Miniseries – Best Practices for the Month-End Close
Written by Jeff Roberts and Joy Thao
A business director of a large church recently shared her frustration of not seeing financial statements in six months. After some discussion it was apparent that one of the root causes was the lack of a formal month-end close process. We often hear from our clients and others that the monthly closing process in many nonprofits is frustrating and overwhelming. Can you relate to any of these?
- Waiting for staff to submit credit card receipts so you can post the activity to the GL
- Bank reconciliations that take an inordinate amount of time because of complexities with credit card deposits or posting from your CRM
- Correcting something on the ledger only to find that it was done incorrectly and now you have to “correct” it again
- And just when you think you’re finished and ready to send reports you find a glaring error and must re-work the reports
A Journey Towards Incremental Improvement
We help close the books and prepare financial statements for thousands of our clients each month. While we do not profess to do it perfectly each time, our goal is to strive for continuous improvement. The Japanese have a term for this called Kaizen, a concept that has been used in their lean manufacturing process for decades. Making a commitment to continuously improving your monthly close will pay significant dividends over time. Author James Clear in his book, Atomic Habits, discusses the powerful impact that just a 1% improvement can have if it’s consistently applied each day, week, and month.
We are starting a series on best practices for the month-end close. We invite you to journey with us to improve your monthly close incrementally. We encourage you not to become overwhelmed with each post but take the 1% approach. Consider what one thing could you implement in the next 30 days? When you have accomplished that then tackle the next thing. Our blog series on this topic is designed to be easy to read and implement to help you improve your close over time.
The Closing Checklist
The closing checklist is the foundational tool to measure the completeness and timeliness of your closing process and will help you spot bottlenecks and areas to improve. When building or revising your checklist, it is important to remember your organization’s monthly close goal and establish a realistic close timeline that coincides with the operational activities of your organization. The easiest way to get started on this is with an Excel template – see the below example and link to download the Excel file.
It’s critical to both identify the major functional area (Cash, AP, Revenue, etc.) along with detailed process steps. We also recommend that you express the close checklist in terms of business days and then use a date calculation, such as Excel’s Workday function, to indicate the target due dates each month. Once you have the initial checklist drafted, hold a team meeting to review and identify dependencies and bottlenecks and what could be done to improve the close. We recommend that you identify the most time-consuming process and work on fixing that area first before moving on to other areas of the close process. Also, conducting a process flow session with your team is as easy as using a big whiteboard with post-it notes so everyone can visualize the close process and their role within it.
A Collaboration Tool
Your checklist can easily be maintained in a shared Excel or Google docs file and updated by each member of your staff. Today there are also online closing tools such as FloQast, that provide a cloud platform for you and your team to manage the close checklist and even synchronize with your GL which eliminates the need to run and re-run the trial balance to confirm tie-outs. Cloud-based software also allows you to leave detailed review notes to staff for follow-up, thereby reducing the need to use email back and forth as the medium.
Make it a Living Document
Regardless of which tool you use, it is critical that each process be identified with assigned responsibility to both a preparer and (hopefully) a reviewer. Your closing checklist should be reviewed by you and your team each month after the financials are distributed. Review what went well and what didn’t, and develop plans for how to incrementally improve next month. Remember, your closing checklist should become a living document providing you with feedback each month. Start now by creating or updating your monthly close checklist and begin your kaizen journey!
Jeff loves helping nonprofits achieve financial excellence through improved monthly reporting, cashflow management, strategic planning, and systems design.
Super helpful information!