Mastering the Month End Close: A Guide for Business Owners
A practical, step-by-step guide to the month end accounting close process. Learn about reconciliations, accruals, and how to interpret your management accounts.
Introduction
For many business owners, "month end" sounds like an administrative burden. It often feels like a box-ticking exercise performed just to satisfy the tax man. However, a proper month end close is actually the most valuable tool you have for business control. It turns raw data into reliable intelligence. As a Chartered Accountant, I help clients see this process not as a chore, but as a monthly health check.
Why the Month End Process Matters
Closing the books effectively serves three distinct purposes for an SME.
- Accuracy: It ensures you are not making decisions based on incorrect bank balances or missing invoices.
- Compliance: It keeps your records audit-ready and ensures VAT/GST returns are precise.
- Performance Tracking: It allows you to compare actual performance against your budget or previous years.
Without a hard close, your financial reports are just guesses.
Core Components of a Month End Close
A standard close involves specific adjustments to convert "cash" thinking into "accrual" accounting. Below is a table summarizing the essential adjustments we make.
| Adjustment Type | Description |
|---|---|
| Bank Reconciliation | Matching your internal records to the bank statement. |
| Accruals | Recording costs you incurred but haven't paid yet. |
| Prepayments | Removing costs you paid in advance for future months. |
| Depreciation | Allocating the cost of assets (like machinery) over their life. |
| WIP / Stock | Valuing the inventory or work currently in progress. |
Step by Step Walkthrough of a Standard Month End Cycle
We follow a logical order to ensure nothing is missed. This workflow keeps the accounts consistent.
1. Cut-Off Checks
We draw a line in the sand. We ensure invoices for goods shipped or services provided before month-end are included in this month. Conversely, we ensure bills dated for next month are excluded. This stops revenue or costs from bleeding into the wrong period.
2. Bank and Cash Reconciliations
This is the foundation. We check every bank account, credit card, and petty cash tin. The balance in your accounting software must match the actual bank statement exactly. If it doesn't, we investigate the difference immediately.
3. Recording Accruals and Prepayments
This is where accounting differs from just checking your bank balance.
- Accruals: If you used electricity all month but the bill arrives next month, we estimate that cost and add it now.
- Prepayments: If you pay annual insurance upfront, we move 11/12ths of that cost to the Balance Sheet and only "expense" one month's worth.
4. Fixed Asset Register Review
We update the list of your physical assets. If you bought a new computer, we add it. We then run the depreciation calculation. This recognizes the wear and tear on your assets as a monthly cost, rather than hitting your profit only when you bought the item.
5. Variance Analysis
Before we finalize the report, we perform a "sanity check." We compare this month’s figures to last month and the budget. If the telephone bill is 300% higher than usual, we drill down to find out why. This catches coding errors or operational issues early.
How to Interpret the Outputs
Once the close is complete, you receive a management pack. Here is how to read the two main reports.
The Profit and Loss (P&L) Statement
This tells you how the business performed over the specific month. Look at your Gross Margin (Revenue minus direct costs). If this percentage drops, your suppliers may have raised prices, or you are offering too many discounts.
The Balance Sheet
This is a snapshot of the business's health at a single point in time.
- Assets: What you own (Cash, Stock, Equipment).
- Liabilities: What you owe (Loans, Unpaid Tax, Unpaid Bills).
- Equity: The net value belonging to the shareholders.
If Liabilities exceed Assets, the business is insolvent.
Actions the Client Can Take After the Close
The numbers are useless if you don't act on them.
- Review Aged Debtors: Look at the list of customers who owe you money. Chase anyone who has exceeded their payment terms.
- Adjust Spending: If the P&L shows net profit is down, review overheads immediately.
- Tax Planning: Use the profit figure to estimate your upcoming tax bill and set that cash aside.
- Inventory Check: If your stock value is high, stop ordering and clear the backlog.
Conclusion
The month end close is the bridge between daily transactions and strategic decision-making. By strictly following reconciliations, cut-off checks, and variance reviews, we ensure your numbers are real. This allows you to lead your business with confidence rather than hope.
FAQs
1. How long should a month end close take?
Ideally, it should be completed within 5 to 10 working days after the month ends.
2. What is the difference between cash and accrual accounting?
Cash accounting records transactions when money moves. Accrual accounting records them when the work happens, regardless of payment.
3. Why is my profit high but my bank account empty?
Profit includes invoices sent but not yet paid by customers. It also excludes loan principal repayments, which drain cash but aren't "expenses."
4. Do I need to depreciate small items?
Generally, no. Low-value items (e.g., under $500) are usually expensed immediately rather than depreciated.
5. Can I automate the month end process?
You can automate data entry (bank feeds, OCR for bills), but the review, accruals, and judgment calls still require human oversight.