The financial close is the process that a company undertakes at the end of each accounting period to verify and finalize its financial statements: the balance sheet, income statement, and cash flow statement.
This includes a month-end close process for monthly reporting periods.
The financial close is an important part of any business operation; it involves completing the accounting cycle, and its main objective is to ensure that the financial statements accurately reflect the company’s financial performance.
Financial Close vs. Closing the Books
While the terms “financial close” and “closing the books” are often used interchangeably, they actually refer to different things.
Closing the books refers to the process of recording and summarizing all financial transactions for the accounting period, preparing them for the financial close, and ensuring that all entries are complete and accurate.
Financial close, however, is the process of verifying and finalizing the financial statements.
What are the Steps of Financial Close?
The following steps are included in the financial close process:
1) Sub-ledger Close: The first step involves closing the sub-ledgers, such as accounts receivable and accounts payable, to ensure that all transactions have been recorded.
2) General Ledger Close: Closing the general ledger to ensure that all journal entries have been posted accurately.
3) Trial Balance: Preparing a trial balance to ensure that the debits and credits balance.
4) Adjustments: Making adjustments such as accruals or deferrals to ensure that the financial statements are accurate, if necessary.
5) Financial Statements: Preparing the financial statements, including the balance sheet, income statement, and cash flow statement.
6) Review and Approval: The financial statements are reviewed by management and approved before being released to external stakeholders.
For the month-end close, the process is similar to the financial close process but on a smaller scale.
Since month-end reports are required for management reporting and analysis, it is crucial to ensure that the month-end close process is completed accurately and on time.
Challenges of Financial Close
The financial close process can be challenging for companies due to its complexity and the need for accuracy. Some of the challenges that companies face during the financial close process include:
- Timing: The financial close process must be completed within a certain time frame, which can be challenging if there are delays or issues with the process.
- Data Quality: The accuracy of the financial statements relies on the quality of the data that is used, which can be challenging if the data is incomplete or inaccurate.
- Coordination: The financial close process involves multiple departments and stakeholders, which can be challenging to coordinate.
- Compliance: Companies must comply with various accounting standards and regulations, which can add complexity to the financial close process.
Financial Close FAQ
- Why is financial close important?
Financial close is important because it ensures that the financial statements accurately reflect the financial performance of the company.
This information is critical for making informed business decisions. Month-end close is a crucial step in order to properly balance the books, plan budgeting and ensure tax compliance.
- How often does the financial close occur?
It typically occurs at the end of each accounting period, which can be monthly, quarterly, or annually, depending on the company’s accounting practices.
- What happens if the financial close process is not completed accurately?
In this case, the financial statements won’t reflect the true financial position of the company, which can have negative consequences, including regulatory fines.
- What tools are used in the financial close process?
Companies use a variety of tools to facilitate the financial close process, including accounting software, spreadsheets, and financial reporting tools. In recent years, we’ve also seen a growing number of platforms specializing in automating the financial close process.
How To Optimize The Financial Close?
For many finance teams, financial close is very stressful and exhausting.
But there are some strategies and best practices that companies can implement to optimize their financial close process, reduce costs, and increase efficiency.
- Automate the financial close: Automation can reduce the time and effort required to complete the financial close process by eliminating manual tasks. Use accounting software that automates workflows, such as automated journal entries, reconciliations, and close checklists.
- Establish a clear timeline: Create a clear timeline for the financial close process, including deadlines for each task. Ensure that all stakeholders involved in the process are aware of the timeline and their responsibilities.
- Implement continuous accounting: Continuous accounting involves performing accounting tasks throughout the accounting period, rather than just at the end. This approach can help to ensure that financial data is up-to-date, reducing the need for adjustments during the financial close process.
- Improve data quality: Ensure that all financial data is accurate and complete by implementing controls and checks throughout the accounting period. This can include reconciling accounts regularly, performing data validations, and checking for errors or anomalies.
- Use analytics tools: Analytics tools can help to identify trends and issues in financial data, making it easier to identify and resolve issues during the financial close process.