Financial close is a process long associated with tedious, error-prone tasks, underpinned by intense pressure to close the books as quickly as possible. And while crucial business decisions often hang in the balance, the financial statements and reports that they depend on are only as good as their accuracy and reliability.

Today, mid-market companies face intense competition and must be able to pivot and adapt their business models at a rapid pace. Efficient and reliable financial close processes help bring confidence and speed to corporate planning and decision-making—and help investors and shareholders to recognise a good thing when they see it.

What is financial close?

Financial close refers to a recurring process of review and reconciliation, leading to the delivery of the financial statements and reports needed for a detailed view of the company’s financial situation. In other words, financial close is the sum of all the financial management activities that accounting teams undertake to “close the books” in a specific time period, such as a month, a quarter, or a financial year. The ultimate aim of an accounting close is to provide detailed and comprehensive reports, including:

• Balance sheet or statement of financial position
• Income statement or profit and loss account
• Cash flow statement

What is the difference between “financial close” and “closing the books”?

Even people who know the difference between these two terms often use them somewhat interchangeably. Yet, from an operational point of view, there is a distinction between financial close and closing the books—and one that becomes increasingly important as medium-sized companies seek to better integrate their accounting processes into a single cloud system, such as enterprise resource planning (ERP) software.

Here is the definition of these key terms:

• Financial close is an umbrella term that refers to all the accounting processes involved in closing the books—including the act of actually closing the books. The result is the financial reports and statements that provide stakeholders and executives with an accurate account of the company’s financial situation. This occurs on a regular basis, which may be monthly, quarterly, annually, or otherwise.
• Closing the books is the step in the financial close process when the general ledger or “the books” are reconciled and closed for the period. After this step, the financial reports are produced to show the company’s financial situation during that specific period.

Key steps in the financial close process

There are essentially five steps in the financial close process: record, analyse, close, consolidate, and report. When the closing deadline is set, the balance of all the financial statements must be reconciled so that the books can be closed and the process started again for the next financial period.

Record, analyse, consolidate

• Creating financial transactions involves recording assets, liabilities, equity, income, and expenditure from across the business for that specific financial period.
• Carrying out financial accounting includes additional tasks such as account analysis and reconciliation, revenue recognition, calculating depreciation, and accruals accounting.

Close

• Entity close is the point at which you have stopped recording and reconciling transactions and are ready to reconcile and close the accounts.
• Corporate close takes place after the books are closed and includes additional steps required for financial consolidation across divisions and legal entities, including mapping to a common chart of accounts, in some cases translation to a common currency, intercompany eliminations, and calculation of investments. As midsized businesses grow, they will need to automate and integrate some of these activities and gain faster access to control and validation checks.

Report

• Carrying out financial reporting is the final step in the financial close process. As reporting becomes more complex and demanding, finance teams are feeling the pressure to deliver faster, more flexible reports. Mobile device interfaces and powerful financial management systems are an ideal solution for running personalised, real-time reports anywhere, at any time.

ERP financial close software can provide you with an overview of the tasks remaining to complete the closing of the accounts.

Top 5 financial close challenges

Many mid-market companies are faced with increasingly complex global accounting challenges, yet they must rely on smaller teams to get things done. For them, it’s crucial to streamline and automate their accounting practices and meet these challenges head-on.

Here are the main challenges for finance teams:

1. Lack of structure and accounting SOPs: The financial close process is “accounting 101” for finance team leaders. In mid-market companies, this often means that a couple of senior people—who know the financial close process in detail—do not feel the need to introduce more formal, granular standard operating procedures (SOPs). As businesses become more complex, they require robust SOPs, but it can be challenging to secure support for more rigorous operational procedures, so any proposed new financial systems or solutions must be able to quickly demonstrate their benefits and ease of use.
2. Time pressure in month-end closing: From the C-suite to the shareholders, important strategic decisions depend—even hinge upon—the story the financial close reports have to tell. So, speed becomes the motivator. Sometimes that’s good when it results in greater efficiency and time management. But all too often it leads to questionable shortcuts or silos, where the fastest people are tasked with closing the books instead of taking the time to disseminate and automate those tasks across the entire team and help ensure a better understanding of standard financial close processes across the business.
3. Inaccurate and late financial data: All it takes is inaccurate or incomplete data from one area of the business to disrupt the entire financial close. Every department produces invoices, expenses, and purchase orders, yet in many companies—especially mid-market enterprises that have grown quickly—there is a lack of procedural consistency regarding financial reporting. Last-minute requests for items at the end of the month lead to frustration and errors. Many businesses face challenges due to a lack of tools and solutions to support consistent and continuous accounting and departmental reporting throughout the entire month.
4. Silos and poor financial data integration: Alongside inaccurate and delayed departmental data, finance teams also struggle with siloed and disparate reporting systems across the business, often with different metadata or data structures for the names and numbers of accounts, names and numbers of products, customers, divisions, and so on. This means that accountants not only have to reconcile and make sense of disparate information, they also often have to resort to manual, error-prone processes to ensure the data is in a consistent structure.
5. Lack of automated accounting: As mid-market companies grow, so does the complexity of their accounts, not to mention the need to enforce increasingly challenging corporate security and the minutiae of governance standards. Clinging to processes that are already in place, many businesses attempt to bolt on these additional items as manually performed tasks. Not only does this increase the risk of error, it also restricts scalability and data integration. Without the power of artificial intelligence (AI)-powered ERP business management systems, mid-market businesses will reach a critical accountancy mass, beyond which they can no longer grow using manual processes.

