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Management, regulatory agencies, lenders, and stakeholders all rely on accurate financial statements to make their decisions. In order to ensure that a company’s financial position is properly reflected, the month end reconciliation process is required.

Depending on the size and complexity of a business’ transactions, the month end reconciliation can vary greatly. Yet, one fact remains certain which is that financial automation software can help streamline the process, save time and reduce errors.

Coming Up

1. What is the Month End Reconciliation Close Process?

2. Where Does the Month End Close Process Begin?

3. Why is Month End Chaotic & Complex?

4. How to Achieve the Perfect Month End Reconciliation Process

5. Benefits of Flux Analysis & Automation to Identify Reconciliation Problems

6. SEC Reporting Requirements

7. What are Balance Sheet Reconciliations?

8. What are Process Integrity Tests?

9. What are Analytical Reviews?

10. Month End Closing Tips

11. Importance of Closing Books Monthly

12. Final Words

What is the Month End Reconciliation Close Process?

The month end close process refers to a set of accounting steps to review, record and reconcile accounts. In order to close books for each period, it’s required to collect information from various sources and ensure that records have been properly kept.

While the process itself will depend on the type of business and account methods applied, it’s typical to review information like:

  • Inventory totals
  • Balance sheets
  • Total fixed assets
  • Bank account information
  • Revenue totals
  • Income and expense account information
  • General ledger data

Where Does the Month End Close Process Begin?

The month end reconciliation close process finds its foundation in the General Ledger. As payments are sent out and received during the month, bookkeepers, clerks and accountants will record debits and credits. These records should match with external accounts like bank statements.

Finally, this information must then be transformed so that key decision holders, stakeholders, banks, investors and the like can have access to your company’s financial information. In fact, much of this work can be automated, which decreases the potential for human errors or the risk of missing information.

To “close the books,” account balances have to be adjusted to take them from a cash basis to accrual basis while adhering to the Generally Accepted Accounting Principles (GAAP).

Cash basis is an accounting method that is based on the cash coming into and out of a business. However, there’s a delay in transaction time, so the records may be distorted from reality. On the other hand, the accrual basis records transactions based on the period that they occur, even if timing of payments is different.

Why is Month End Chaotic & Complex?

If you think about the amount of transactions that happen on a daily basis within your business, it’s easy to see how this process can become complex. Even if there aren’t many transactions, timing can play a role in complicating the process. Ultimately, month end close requires that various team members be in the loop and sequentially complete their tasks without delay.

To complete this process properly, two main tasks must be completed – account balances must be reconciled so that they display the proper amounts in the right accounts and there must be a clear cut line between one accounting period and the next. However, expenses and matching revenue have to be recorded in the same period. Yet, it could be the case that expenses are paid out later than the period in which their matching revenue exists, which calls for accrual.

With all the moving pieces and time-sensitive data, automation software can help to lighten the manual load. Data automation tools like SolveXia collect data from various sources in seconds and match records. If an anomaly exists, SolveXia will notify its user on the spot so that it can be investigated and rectified.

How to Achieve the Perfect Month End Reconciliation Process

When you face any challenging situation, it’s often useful to break it down into parts. The same can be said for the month end reconciliation process. Some companies realise the benefit of reconciling high-risk accounts daily, or at least more frequently than on a monthly basis.

High-risk accounts typically include: accounts receivable, inventory, accounts payable and cash flow given their high volume of transactions. However, reconciliation takes time and resources to manage. While it’s possible to wait to reconcile accounts on a monthly basis, it increases the risk for error and can create a snowball effect if a small issue wasn’t corrected as soon as it happened.

Thanks to automation tools, it’s possible to reconcile accounts immediately with little to no human intervention. Consistently reviewing accounts by way of an accounting tool will help to decrease compliance risk, correct issues on the spot, and alleviate your team from the burden of having to spend days or weeks reviewing massive amounts of information under strict deadlines.

Benefits of Flux Analysis & Automation to Identify Reconciliation Problems

Combing through massive amounts of data to find discrepancies is undoubtedly a large task to take on. Additionally, teams may do so and find no errors at all, which is desired, but leaves a bad taste that all the time spent doing so was in vain.

There are a few paths you can take to avoid this sentiment. Flux analysis, short for fluctuation analysis (or also known as variance analysis), is one method that teams can use to identify signs of errors early on. It works by way of aggregating data and noticing instances of variance from what’s expected. However, if flux analysis is performed manually, it turns out to be time consuming and tedious. It also may be too late to correct issues by the time they are recognised.

