Without a proper review of their completed work, businesses can hardly make real progress. To expect positive development in the future, a company owner needs to review all their failures and successes. Otherwise, they end up with a disillusioned picture of their business that gets them nowhere. Some people don’t do their homework and still expect to flourish, but this belongs to the realm of science fiction.
This article is concerned with a specific procedure known as the month-end close. It’s immediately clear what it’s about – it covers a company’s entire financial activity in a month. And why monthly? Because four weeks is a sufficiently long period to properly evaluate most business operations and cycles and finalize your financial activities.
Also, it’s necessary for proper salary distribution: you cannot organize your employees’ incomes without a detailed month-end revision. Find more info at https://www.accountingcoach.com/blog/what-is-the-monthly-close.
There’s nothing new and unfamiliar about this. It uses a fairly standard procedure most companies use to revise their monthly work and improve their strategies. Let’s see what the fuss is all about.
Why Do You Need It?
Financial transactions are a complex field. It takes careful documenting and reviewing of all operations to know where you stand. But one should never do it haphazardly. For this reason, accountants use the month-end close as the optimal timeframe to set their records straight.
Just try to imagine a giant like Amazon, one of the top 3 US companies by revenue, disregarding the month-end close. Utter chaos and confusion would ensue at the accountant’s office.
One obvious advantage of using month-end closing is regularity. The business year is too long a period to leave calculations for the last minute. Let’s presume a company has a bad debt-to-equity ratio (a figure that shows one’s debt compared to their assets).
If the accountant is irresponsible and doesn’t perform month-end checks, this state can go on for months, and the company will eventually run into trouble. Avoiding such financial disasters requires a diligent month-end close process that takes all figures into account.
Other than that, irresponsible handling of finances always increases the chance of errors that can cost the company dearly in the long run. That’s not only dangerous for the business itself but for compliance, too.
The month-end closing process typically involves a defined set of documents providing the most relevant business data. A company then uses this information to revise past work and create strategies for the future.
All transactions can be found in one big accounting record called the general ledger, an all-encompassing summary of your business workings. Also, it provides a source for creating financial statements. Keeping a correct and detailed general ledger is no easy task: accountants need to get data from all sectors to paint an objective and complete financial picture.
But to do that, they need a few staple documents known as financial statements. One of them is the balance sheet, which gives you the total assets by combining owners’ equity and liabilities. If your company was an actual face, the balance sheet would be the mirror. By analyzing it, owners can assess their current standing and go on from there.
Up next is the monthly income statement, giving you the total revenue and expenses pertaining to your business. Accountants use it to ensure all figures are in order and to see if the company has had profit or loss during the previous month. Finally, you have the cash flow statement, showing all inflows and outflows from current company activities and outside sources.
Proper month-end closing can vastly improve your business and reduce risks. It shows the entire organization you’re on the right track, which in turn motivates employees to maintain or even increase the quality level.
One great thing about month-end analysis is accuracy. It covers short work periods, and there’s no room for out-of-date information. Some owners choose to do the closing every six months or even once a year. This is clearly bad for business because you have no real transparency.
Reviewing data that is several months old can easily lead to confusion and errors. But a thorough month-end close process would never allow that. As the perennial saying goes, strike the iron while it’s still hot.
Moreover, keeping track of your business operations helps you make decisions at any given time. Assume you need to upgrade your production line with some new gear mid-year. Instead of dreading whether you’ll damage the budget, you can just check the latest statements and see how you fare.
Handling your taxes well is more than a valid reason for month-end closing. Your financial team has enough on their minds with all the business operations, so tax work needs to run as smoothly and efficiently as possible. Also, monthly closing prepares you for upcoming audits and makes it easier for your public accountant to file taxes at the end of the year.
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