6 Reasons For Effectively Closing The Books
A common source of problems incurred by emerging and mid-size businesses stem from the priority businesses place on properly closing their accounting books. When I talk about closing the books, I am referring to the process used to finalize and report monthly/quarterly/annual results. Many businesses view the entire process as a â€œcheck the boxâ€ activity that adds little value. Once a â€œcheck the boxâ€ mentally settles in, the accounting close is assigned a low priority.
Issues with lackadaisically closing the books:
- The time required to close the books begins expanding. Historically a business may have been closing in 3 weeks, but now it takes 6 weeks;
- The bank statement reconciliations typically follow the close schedule and consequently are delayed or put on the back burner;
- Monthly financial statements are produced later and later or not at all, because no one is looking at them;
- The bank starts calling because the business is not meeting their loan covenants with respect to sending in periodic financial statements. This is when lenders start thinking about moving the businessâ€™ loan to the special asset group;
- Funding payroll becomes more challenging because no one is generating a cash flow projection or when a projection is made it is of little value because it is based on old or erroneous data; and
- Management is constantly surprised because information is stale by the time it is reviewed making the implementation of corrective actions less impactful.
If you are experiencing any of these issues, the root cause maybe the importance placed on closing your books in a disciplined fashion. You should note that successful companies place a high importance on how many days it takes to close the books. Ford is able to close their books in 4 days. If a huge multi-national firm can close their books in 4 days, why canâ€™t a midsize business close their books in three weeks? How about two weeks? Is there really any reason a midsize business canâ€™t close their books in five days? Really there is no good reason.
If youâ€™re a business owner, here are some things that you can focus on to bring more discipline and speed to closing the books:
Reasons to bring more discipline and speed to closing the books:
- Start to pull in time lines with a target in mind. You should be able to close the books in a week, but it may take some time getting there;
- Demand that bank reconciliations are generated monthly, within two days of statement receipt;
- Have your accounting staff produce a close calendar listing all the various tasks and their interdependencies;
- Make sure the accounting staff is taking full advantage of technology. For example, is your accounting team able to upload complex journal entries;
- Establish a fixed date, e.g. second Wednesday of each month, to review all the financial statements with your accounting team; and
- Be sure that issuance of financial statements to your lenders is referenced on the close calendar and immediately follows your monthly review (so you are prepared to talk with your lender in the event a conversation is necessary).
These are a couple of recommendations that can quickly improve the timeliness of your financial data. The big improvement will be your ability to gain insight much quicker, allowing for time to actually react to changing circumstances before circumstances take control of you. If you need assistance bringing more discipline to closing the books, contact us today.