Close-checklist-accounting

When you want to change your diet to achieve better health, it is helpful to start by getting on the scale. If you don’t do this, it is difficult to determine if what you’re doing is actually working. To really be proactive, you should get on the scale regularly and consistently so you can continuously adjust your behavior based upon the results you see. The scale is a barometer of performance.

Much like a scale, financial data is a barometer of performance for financial health. It tells you what your organization has done right, where it has gone wrong, and where it needs to improve. To maximize its effectiveness, it must be reviewed regularly and consistently so decisions can be adjusted as needed along the way. 

In the best environment, a regular and consistent review occurs monthly but, before that can happen, the data needs to be reviewed and confirmed by way of a monthly-close process. 

Why a Monthly-Close Process?

Throughout each month, hundreds, if not thousands, of transactions will be entered into the accounting system. Most of those will be done manually and even the best of employees will occasionally make mistakes. The monthly-close process is designed to find and correct those mistakes.   

What is it?

The monthly-close is nothing more than a review and cleanup of financial data before it is presented to the decision-makers in the organization, whether they be the Board, senior management, or budget managers. Because of its value to, and importance in, decision-making, it should be done timely. A September monthly close that doesn’t happen until January provides data too late to maximize its effectiveness on operations. A good rule of thumb is that the month-end close should be done by the 15th of the following month (for example, January should be closed by February 15th).

When performed each month, it does not have to be difficult or time-consuming; it will additionally position the organization well for year-end audit readiness. Just like any other business process, it should be formalized and documented.    

What Should a Month-End Close Process Include?

A good month end-close resembles audit preparation. It starts with the Statement of Financial Position.  Almost every account should be reconciled to something. For example (and the following is by no means an exhaustive list):

  • The bank accounts should be reconciled to the bank statements.
  • Accounts receivable should be reconciled to the accounts receivable aging and any uncollectible balances should be written off.
  • Contributions or pledges receivable should be reconciled to records maintained by the organization’s fundraisers.
  • Investments should be reconciled to monthly investment statements.
  • Fixed assets should be tied out to the fixed asset subsidiary ledger, which is often an excel spreadsheet listing all fixed assets. Write-offs or disposals should be recorded as appropriate. Assets should be properly depreciated, and depreciation expense should be recorded. 
  • Accounts payable should be reconciled to the accounts payable aging which should be reviewed for any unused credits. Invoices dated in the month being closed should be recorded in that month and not in the following month.
  • Loans and leases should be tied out to statements and/or amortization schedules. Interest expense should be properly booked.

Once that is completed, the Statement of Activities should be reviewed for reasonableness.

  • Revenues should be compared to the previous month and/or to budget. Unusual variances should be investigated and understood.
  • Expenses should be compared to the previous month and/or to budget. Unusual variances should be researched and understood.
  • Repair and Maintenance expenses should be reviewed for those that should be capitalized.
  • Payroll expense should be reviewed for proper cutoff and reasonableness of employer payroll tax expenses.

During this process, it is helpful to work closely with budget managers. If they are questioned about large or unusual variances, they can bring an understanding to these or maybe even help to uncover errors that were overlooked because, most certainly, senior management and an engaged Board will ask the tough questions.       

The final step to a month-end close is to produce financial reports that bring value to the decision-making process.  Typically, these include:

  • Statement of Financial Position
  • Statement of Activities
  • Budget to Actual Variance Report
  • Others such as a cash flow projection as needed

By implementing a proper and regular monthly close you will help to ensure the data you are using each month to make management and leadership decisions is both accurate and timely.

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Chazin and Company

Chazin and Company

With over 15 years years working exclusively with nonprofits, we pride ourselves in having a unique understanding of non profit accounting needs. We believe that nonprofits deserve personalized, quality service and should not settle for a one-size-fits-all approach. We collaborate with you to provide a fully virtual, customized, solution that is not only cost-effective but also strengthens your accounting function. We offer a team of industry experts at your disposal to provide advice, leading technology, and to supplement existing staff to improve efficiency and compliance.

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