What is the Financial Close Process: Optimise for Success

Data Analysis

The well-known quote, “In this world, nothing is certain except death and taxes,” could be reworked and still remain true if it read, “In this world, nothing is certain except death, taxes, and the financial close process.”

Organisations are all too familiar with the year-end process and month-end close procedures. And, while the recurring process often ends up being overwhelming and time-consuming, automation solutions can help ensure that it’s anything but that.

Let’s dive into how you can optimise your financial close process without high costs, effort, or energy.

Coming Up

1. What is the Financial Close Process?

2. What are the Closing Journal Entries?

3. What are the Biggest Challenges of the Financial Close Process?

4. What is the Month End Financial Close Process?

5. How to Improve the Financial Close Process?

6. How does Automation Help Financial Close?

7. Wrap Up

What is the Financial Close Process?

The financial close process is the recurring sequence of events in which accounting teams verify the accuracy and validity of account balances at the end of each designated period. It occurs before the accounting cycle closes.

To carry out the necessary steps, the team must document journal entries for each transaction that occurred in the period, and then finalise the process by preparing necessary data for the following period.

The process involves:

  1. Identifying transactions
  2. Recording data into journal entries
  3. Posting transactions to the general ledger
  4. Reconciling accounts
  5. Creating adjusting journal entries
  6. Preparing financial statements
  7. Closing the books for the time period

To move into the next accounting period, all accounts should reflect a zero balance. Financial statements that are developed from this process are then used by stakeholders and management alike for trend analysis, budgeting, KPIs, and more, which reflects just a few of the key reasons that that process is so important.

What are the Closing Journal Entries?

The four closing journal entries required in order to zero out temporary accounts include:

  • Revenue accounts - must be closed to income summary
  • Expense accounts - must be closed to income summary
  • Income summary- must be closed to retained earnings
  • Dividends (or withdrawals) - must be closed to retained earnings

What are the Biggest Challenges of the Financial Close Process?

The financial close process is rife with challenges, when it’s not being automated or carefully considered. The challenges may include:

1. Unclear process

The financial close process requires data from various sources as well as multiple hands for the job. Without a clearly defined process, steps could be overlooked, missed, or even the cause of bottlenecks occurring.

2. Lack of real-time data

In many instances, finance teams are unsure of real-time spend and transactions until the monthly close process takes place. Since multiple departments must supply data for accuracy, this can become a big issue. However, automation solutions can pull data from disparate systems for a centralised and streamlined process for real-time data insights and analytics.

3. Missing or erroneous data

From duplicate data, missing data, and erroneous data, the financial close process is only as accurate as the data itself.

Resolving poor data is costly and timely. But, with an automation solution, data is accurately recorded as transactions occur, so you can prevent such errors from occuring.

This is because the automation solution removes the need for manual and time-consuming data entry tasks. By connecting data from various systems, mapping and cleansing the data through automation, accuracy is maintained.

The use of automation to manage data means that your finance team can spend their time on more value added tasks like analytics and strategy, for example.

4. Lack of standardisation

An undefined process can lead to discrepancies in how various members of the team carry out the financial close process. People are used to working how they choose, so it’s important to standardise and define the process.

Additionally, organisations often depend on one person or a team of a few people to carry out specific tasks. But, when that person is out of office or sick, then that task can run the risk of being delayed.

When deploying an automation solution, not only are all processes standardised, but they can be executed without the requirement of personnel.

What is the Month End Financial Close Process?

It’s possible to clearly define and design your month-end financial close process by covering the following steps:

1. Record incoming cash

The month-end financial close process begins with recording all funds received over the prior four weeks, including: revenue, invoice payments, and loans. To make sure you haven’t missed any data, compare invoices with records to track customer payments.

2. Accounts payable

After tracking transactions, cross-check records against bills and invoices.

3. Account reconciliation

A key aspect of the financial close process is reconciliation. In this step, you’ll need to check your internal accounts against external statements, like bank statements, for example.

If records don’t match, you have to look for reasons why because there are some explainable situations in which this would be the case (i.e. a delay in the time it takes for a check to clear after being deposited).

Automation solutions like SolveXia can execute your account reconciliations with utmost accuracy in no time so that your team doesn’t have to be bogged down conducting manual work or concerned about data accuracy.

