With 2022 behind us, it's time to start focusing on closing the books for the year and putting 2023's goals in the sights of business owners. Closing the books is a critical business process for many reasons. Doing so leads to the data needed for the creation of financial statements that can guide strategy and decision-making for business owners.
But the financial close process is not always an easy one, especially if the business's books are messy or if there is not a system in place to make it easier on a business owner.
What is the Financial Close Process?
The financial close process involves reconciling all of the company's activity over a set period of time. At this time, a year-end close is most relevant, but the financial close process can be utilized on a monthly basis, quarterly basis, or any other predetermined period of time.
Some businesses will often try to close the books in a speedy manner to get the financial statements together quickly, but the desire for speed must be balanced with the need for accuracy. As with anything in running a business, rushing things can lead to sloppy results, so time must be spent on the closing process in order to yield the results a business owner desires. However, there are many technology solutions out there to help make the closing process quick and accurate.
The Importance of a Financial Close
With a financial close comes a consolidated and accurate record of the financial activity for the desired period. Both internal departments and external stakeholders rely on the statements that a close generates.
Owners and managers within a business utilize these statements to conduct financial analysis, forecast future income and expenditures, establish and adjust budgets, generate key performance indicators (KPIs), and more after an accurate and timely close.
External stakeholders such as investors and lenders look to the financial statements and reports that are generated during a close process to assess a company's financial performance and see how well their investments are performing.
The Steps to Complete a Financial Close
Recording financials accurately throughout the year. Throughout the year, the bookkeeping and accounting team will record all transactions from the period. Everything from sales to services gets recorded and any issues that arise must be addressed to ensure the records are accurate at this point.
Review Accounts Payables. While everyone wants to focus on recording revenue, the bookkeeping and accounting team will need to record any expenses that were incurred during the desired period of time. This includes things like payroll, contractor payments, and more. At this time, it is also important for the team to ensure that all invoices are paid that should be paid in that period, to ensure the profit numbers are accurate for the business.
Reconcile All Accounts. After the payables and receivables are recorded and reviewed, it is time to reconcile all of the business accounts. This includes all cash, checking & savings accounts, and credit cards. Any shortfalls that are identified must be investigated and resolved to ensure accuracy in the process.
Review Inventory. If a business has inventory on hand, there must be reviewed to ensure that the accounting records can be reconciled with a physical inventory count to ensure everything is where it should be.
Generate the Financial Statements. Assembling the financial statements for the business can be done manually using an excel sheet, or in the more preferred way, automation software. Financial statements include an income statement, a cash flow statement, and a balance sheet. Having a system in place that removes the manual work from creating financial statements will help a business finalize a close much faster and provide a higher level of accuracy when there is less room for human error.
Review the Financial Statements. A review of the generated financial statements should be reviewed by an unbiased party that is not actively involved with the close process. That could be an accounting professional or if the company outsources its bookkeeping and accounting, they can work with their specialist to ensure accuracy.
Finalize the Close Process. Once a final review is completed, the statements and any other related documentation can be presented to the management teams and used as a baseline for future planning.
Challenges that Come With a Financial Close
The close process isn't always an easy one. Here are some of the common challenges that businesses face when it comes to closing a period.
- Lack of standardized processes within the business.
- Ensuring accuracy while gathering bookkeeping records.
- The pressure of close deadlines.
- Data issues.
- Systems that are outdated or not up to par.
- Insufficient resources.
Solutions to Make Financial Closes Easier
One point that we hit on a few times is having organized data that can be compiled in a timely manner. To make this easier for businesses, it's important to have an enterprise system like NetSuite operating from the top down and across all departments and areas. Having a system like NetSuite in place creates a central hub of data and records for the business.
On top of being more organized, data can be compiled in a fraction of the time for a financial close with automation, compared to a manual process or disparate systems. In between closing periods, the real-time financial dashboards within NetSuite provide business owners and managers with an accurate look at the books to help shape business strategies. It doesn't keep a business's financial health in the dark until the end of the year.
For businesses looking to take it to the next level, consider outsourced bookkeeping and accounting services. Relying on an outsourced bookkeeping services provider will ensure that the books are handled for a business without worry. Along with a host of benefits over trying to handle bookkeeping in-house, a qualified bookkeeping services provider will have their own tech stack that provides businesses with the best and most up-to-date software solutions to make a financial close easy! Reach out to AccountingDepartment.com today to learn more about how we can help you and your business.