This most basic financial routine — generating an accurate set of financial reports by the 15th of each month — can improve profitability and cash flow while reducing your exposure to losses from theft, bad debt, and other nefarious enemies of the small business state.
Your monthly close produces financial statements — P&L, balance sheet, and cash flow statement. These reports give you valuable feedback about what’s working (and what’s not) in your business.
The sooner you respond to this feedback, the sooner you can correct course to improve financial performance. But if you have to wait 30 or 60 or 90 days to know, for example, that labor costs are out of control, you’ve lost valuable time to fix the problem. You’ve lost more money. And that money is gone forever.
If there’s a problem, the sooner you know about it the better. And if there’s an opportunity emerging, the sooner you see it, the more chance you have to optimize it.
Gain access to bank financing
When it comes time to apply for a bank loan or line of credit, you’ll need to furnish accurate financial statements. Maintaining an accurate, timely monthly close means you’re prepared at all times.
Reduce CPA tax preparation fees
Every CPA I’ve ever worked with would be happy to charge you less money to prepare your taxes or do your tax planning because you sent them a clean set of books. They want to do tax stuff; they didn’t become CPAs to slog through a messy set of books trying to find out which end is up.
Prevent accounting problems
On one of my first jobs as a financial consultant, I was paid $2,500 to clean up a large QuickBooks payroll mess. It would have cost my client $500 for me to set it up correctly in the first place. That’s a 500% premium for after-the-fact clean up.
A quick, clean monthly close sniffs out accounting problems when they’re small, before they have a chance to grow large and expensive. Find these problems, fix them, and put the money you save toward more productive uses, or take it out as profit.
Here’s another example of the kind of mess a quick, clean monthly close can prevent: a short story about a $100,000 theft loss.
A well run finance department
A quick, clean monthly close usually points to a well run finance department.
A perennially late, messy monthly close might be a symptom of such problems as:
- time planning issues (bookkeeper and/or business owner)
- lack of management commitment
- lack of technical skill, capacity, or motivation
Is 10-15 days realistic?
A soft close within 10 days, and a hard close within 15 days, is a reasonable expectation in today’s wired world, where global transactions can clear in minutes and daily bank balances are confirmed within hours.
It takes commitment, as well as coordination with employees, vendors, and customers. But it’s definitely possible, and very much worth the effort.
1. What should be done by the 5th of each month
- Bank and credit card reconciliations
- Payroll entries
- Customer invoicing
- Most vendor bills
- Work in Progress (WIP)
- Physical inventory count (full or partial, depending on your policy) – learn more about this topic here: http://davidsterncfo.wordpress.com/learning/inventory-physical-count/
- Recurring journal entries (e.g. depreciation).
2. By the 10th:
- Issue “soft close” financial reports; you should have a clear sense about last month’s financial performance
- Complete your self-review of the books
- Send the books to peer review.
3. By the 15th:
- Finish peer review
- Issue management reports
- Carry forward open items
- QuickBooks users: advance the closing date each month or quarter.
If you find yourself deep into the month before your books are closed (e.g. the 20th, 25th, etc.), that’s a symptom of accounting department problems that need to be corrected.
On the other hand, if you can finish the three steps above by the 1oth of each month instead of the 15th, even better.