifying and recording transactions, reconciling accounts, preparing journal entries and closing the books. The expected outcome is reliable and accurate financial information for the enterprise stakeholders.
Who is Included in the Financial Close Process?
The financial close process includes many company roles, including CFOs, accounting teams, stakeholders and compliance experts. They all have different roles, from handling transactions and ensuring accurate records, to ensuring alignment between internal and external reports.
Consultants, subcontractors, suppliers and external stakeholders may also contribute data or insights necessary for the close process in larger organisations.
Is Financial Close the Same as Closing Books?
While they sound similar, financial closing is the whole process, while closing books is just a part of that process. Financial close incorporates various accounting and financial activities in a given period. Closing the books is transferring balances to permanent accounts, so the account balance is set to zero for the next period.
Financial Close Process Explained: The Core Steps
The financial close process is a comprehensive system where accounting and finance teams review, reconcile and finalise financial records in a given period. Let's take a look at the core steps in this process:
Identifying and Recording Transactions
This step ensures that all financial transactions that occurred during the reporting period are accurately identified, captured, and recorded in the financial records. This ensures the integrity and completeness of the financial statements.
Reconciling Accounts
This step ensures that the company’s records match external records (such as bank accounts or vendor statements) to identify any discrepancies. Activities include bank reconciliations and account reconciliation between sub ledgers and the General ledger.
Journal Entries and Adjustments
During this phase, responsible parties make necessary corrections or adjustments to the accounting records to reflect the true financial position. This includes posting adjusting journal entries for things like depreciation, amortisation, prepayments and accruals.
Discover what accruals are and why they're an essential part of this process.
Running Trial Balances and Financial Statements
The accounting team prepares unadjusted and adjusted trial balances. Based on them, they create financial statements, ensuring compliance with the relevant laws and acts. These entries exist in spreadsheets and documents or are incorporated in a software dashboard.
Final Review and Closing
Before the final closing, accountants and CFOs may need to review the statement to ensure an unbiased and correct close. Once it's done, the reports are finalised, the financial close is ready and teams prepare for the next close period.
Challenges in the Financial Close Process
Financial closing is an essential process and comes with various challenges. Addressing them will help the accounting and finance teams resolve them and lead the process towards the close.
Time Constraints and Deadlines
Financial close processes are followed by tight timelines and a lot of data to be managed and reconciled. All included parties must submit the documents on time, as there's no time to leave this task for the last minute.
Month-end and year-end close are the specific ones as they involve many complex tasks determined by law or regulatory bodies. Many enterprises look for automated document and statement collection to ease the financial closing processes.
Manual Errors and Their Consequences
Manual entries are full of risks that may result in errors. If one entry is missed, the whole financial close process goes wrong, causing operational inefficiencies and reputational damage.
The biggest risk at this point is the financial loss caused by overpayments and unregistered transactions. So, leveraging software makes things much easier. Some teams use legacy systems, while others may go for modern solutions.
Compliance and Regulatory Requirements
Enterprises must comply with many regulations like GAAP or IFRS. As part of the financial close process, they must understand which regulations apply to their industry and stay updated on the regulatory changes.
Failure to adhere to these standards can result in legal consequences, damage to an organisation and potential fines.
Disparate Systems and Integration Issues
If the enterprise doesn't integrate the systems properly, it may not be able to retrieve and consolidate data.
Failing to integrate disparate systems may result in inconsistent data and cross-application difficulties. The outcome can affect the financial close process, making it incorrect and unreliable.
Leveraging Technology to Ease the Financial Close Process
The financial close process is not straightforward as it involves various accounting and finance activities. Automating some parts of it improves the overall efficiency and productivity, almost doubling the speed of the process. Choosing a great cloud solution to automate some of the tasks will help with data matching, reconciliation, journal entries management and reporting.
Also, technology makes it easier to track the relevant key performance indicators and accounting metrics. This way, enterprises can identify eventual bottlenecks and improve the closing process for the next period.
Financial Close Checklist: The Essential Steps Summarised
To effectively run the financial close process, you will have to set a checklist to remind you of each step involved. Implementing a structured financial close process is crucial for ensuring accuracy, compliance, and efficiency in financial reporting.
Financial Close Preparation
- Create a closing schedule with a defined timeline
- Organise responsible team and keep them on track
- Gather the needed data on transactions for the closing period
Transaction Review and Reconciliation
- Reviewing transactions to ensure they're all properly documented
- Reconciling bank accounts and statements to detect discrepancies
- Reconciling other balance sheet accounts that may include cash, expenses and inventory
Accruals and Adjustments
- Identify expenses incurred but not yet recorded and make necessary journal entries
- Adjusting account balances to ensure accuracy
- Conduct a monthly inventory count and adjust for any discrepancies
Financial Statement Preparation
- Generate the balance sheet, income statement and statement of cash flows
- Review the statements to ensure accuracy and completeness before finalising
Temporary Accounts
- Transfer balances of temporary accounts (revenue and expense) to permanent accounts (retained earnings)
- Ensure all temporary accounts are reset to zero for the new period
Compliance and Reporting
- Verify adherence to relevant accounting standards and regulatory requirements
- Communicate the results with the relevant people included in the process
Post-Close Review and Improvement
- Review the whole process to identify areas for improvement
- Adjust the close process based on feedback and lessons learned
Automation and Technology Integration
- Leverage technology to streamline repetitive tasks, reduce errors and enhance efficiency
- Use dashboards and reporting tools to track the close process in real-time
These steps ensure a smooth and accurate close process that guarantees financial transparency.
Final Words on the Financial Close Process
Understanding the financial closing process ensures you or your team take all the steps with care and focus, resulting in an efficient close. No matter if it's a monthly, yearly or quarterly close, the explained steps apply to each process - as well as to other periods defined by you or your team.
Technology surely helps, as financial close tools speed up the process and improve its efficiency. Consider including it in your process, if you haven't already - it's a life-changing step for your company.
Interested to learn how Aico streamlines the financial close?