Almost any public or private business with an accounting and finance department performs a month, quarter, and year-end close, which is a series of steps to review, record, and reconcile accounting information.
For this blog, I’m going to refer to only month-end close for consistency and simplicity.
It’s important for companies to perform a month-end close to keep accounting data organized and ensure all transactions for the reporting period are accounted for. Month-end close contains a series of detail-oriented steps that verify and adjust account balances and produce reports to represent and communicate a company’s true financial standing to management, investors, and other stakeholders.
Usually, an ERP system, or other financial platforms, assist in closings by automating processes such as reconciliation management, importing or integrating spreadsheets, flagging inconsistencies, reporting, workflows, and so on. A lot of times, organizations rely on several platforms in the close process that each perform a specific task. For example, a budgeting and forecasting platform might share information with financial close software, which in turn pulls data from an ERP system.
But what if an organization is using an on-premises ERP platform—on-premises ERP software runs using in-house servers at a company-controlled location, using their own IT infrastructure, people, systems, and processes—or another on-premises software, and is forced to close their books from home? In such a situation, they are also not empowered to use virtual desktop infrastructure (VDI) software, virtual private network (VPN), or remote desktop software to reach their on-premises workstation and network. What tasks must they perform manually and how can teams stay organized and maintain the proper workflows when each employee is working from a different location?
There are several steps involved in the month-end close process that is usually divided amongst several employees, which makes communication and workflow management more crucial than ever. Workflow management software helps with collaboration between team members and assists in defining and managing closing activities and tasks. Management needs to also make sure every employee's contact information is up to date, their calendars are visible to other team members, and an efficient instant messaging and communication system is in place and being utilized, such as Slack or Microsoft Teams.
When every dollar matters and attention to detail is a necessity in every step of the process, it’s imperative to have open communication and clarity across teams to alleviate any misunderstandings.
The starting point for consolidating and closing the books at the end of the month is the general ledger (GL). During the previous month, accountants and other finance staff record debits and credits of bills paid and payments received, to verify that all transactions for the period are recorded in the correct accounts and in the correct amounts. They also have to draw a firm line between one period and the next so there’s a definite cutoff for each period’s activities. By following the matching principle, expenses need to be recorded in the same period as the related revenue.
Usually, this information is organized and automatically fed to an ERP system, which results in a trial balance or a preliminary listing of all account balances at the end of a period. But not having access to an on-premises ERP system poses challenges in this step of the process.
Accountants now have to manually record AP and AR transactions by accessing several sources, such as their bank, AP automation and AR automation software, paper receipts or invoices, and so on. This is not only time consuming and tedious but opens the door for human error which will undoubtedly cause inconsistencies further down the closing process.
Then, these account balances have to be adjusted to follow GAAP (Generally Accepted Accounting Principles), which is a set of rules for consistent, accurate, and comparable financials for companies to follow. It is mandatory for public companies, but many private companies follow these guidelines, as well. Owing to these guidelines, and without the aid of a cloud-based ERP platform, accountants need to manually confirm that the data they are presenting is accurate, transparent, and presented in consistent intervals.
Another challenge that manually adhering to GAAP standards brings to accounting teams, is accruing transactions on an accrual basis, rather than a cash basis. Accrual basis accounting records transactions in the period they occur, regardless of the timing of the payments. This poses a challenge when done manually because employees will need to compare records between periods, and depending on the size of the organization, between companies. Cash basis accounting is not GAAP compliant because it records income and expenses based on cash coming in and out, thus creating timing differences in payments. This, in turn, can blur the financial reality of transactions, making results look better or worse than they actually are.
Another crucial aspect of month-end close is the creation and presentation of reports, graphs, and other collaterals to financial stakeholders, such as investors, banks, and upper management. Generally, an ERP or accounting system is able to digest the financial information fed to it, and produce at least the three standard reports (income statement, balance sheet, cash flow statement) accurately and timely, assuming the information it received was correct. Without access to a system to assist in the creation of these reports, accounting and finance teams would have to manually collect, review, and enter data into a template. This would require coordination amongst multiple employees to make sure the data is first correct, and then formatting the reports to match reports from previous periods. Again, this increase in human interaction can lead to errors and mistakes that ERP systems help to avoid.
The managing of data is another month-end process that becomes challenging when done manually. Items like checklists, schedules, documents, and reconciliations that were previously stored in one place for easy reference, are now possibly scattered across multiple systems and employees. This not only creates a logistics problem when consolidating and verifying this data, but it’s now harder to locate and see if any changes were made, and by whom.
Most month-end close software features provide a dashboard that allows team members to see what needs to be done and what the status of each task is. This checklist of sorts also provides notes and documentation to facilitate employee communication and keeps supporting documentation easily accessible.
These features of the close process of financial accounting are important because they help to eliminate duplicate work, redundancies, and make sure everyone is working off the same document and nothing is being changed twice or copied over. Not having access to these features would require managers to manually track which employees are performing which tasks, and to make sure this information is successfully being shared with the team. Each employee has to be thorough with their documentation throughout the close process to maintain not only an orderly and organized workflow but also to produce accurate data.
This list below covers some steps involved in a month-end closing and shows how important communication and organization amongst the team is.
Record incoming and outgoing cash
Review fixed assets
Account for inventory (if applicable)
Create and review financial statements
Prepare for next month
There are a lot of moving pieces in a month-end financial close process. There are complicated calculations using data from multiple sources that create important reports that management and other stakeholders use to guide the financial direction of the company. Without the assistance of a cloud-based ERP, accounting, or financial close software, accounting and finance teams working from home full-time need to make sure that there is clear communication across teams in the accounting firm regarding processes and responsibilities. They also need to set realistic expectations for each team member and explain how their work fits into and impacts the close process.
Nathan is a research analyst at G2 focusing on finance and accounting ERP software and their respective markets. Coming from the world of finance, Nathan understands and is familiar with the importance of finance/accounting software, and the complexities, struggles, and nuances that come with them. He is naturally curious and passionate about all thing tech, and has previously worked for tech giants such as Oracle and Toshiba. He has over 13 years of analytical experience in industries ranging from health care and transportation logistics, to foodservice and software. Nathan received his MBA in finance and international business administration from the University of Illinois, Chicago, and his B.S. in production and operations management from California State University, Chico. In his spare time, Nathan enjoys listening to live music, building his record collection, cooking, and doing anything outdoors.