Many small businesses close their books on an annual basis largely for the purpose of preparing annual tax filings.
We recommend that the books be closed on a monthly basis so you, as business owners, have a clear picture of actual trends that are affecting your business in order to make timely strategic decisions.
All too often we see businesses with unreconciled balance sheets, which can result in skewed earnings figures on a month to month basis. Preparing balance sheet reconciliations and the related journal entries as a part of a month-end close will allow management to be prepared for fielding questions from potential acquirers, bankers, or investors. A monthly close will show a level of financial reporting sophistication that can lead to shorter timelines to closing financing rounds or transactions and is all too often overlooked.
What are the steps to a successful monthly financial statement close?
- Reconcile all balance sheet accounts. Performing monthly bank reconciliations timely will help to ensure that all transactions have been accurately entered into the accounting system.
- Record monthly journal entries to account for non-cash activity such as depreciation and amortization, accrued expenses, prepaid expenses, and other activity.
- Use estimates to record month-end journal entries when actual information is not available in a timely manner.
- Perform a review of account fluctuations to prior comparative periods and/or budget versus actuals. By reviewing account fluctuations analytically or against expectations, errors can be detected timely and potential misstatements prevented.
- Prepare final balance sheet and profit and loss for the month.
- Have monthly financial statement package reviewed by management. This step is important in maintaining solid internal controls and segregation of duties in the process.
- Close or lock the accounting periods in the accounting system. This will ensure that no changes are made to a previous period that has been presented to and approved by management.
What are the benefits of doing a monthly close?
- Understanding the financial health of the Company
Having monthly financials will result in a more accurate and timely picture of how the Company has been performing. This may help you to determine how certain decisions have impacted the business, what is working, and what isn’t working.
- Strategic tool for monitoring key data and making financial decisions
Monthly financial statements will allow the Company to have more accurate information about the Company in order to make informed decisions. It can also help the Company with preparing more accurate forecasts and projections. The Company can determine when the best time to plan for additional financing, make capital purchases, increase inventory levels, etc.
- Tax planning
Knowing where the Company’s bottom line stands allows for more time to plan for potential tax impacts to the business. The Company can proactively determine how to structure a transaction or determine the best timing for certain transactions such as capital expenditures or payment of certain expenses for cash-basis taxpayers.
- Being prepared for a capital raise or a transaction
If monthly financials are readily available, interested parties can analyze the trends of the business, knowing that the accounting practices are consistent with their expectations. When balance sheet accounts are not reconciled on a timely basis, interested parties may be skeptical about the reported results of the Company.
Jessica Pope, MSA, is an Assurance Manager at Katz, Nannis + Solomon, P.C. If you have any questions or would like to speak with one of our tax professionals, please contact our office at 781-453-8700.