Instead, automation tools can do this work for your team. Automation tools can easily conduct variance analysis by pulling data from disparate sources, reviewing the data and calling out any notable discrepancies or changes in patterns from the historical data.

SEC Reporting Requirements

On top of the pressure to produce precise financial statements for the sake of stakeholders and management teams is the need to comply with SEC regulations. While banks and investors expect to review reports that are in accordance with GAAP principles, the SEC and IRS require faultless financial statements.

Additionally, auditors may be asked to review your team’s work, which brings audit risk to light. The creation of an audit report doesn’t need to suck up any more of your team’s time. With automation software, it’s easy to create audit reports because the system stores every action that’s been taken within the system so audit trails are created automatically in the system.

If an auditor wishes to review any of your processes, they can easily do so as the process is mapped out and actions and approvals are all recorded. Furthermore, they can have the ability to review any notes that your team members have attached to steps within the process.

Carefully managing and controlling the month end process will help to avoid potential legal and financial consequences of having any mistakes

What are Balance Sheet Reconciliations?

The month end close process varies, but the balance sheet reconciliation is an essential piece of the process.

Balance sheet reconciliations make sure that your balance sheet correctly reflects your financial position as it displays current value of assets and liabilities. It’s completed by comparing your general ledger to external accounts like a bank statement, or even to internal accounts like a sub-ledger.

It’s crucial that this is right because it’s often one of the most utilised financial reports when it comes to making business decisions.

What are Process Integrity Tests?

No matter how smoothly or properly a process runs, if there is missing or incorrect data, then outcomes could be misconstrued. As such, process integrity checks can be applied to make sure that all records are accounted for in financial statements.

Depending on your organisation, there are various process integrity checks to choose from. Here’s an abbreviated list of what they could be:

  • Sales orders - All inventory sales order lines have been shipped
  • Recurring billing - All recurring billing contracts have been billed
  • Purchase orders - All purchase orders have been recorded in the Accounts Payable account
  • Work orders - All work orders have been processed and created.

What are Analytical Reviews?

Process integrity checks are just one way to make sure that data is right. Organisations can also utilise analytical reviews, which help to verify that General Ledger account balances are reasonable. For example, if there is a large variance or fluctuation in any account balance, it could signal that there’s been a mistake or error in reporting.

When a team notices anomalies in the data, then it’s important to conduct an investigation and fix the issue. For example, you can review your Profits and Losses by period to see that transactions in the accounting period and general ledger are in accordance.

Month End Closing Tips

Organisation is key throughout the month end closing process. Utilising a data automation tool like SolveXia will bring with it an unparalleled and organised process. This is because the automated system is designed to conduct reconciliation according to your desired frequency and standardises the process across your organisation.

Whether or not you choose to manage reconciliation with automation, the following tips will help you set up a process that can be repeated as needed:

  • Record incoming cash - make sure each customer has received an invoice and that all payments have been made
  • Update accounts payable - with organised receipts and records, you can update accounts payable to document when invoices have been paid
  • Reconcile - match records with external statements and resolve discrepancies
  • Petty cash - don’t forget to record all transactions that have been made using petty cash
  • Fixed assets - record payments that are related to fixed assets like furniture, vehicles buildings, equipment, etc. as they depreciate in value over time
  • Inventory - monthly inventory counts can help to make sure that your books are right
  • Review statements - check that your balance sheet, profit and loss statement, and general ledger are in good shape
  • Double check - have another set of eyes take a look before moving into the next period’s process

Importance of Closing Books Monthly

The monthly process of closing your books is vital for many reasons.

Firstly, it helps to make sure that your financial statements are correct. These statements are used for many purposes, including receiving investment and making important business decisions, so you want the data to be right.

Secondly, if you’re running a public company, you can run the risk of immense damage for having incorrect financial statements.

Thirdly, the monthly process makes it easier to spot honest mistakes and correct them as they happen. It also makes it easier to:

  • Submit tax filings
  • Have a clear view of your business’ financial position
  • Prevent future mistakes
  • Backup audits

Final Words

Month end reconciliation doesn’t have to be tricky or overwhelming. Reconciliation tools like SolveXia can manage the process for you. The ability to collect, store and compare records in a centralised system boosts accuracy, transparency and efficiency.

Every business leader recognises the value of a month end close process that is error-free and easy to perform. If you want to get started using automation to better manage month end reconciliation and financial close, request a free demo with a data automation tool to learn more.

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