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Treat every month-end close as if it were a quarter- or year-end close

April 29, 2015
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Why each monthly close should be as complete as practically possible

Recently there was a great question on the site which reminded me of a similar situation I was in when working as a controller in the hi-tech industry. The question was: Do you treat a Month-End close differently than a Quarter-End close, or a Year-End close?  Do you reconcile every single balance sheet account every month or do you only look at certain accounts quarterly or even annually?

Most Proformative members who participated in the discussion agreed that all critical and some of the less critical accounts should be reconciled monthly, leaving little or no reconciliation work at quarter or year end. The reason for this is that by performing more detail work on specific accounts more frequently, you get more accurate interim financial statements, and any necessary reconciliation work is going to be greatly simplified due to less research and not having to rely on memory or other people’s knowledge.

There is, of course, a tradeoff here. If you were to reconcile every single balance sheet account every single month you would find that certain accounts have very little movement during the period, and therefore there is little value in reconciling them monthly. On the other hand, we must all agree that it would be foolish not to reconcile the cash account at least monthly.  In fact, several of my client companies reconcile their cash and bank line of credit accounts daily, practically leaving little or no work for month, quarter and year end close.

Accounts that are reconciled monthly are automatically considered reconciled for month and year end closes, so we see that there is great value in reconciling as many of the “active” balance sheet accounts monthly.

However, there is another reason, overlooked by many accounting and finance professionals, why monthly reconciliations should be as complete as practically possible. This has to do with the analysis of actual financial results against an established and approved budget, a process that should be performed monthly, as soon as the accounting period is closed.

A company that does not establish and enforce account reconciliations guidelines or where key account reconciliations are not performed monthly, might find that due to errors or incomplete periodic transactional information, there may be inconsistent variances between actual accounting data and budget data that may be misleading due to these errors and lack of complete data. In cases like this, the analysis may not be meaningful and in extreme cases may lead to incorrect conclusions or bad management decisions.

Ideally, accounting should reconcile all significant balance sheet accounts monthly, and all other accounts quarterly, which implies that at quarter end and year end all balance sheet accounts are completely reconciled.

At the same time, finance should perform a monthly analysis of actual data vs. budgeted data, as soon as period end close is completed. As we already saw on this blog site, using planning, budgeting and analysis software such as Budget Maestro with Analytics Maestro from Centage Corporation can greatly simplify the process, while providing good insight into the future financial health of the organization. Good examples can be found here: Are Financial Planning and Cash Processes High Priorities on Your List? and here: Become Your Company’s Chief Future Officer

It makes sense to try and find a balance between work efficiency and overall accuracy and completeness of information in interim periods. It is also important to note that making the planning, budgeting and analysis process meaningful and insightful requires that accounting data be timely available, and accurately representing the operations of the organization in all functional areas. Having a more accurate set of actual interim financial statements will greatly assist the company with its strategic and financial planning, its analysis of actual results against goals and objectives, and ultimately with more accurate and confident management decisions.

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