A consistent message across all industries is that each month should be closed out by the 10th of the following. It allows for a company to review the prior month’s performance and make any necessary changes in the current period. This way, a company can identify issues and act to fix them going forward. If we think about it differently, the 10th day of the following month is actually the 40th day since the last period was closed.

This means a company can operate for 40 days with a potential issue existing before it’s noticed. Therefore, it’s important to close the books by the 10th of the following month. Sure, there is the possibility of noticing issues through interim reports and operational inefficiencies, but there’s no replacing a solid financial review. There’s performance indicators in those numbers that can’t be measured accurately mid-month. I’d also argue that a company who is not accurately closing the month in a timely manner is most likely not reporting in the interim, at least not accurately.

To properly close the books and move on to the next month there’s a few key items that need to be completed. The first step is closing invoicing and accounts receivable. I’m always amazed when I see companies close their prior period with invoices still open – and it happens a lot! A company cannot have an accurate close if there’s still work and invoices open in the prior period. Those jobs either need to be accrued or they need to be closed because the work is complete. After invoicing and accounts receivables are closed, the next step is accounts payable. All bills and credit card charges for the period need to be accounted for and entered. Once those are verified and entered, a bank reconciliation can be done. This will ensure that all cash transactions are in the system and that your bank balance ties out and is accurate at the end of the month.

After that, it’s time to tie out your payroll. This is done through an accrual where you move back the days worked in the previous month that are paid and posted in the current month. Without this step the labor figures for the month will not be accurate. At this point, the company will be ready to reconcile the balance sheet accounts to make sure all transactions that were booked previously had been recognized, and that the only transactions remaining are for future periods.

Once the previous steps have been completed, the final step is to look back on the month and think about any activities that have taken place but haven’t yet been billed. These expenses will need to be accrued. You’ll then be ready for a final scrub of your accounts to ensure all transactions are in the right area and everything is accounted for. A review should be done on anything that doesn’t look like it belongs. At this point the month is ready to be closed.

This is a very high-level review of the steps to closing out a month, and it’s important to realize that this is the bare minimum of what should be done on a regular basis. Inside of each of these steps there are several important but smaller steps. Each company will have its own specific needs, so there might be a few items to complete that aren’t listed. The best thing to do is to have a meeting with your accountants. Within that meeting, discuss what steps need to be taken to close out any given month and create a plan to achieve that by the 10th of each month.

Publication date: 6/25/2018

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