Why does month-end take so long and how could you do it quicker?
It’s not much of an exaggeration to say that closing the books on last month’s finances can be a full-time job.
For many finance teams, particularly in smaller non-profits, a month-end close can take several weeks, and some staff can be occupied with the related tasks almost all the time.
If your finance team is managing to complete its month-end tasks within a five days or so, you’re probably among the better performers already. But you’d probably still like to get it done quicker – and cloud accounting software provider iplicit has some suggestions.
Why do we do a month-end close?
Smaller organisations might not bother with a month-end close at all, but for those of any size, it is a necessary procedure.
It is your opportunity to tie up loose ends, make sure you’re paying your bills and being paid and that things are not falling through the cracks.
But the bigger purpose of the exercise is providing clear financial information to inform business decisions.
It’s not always easy to remember that when you’re bogged down in the detail of a messy month-end. What’s more, the process can take so long that the information that comes out at the end is already out of date.
What are the barriers to a quick month-end close?
Finance teams will be familiar with the normal elements of a month-end process:
- Collect information
- Verify and reconcile the figures
- Manage budgets, forecasts and variances
- Prepare the management accounts
- Conduct a final review and analysis.
It is the time to review everything and ensure all transactions are recorded accurately and completely. It also involves getting to the bottom of any anomalies that might distort the picture – for example, transactions for a different month slipping into the accounts of the month in question.
But there are a host of factors that can hold matters up.
You might not have received all the expected invoices. It’s quite likely that you won’t have received all the invoices for goods or services ordered near the end of the month.
Sales might not have been finished. It’s possible your customers may not yet have been invoiced for goods that have been sent or services which have been done.
Purchase orders: The process of making sure all orders have been received and entered in the system, and that the corresponding sales invoices have come through, can be time-consuming.
Accruals and deferrals: It can be a complicated business to adjust the accounts to reflect payments already received for future goods and services – or for income earned but not yet received.
Expenses: Hardly anyone enjoys the admin of expenses claims, which is why staff tend to be slow to sign them off and line managers often don’t authorise them promptly. This all presents another barrier to closing the books in a timely manner.
Bank reconciliation: Checking the credits and debits in the bank statement against the cashbook in the finance system is a slow task if done in the traditional fashion.
VAT returns and other headaches: The complexity of quarterly VAT returns become part of many month-end closes, while in many sectors there is also the need to prepare figures for reporting to government or industry bodies.
Rekeying of information: If the finance system does not automatically pull in information from other business systems, such as the CRM (customer relations management) software, there can be a long and error-prone process of rekeying data.
Budgets and forecasts: Provide variance reports and analysis, collate up to date budget revisions. Get to the bottom of under/overs across the organisation and supply management with the figures for their area of the business.
Intercompany eliminations: If you’re doing the accounts for a group of companies, the process of stripping out transactions that have taken place between those companies – so as not to artificially inflate turnover – will be extremely laborious if done manually.
Fixed asset management: Most fixed assets depreciate in value month-on-month. Recalculating their value each month can be a frustratingly complex task and typically involves spreadsheets.
What can be done to speed up month-end close?
The key to achieving a quicker month-end close is to have software do more of the work and to manage these tasks on a continual basis i.e. not leaving everything until month end.
It’s here that you soon see the difference between basic accounting software and the kind that delivers the full range of features that are possible with cloud technology.
The best software will be able to do these things:
• Automatically calculate accruals, prepayments and deferred income (leaving you to review and adjust manually if you wish);
• Simplify the handling of workflows, so expenses, purchases and orders can be processed electronically, wherever staff are;
• Store documents such as purchase invoices in the system, next to the relevant line item, so there is no running around to find paperwork at month-end;
• Automate bank reconciliation, so there is no more checking statements line by line;
• Integrate with other business systems, eliminating much data entry and scope for human error;
• Calculate capitalisation, depreciation and amortisation for fixed assets, in line with your chosen rules;
• Provide real time budgeting and forecasting analysis available on demand from any device;
• Handle group accounting and eliminations, so there is no need to reconcile multiple sets of books and manipulate data outside the finance system;
• Present everything in the required format, ready for scrutiny by management, and later by auditors.
Does month-end have to be such a big deal?
It’s easy to forget that there’s a reason month-end close is done – and it’s not to torment the finance team.
Apart from uncovering any problems, the object of the exercise is to produce reliable figures which the management team can use to make business decisions.
In fact, a lot of business decisions in any organisation might well be on hold until the numbers are available.
Yet in some organisations, the month-end process is so time-consuming that those figures are not in the hands of the management until two or three weeks after month-end, by which time they are already out of date.
Automating as many processes as possible can therefore enable more effective decision making.
With the right software, there is no longer only one point each month when you can be confident the books are accurate, reliable and current.