4. Check petty cash

At the month-end, you must also account for all petty cash and record the receipts that represent spending with petty cash. Ensure that your balance of the petty cash fund accurately reflects transactions.

5. Review fixed assets

Since fixed assets typically represent big purchases that depreciate over time, record any payments you’ve made that are related to your fixed assets. This could include: parts, replacement, or maintenance.

6. Check inventory and stock

Perform monthly inventory and stock counts. Update inventory counts and make necessary adjustments to your books as part of your accounting month-end close procedures.

7. Review financial statements

These statements will include the:

  • General ledger
  • Profit and loss statement
  • Business balance sheet

These documents are pivotal to your business’ operations and business decisions. That’s why it’s a best practice to rely on financial automation software to manage your data.

Data is constantly changing and being added within organisations. When you are collecting data in various systems, an automation solution can manage pulling together newly ingested data and connecting and mapping it within a centralised location.

The real-time updates improves data accuracy, reduces the need for manual work and  improves insights.

8. Check revenue and expense accounts

At this stage, not only will you want to make sure that expenses are accurate and properly recorded, but it also gives you a chance to review where your business is spending its money. You can optimise operations and cut costs by reviewing these accounts regularly.

9. Double check data

Don’t simply rely on a single set of eyes to check all of this work. Not only will your statement be regulated if you’re a public company, but they also dictate big decisions. As such, have a second set of eyes to review the work. This also is the last step to ensure your audit trail is clean.

With automation solutions, you can rest assured that all the work has been performed accurately since the system will pull all data and prevent the risk of manual errors from taking place. If something out of the ordinary did pop up, the responsible party would be notified immediately.

10. Preparation

Now that you’ve finalised this month’s process, get ready for next month’s process. With an automation solution, you don’t actually have to go through the motions of preparation because the process runs on time every month, cuts the workload from your team’s plate, and automatically will take place in a standardised fashion.

It enables processes to be clearly mapped out, improved approval flows and removes key man dependency.

How to Improve the Financial Close Process?

The easiest way to optimise your financial close process is to implement financial automation software that can do it for you. Automation solutions make it possible to:

  • Design a process and ensure accountability: by connecting a key person to each step along the way
  • Reconcile accounts more frequently: as the timely and repetitive tasks are handled automatically
  • Reduce the need for data entry: as the software can collect data from connected sources
  • Improves access to information: through a secured system with access controls and data logs
  • Automates intercompany consolidation: and data across subsidiaries
  • Tracks progress and performance: and provides a sense of transparency for stakeholders, management, and employees alike

How does Automation Help Financial Close?

Automation can transform your business’ financial close process in various ways.

A data automation tool like SolveXia is a human analytical finance automation solution that specialises in financial close. The cloud-based solution can be deployed out-of-the-box with no need for IT specialists or coding.

By utilising an automation solution, your team can automate the financial close process from end-to-end through the easy-to-use drag-and-drop interface.

The software collects data from all your connected systems, including legacy technology so you can rest assured knowing that the data is up to date and complete. With live analytics and customisable dashboards, you are able to also perform process improvement should there be inefficiencies in your workflow.

A tool like SolveXia removes the risk of errors and compliance risk. The technology frees up your team’s time to focus on high-level analytical work rather than manual data entry and cross-checks.

Additionally, automation tools make an auditor’s job easier. Paper trails can get lost in the shuffle and become messy. Instead, you can share documentation with an auditor at a moment’s notice since every action taken within the system is documented.

Employees can also leave notes and comments at various steps along the process’ pathway in case there is need for further explanation.

Financial teams get to leverage the power of advanced analytics to achieve operational efficiency, cut costs, and accurately execute business processes, including the all too familiar account close process.

Some of examples of processes that SolveXia can automate for you include:

  • Performing reconciliations
  • Conducting transaction matching
  • Preparing revenue reports
  • Submitting regulatory reports
  • Analysing and allocating expenses

Wrap Up

The financial close process is a sure thing, just like death and taxes. As such, it pays to invest wisely in a financial software solution that can help to standardise and streamline the necessary business process of financial close.

A financial close automation solution like SolveXia requires a relatively low upfront investment to reap virtually immediate upsides. It removes manual, error prone, tedious processes. Additionally, the system is designed for business users to use, as opposed to IT professionals. To see SolveXia in action, request a demo!

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