What is the Purpose of Month-End Close?

Why do you do a Month-End Close? It’s an interesting question and one which many organisations have not yet seriously considered.

What is the purpose of month-end close? Who are the stakeholders for it, and why do they require it?

I think this is a question you should spend some timing thinking about. Discuss it with your colleagues too. Often the responses can be interesting – “we have always done one”; “management require it”; “we need to do a close to prepare management reports”.

Really? Modern accounting systems allow you to extract reports with up-to-date data at any time. Old finance systems required a close in order to save down data and populate reports because active storage was expensive, and they lacked processing power. Nearly 40 years ago I worked with a system that required a nightly close because it didn’t have enough active memory to store more detailed transactions. But modern systems are vastly different.

I often think that the month-end close is a relic of accounting tradition handed down from generation to generation of accountants; like received wisdom: ye olde accounting lore!. I am unconvinced that organisations with modern accounting systems need to do a full close every single month. Surely Financial Reporting Standards only require an annual statement? Listed companies may need to report to investors more frequently but even they don’t need a monthly close.

Of course, we do need monthly debtor and creditor reviews, and stock checks for higher value items, but those things don’t need a full close. And management accounts and performance management reports should be produced more frequently than monthly anyway (and don’t need a formal close).

It might be that one easy improvement would be to move to a bi-monthly or quarterly close and see how it goes. What other processes would be affected by that change?

What do you think?

January 20, 2021

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