Like most accounting tasks, there are best practices pertaining to closing. In a recent presentation, we shared our experience with closing, as well as best practices. This article shares that information, and we’ll continue sharing more next month so that you too can have the latest accounting best practices.
Three Types of Closing
In accounting, there are various approaches to closing financial records, each serving distinct purposes.
The first method is the “No Close” approach, where the books are intentionally left open, allowing for adjustments to be made, as necessary.
Another technique is the “Soft Closing” or “Pre-Closing” of a fiscal year, which safeguards the integrity of account balances by restricting any transaction postings to that specific period. Soft closing permits the reopening of fiscal years or periods if needed.
“Hard Closing” involves permanently preventing any postings to a fiscal year. Lastly, a combination of both “Soft and Hard Closing” strategies may be employed to strike a balance between maintaining flexibility for adjustments and imposing more stringent closure measures for certain periods. Each type of closing method offers its own advantages and is chosen based on the specific requirements and preferences of the organization.
When Should You Close Accounts?
The frequency and due dates for closing procedures in accounting are flexible, allowing organizations to tailor their approach based on specific needs. Not every step in the closing process needs to be completed each month, offering adaptability. Organizations can opt for a monthly, quarterly, or annual close step, depending on factors such as the volume of transactions, the complexity of the organization, and the efficiency of the accounting system(s). This approach ensures that the closing process aligns with the unique requirements and operational characteristics of each organization.
Barriers to Effective Closing
Several potential barriers or hurdles may impede the completion of the closing process in accounting. One significant challenge arises from system or software limitations, where the existing tools may lack the necessary capabilities for a smooth and efficient closing. This can hinder the overall process and necessitate workarounds or additional manual efforts.
Another obstacle is the lack of time to set up a Close checklist. The demands of other priorities may leave little room for the meticulous planning and organization required for an effective closing procedure. This time constraint can result in oversight and errors during the process.
Adjustments pose another challenge in closing the books. Unforeseen changes or corrections may be needed and addressing these adjustments can be time-consuming and complex. Late invoices or receipts further compound the issue by introducing delays and potentially disrupting the entire closing timeline.
The existence of separate systems that do not interface and require manual entry creates a considerable barrier. This not only adds to the workload but also increases the likelihood of errors, as information must be transferred manually between systems.
Closing isn’t for perfectionists. Although you want to be as accurate as possible, perfection isn’t the goal, and striving for absolute accuracy may lead to excessive scrutiny and time spent on minor details, potentially delaying the overall completion of the books.
Moreover, a lack of understanding about reconciliations and closing procedures among team members can impede progress. Adequate training and communication are essential to ensure that everyone involved comprehends the importance and intricacies of the closing process.
Staff shortages or absences during key times can be a significant hurdle. The unavailability of essential team members can disrupt the workflow and lead to delays in completing the necessary tasks.
Finally, if it takes too long to close the books each month, it can become a substantial barrier. Inefficiencies in the closing process may result in a drain on resources and can hinder the organization’s ability to respond promptly to financial insights and changes. Addressing these potential barriers requires a proactive approach, including system improvements, time management strategies, and ongoing training to enhance overall efficiency in the closing process.
More Tips for Effective Closing
In our next installment, we’ll share best practices for effective closing. If you have any questions about closing your accounts, let us know. We’re here to help!
Welter Consulting
Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact us for more information.
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