Best practices for a smoother financial reporting and accounting close

The reports and insights provided by the financial close process are some of the most vital to the growth and operation of your business—yet due to their complexity and detail, they are often among the most dreaded of corporate activities. However, by standardising procedures, developing effective communication strategies, and utilising powerful accounting software solutions, businesses can make the process much easier and far more efficient.

• Identify inefficiencies and accounting processes prone to errors. While digitalising and modernising their accounting practices, many of the best mid-market businesses assemble a task force of representatives from across the departments. The finance team provides them with a set of risks and issues to look for, and these findings are then consolidated and assessed to gain a good understanding of where there are opportunities for improvement.
  
  This process typically uncovers bottlenecks and delays, but also draws attention to the myriad activities that are still being carried out on stand-alone, manual spreadsheets. This process lays the groundwork for the development of SOPs and the implementation of more integrated and automated accounting tools.
• Develop good change management practices to create and implement SOPs. While the accounts team is ultimately held responsible for a smooth financial close, they are dependent upon every department to achieve this—from C-suite acquisition costs to sales team lunch expenses. If departments are expected to deliver with speed and accuracy, then it is incumbent upon the company to ensure that everyone across the business is singing from the same hymn sheet.
  
  In the best mid-market businesses, this often begins with a good change management strategy to help communicate the importance of standardising tasks and establishing protocols for who is responsible for what, and when and how they need to complete and submit their financial tasks. And as SOPs are created and implemented, this is the ideal time to introduce and support the use of intelligent financial management tools, such as an ERP solution.
• Implement and support a continuous accounting process. “Continuous accounting” simply means that instead of all the departments rushing around in a panic on the 29 ^th of every month, workflows are established to distribute financial close tasks more evenly throughout the reporting period.
  
  The use of automated finance tools can greatly help to streamline this process with things such as mobile apps and templates—all via the cloud to collect and integrate daily cross-departmental data in real time. This helps to avoid the month-end panic and also enables teams to spot (and rectify) errors early. Finally, when books are kept up to date, businesses can perform a “soft close” at any point during the month, to avoid surprises or identify opportunities.
• Automate and digitalise the financial close. With an AI-powered ERP that provides cloud-based financial solutions, mid-market businesses can reallocate valuable time. Rather than spending hours carrying out manual tasks and making sense of disorganised data, finance teams can dedicate more time to strategic and skilled activities that help their companies grow and adapt quickly in the rapidly changing market.
  
  Cloud systems provide real-time dashboards that enable executives to customise reports and gain in-depth insights at any time during the month—from their device, desk, or wherever they may be. It also gives the accounts team open access to information across the business, using tools that automatically integrate and standardise disparate data sets and provide them with a command base from which to aggregate and analyse data from across the business.
• Meet up after every financial close. This is particularly important for mid-market businesses that are growing and rapidly shifting their business models—especially when they are attempting to implement and establish new digital tools and SOPs. All the procedural challenges and epiphanies that occurred during the last close will never be fresher in the team’s mind than a day or two after it is completed.
  
  Many businesses take advantage of this brief post-close respite to arrange regular financial close debriefing meetings where teams can go off-site, perhaps have a meal, and take a moment to analyse and share their ideas for improving and streamlining the process.

Automation and task lists help to improve the financial close process, as shown here in this list of approvals.

Get started with financial close software

Legend has it that while visiting NASA, President Kennedy came across a caretaker working into the evening. When Kennedy asked him why he was there so late, the man replied, “Because I’m helping to put a man on the moon.” While that old story may seem a little bit cheesy today, its message nonetheless remains extremely powerful.

To be agile and resilient in today’s fast-paced and competitive global markets, medium-sized businesses must strive to instil—a sense of common purpose and an understanding of the company’s objectives—across all their teams. And that cannot easily happen amid internal silos, inefficient processes, and error-prone manual workflows. Financial digital transformation does not have to happen overnight. Getting started with the best cloud financial closing tools may be easier than you think. Contact your software supplier to find out more about options and solutions that are tailored to your unique business needs.