Month end close, what is it and why is it important? This is a process that is carried out by accountants and bookkeepers where the books are closed or properly wrapped up. The reason it is important because it provides data and information to create financial reports that can help business owners and managers make smarter business decisions. If all items are not recorded and not recorded in their correct categories financial reporting is inaccurate and becomes irrelevant to the business manager or owner. Another reason it is important? You know where your business stands as opposed to going a whole year and learning your business had a loss. This allows you to make adjustments and correct any issues so that they don't linger all year.
The process of month end close requires gathering all information and transactions that have occurred during the month. Depending on whether a business uses accrual or cash basis dictates how transactions are recorded and how they are presented in reporting. Receipts for items such as inventory, travel expenses, meals, office supplies, etc. are gathered and recorded not just to the correct month, but to the correct expense line item or balance sheet account and if necessary the correct line of business. Another reason that properly recording expenses are important is due to the tax benefits some business expense items have. Journal entries have to be made as well recognizing transactions such as payroll expenses.
Once all transactions have been accounted for and recorded. Then accountants and bookkeepers run certain reports to ensure that all accounts are in balance. Once this is done financial statements and balance sheets are run and can be presented. In some organizations financial analysis is performed with ratios, volume/rate analysis, to help determine what is going on in the business.
With the increasing development of decision science and the marrying of operational and financial data new analysis and insights are being brought forth that go far beyond just whether there is a net profit or net loss. This kind of analysis gives a holistic view of the business and emphasis on what is referred to as business drivers. Business drivers are defined as the crucial factors that are vital to the continued success of your business. It isn't just sales but factors that impact operations and sales.
As we can see month end close and the accurate recording of business expenses provides the foundation for accurate, actionable reporting and analysis that can provide business managers and owners with the necessary tools and information to make better business decisions.