Part of effective financial management is managing the accounting system according to a fixed schedule. Below we’re repeating information from last month’s post to help entrepreneurs and their bookkeepers/accounting managers get into a calendar rhythm, to remind them of what needs to be done throughout the year.

Perhaps the most important activity: the monthly close.

If you start now, you’ve still got a week left to close the 7/31 books.

Sound unreasonable? We work with a $2 billion public company whose business units close within six business days. Smaller, entrepreneurial companies should be able to close, then, by the 15th of each month.

This month’s close has the added difficulty of it being summer, when staff and vendor vacations can interfere, and also it’s a little more difficult to stay focused on the less glamorous aspects of business when you’ve got vacation or holidays on your mind.

Monthly Close Essentials

The monthly close process results in a set of financial statements that tell a story about the financial performance and condition of your business.

Generate these financial statements – P&L, Balance Sheet, Cash Flow, A/R and A/P – by the 15th of each month to meet three primary needs:

• Management needs information to make decisions about how to run the company
• Money people like bankers and investors use the data to evaluate your business
• Government entities confirm your company is in regulatory compliance.

A typical monthly close checklist can range from 20 to over 100 items, but the process can be organized into five parts:

1. Complete data entry. Important items here:
• Bank, credit card, loan, and line of credit transactions all entered and accounts reconciled
• Customer invoices/sales all entered and dated in the correct month
• Vendor bills/checks all entered and dated in the correct month
• Payroll entries current including wages, payroll tax, worker’s compensation, PTO, and retirement plan deferrals and liabilities
• Other key accruals entered such as general liability insurance
2. Open items
• Last month’s open items addressed.
• Suspense account is actively managed; items aren’t stuck in there and left for dead until tax time
• An open items list outside of the books is maintained. A bookkeeping system is constantly changing to meet the business goals of its owners and keep up with new compliance tasks. There will always be open items such as instituting job costing, converting to a new payroll system, aligning the chart of accounts to make for better forecasting, memorizing management reports, etc.
3. Backup system. In place, working (recently tested), daily backups being made including offsite copies of data file.
4. Line by line review of financial statements
• P&L
• Balance Sheet
• Support schedules
• General ledger detail
5. Management reports. Report package delivered on time to Management with “known issues” identified that might affect Management’s interpretation of the numbers and decision-making process.

The key to the monthly close is a commitment to the process. It’s guaranteed: you’ll never have “more time” to catch up later. But if you ever get audited, run into a cash flow crisis, work on government contracts, take on partners or try to sell your business, you will be thankful you had the foresight to close the books promptly month in and month out.