How to Reduce the Number of Days from your Month End Closing Process
In my previous article, I mentioned The Five Stages of a Finance Department when a company is growing and creating it’s team. In my following articles, I intend to show some of the most important procedures to keep in mind when transforming from a one-man business to one with different departments and teams. We’ll start with one of the most important by far (in my opinion), which is the bank account reconciliation. I will also explain how it can reduce the time it takes to complete your month end closing process.
I remember when I started two previous jobs. Even though they were for different positions, I was in charge of organizing the Finance Department. The ultimate goal was to issue reliable interim Financial Statements for the previous 4 or 5 months. I had no previous history in either company and there was no person who could show me what they had done before. I had to start from a blank slate, so the very first thing I did was perform monthly bank reconciliations starting 5 months back.
What this helped me achieve was to recognize every income and disbursement from the bank account and link it to the corresponding document. If it was already registered, perfect. If it wasn’t (as was the case with most transactions), I had to find the relevant document, understand what it was and make sure it was registered correctly. It took some time, but after 2–3 weeks, I was able to issue reliable, interim Financial Statements. Although I made some changes later on, I had at least a starting point and it was all because I simply reconciled the company’s bank accounts.
The thing about bank accounts is that everything a business does will at some point in time create a right or an obligation to receive or pay cash. For example, you register a sales invoice so the client can pay you afterwards. You register a supplier invoice to purchase what you need and pay the supplier. By recognizing everything in your bank statement, you are ultimately registering the majority of the transactions your company does. This is why performing bank account reconciliations are crucial to issue monthly reports with a high degree of confidence.
However, a mistake I see in many businesses is that they leave this procedure until the last week of the month, or even for the first week of the following month. If your bank statement only has one page worth of transactions, this will not be that big a deal. But what happens when your company starts to scale and you suddenly have 10 pages worth of transactions for the current month? What will happen is that your monthly reports will not be ready when you need them to make an informed decision.
In my experience, the only way to have all bank accounts reconciled by the first day of the following month is by performing weekly reconciliations. The procedure I implemented in my department is the following (keep in mind that this is a wholesale company, so the volume of transactions to register is relatively high on a daily basis):
WEEKLY BANK ACCOUNT RECONCILIATION PROCEDURE
MONDAY: Recognize and register any pending bank transaction up until last week. It is necessary to confirm that your ERP’s bank balance is the same as your actual bank account balance.
TUESDAY: Register every invoice that will be paid in the current week. This serves two purposes:
1) to get a head start on your month end closing process (more on that in a future article) and
2) to apply the payment in your ERP as soon as it is shown in your bank statement.
WEDNESDAY: Prepare and present all payments for the current week. On this day, everything should be signed and sent to the bank for processing (or by Thursday morning at the latest). However, should any emergency payments arise before or after this day and cannot be delayed, at least register the invoice or payment before sending it to the bank so you know exactly what it is for. This will prevent you from having unidentified bank transactions that were done in a rush.
THURSDAY: Follow up on any payments that were not sent to the bank or that were not processed yet by the bank.
FRIDAY: On this day every bank transaction must be left identified and registered to prepare in advance the bank reconciliation for the following Monday.
This procedure is very easy to follow and should be done EVERY SINGLE WEEK without missing a beat. The risk of not doing so is that you may have many unidentified transactions by the end of the month, which leads to a delay in reviewing your Financial Statements to make decisions. Every day that goes by without you receiving the monthly results could cost you real money. Otherwise, how do you know if you need to switch your strategy to increase sales? How do you know if your decisions were correct or not?
By having all bank accounts reconciled by the first day of the following month, you will be able to reduce by 2 or 3 days your month end closing process. The good news is that the more you do this procedure, the less time it will take to complete each bank reconciliation, allowing you to focus on other important matters as we will see in my next article.
