Accounting Best Practices: Why You Should Close Your Books Every Month
Making smart nonprofit decisions requires accurate financial reporting and “good numbers.” The best way to accomplish this is by implementing a formal month-end closing process for your accounting books. While most nonprofits realize the importance of a year-end close for audit purposes, closing your books each month will make it easier to ensure financial record accuracy and relevance.
General ledger closing should be an ongoing activity that encompasses a wide range of procedures. These include account reconciliation, accounts payable and accounts receivable review, payroll posting and proper allocation and recording of donor-restricted funds.
Performing these procedures consistently every month will make the closing process more manageable while strengthening internal controls and helping ensure financial accuracy. As a result, you can make more confident decisions that support your organization’s mission.
Five Benefits of Monthly Closings
Your nonprofit could realize a number of benefits by closing your books monthly instead of at the end of the year, including the following:
- Better budget monitoring — This is a common weak point when monthly closes aren’t performed. The annual budget can’t serve its purpose if actual financial results aren’t updated regularly. By closing your books on a monthly basis, you can compare actual revenue and expenses to your budget projections, identify any variances and make necessary adjustments.
This is especially important for nonprofits that deal with unpredictable revenue streams due to giving seasonality and other factors. Without accurate budget numbers, you could easily overspend or fail to invest in mission-critical opportunities.
- Improved cash flow management — Even nonprofits with strong programs and reliable donors can experience cash flow lags from time to time. Monthly closings provide clarity in terms of how much cash is available at any given time and how cash needs will evolve in the future. In addition, monthly reconciliation of bank accounts, outstanding invoices and grant receivables will make it easier to anticipate future cash shortages or surpluses.
- Enhanced donor accountability — Many donors give with specific intentions, like supporting a unique program or funding a particular scholarship, while grant agreements often come with detailed reporting requirements and timelines. Meeting these requirements requires maintenance of precise and timely revenue and expense records.
Monthly closings make it easier to prepare accurate grant reports, track donor-restricted funds and ensure compliance with donor intent. This level of enhanced accountability will boost donors’ confidence in your organization’s ability to manage resources responsibly and according to donor intent.
- Stronger internal controls — Monthly closings are a cornerstone of strong internal controls for nonprofit organizations. Regular bank account, accounts payable and accounts receivable reconciliation makes it easier to spot any unusual activity or unauthorized purchases that could indicate fraud or asset misappropriation.
A monthly close also presents an opportunity to maintain control logs, review access to financial systems, confirm proper coding of transactions and ensure compliance with your organization’s financial policies.
- A more streamlined annual audit — Waiting until year-end to close the books can put pressure on the finance staff as they prepare for the annual audit. Meanwhile, auditors may find inconsistencies or missing documentation that require additional research, which could delay the audit and issuance of the financial statements and Form 990.
By closing your books each month, you can transform the year-end audit from a stressful scramble to a more manageable review. Auditors can rely more confidently on your internal controls and monthly reconciliations, which will reduce the number of adjustments required, shorten the audit timeline and lower audit costs.
Best Practices for Closing the Books
Here are a few best practices to consider when preparing a month-end closing schedule:
- Be sure to record all transactions in the general ledger. These include all receipts, disbursements, accruals and pledges (if applicable). Also make sure that various accounting modules have been posted to the general ledger, if applicable.
- Reconcile all cash accounts. These should be reconciled before other general ledger accounts; otherwise, you could end up re-reconciling some of the other accounts.
- Ensure that each general ledger account is accurate. Make sure the asset and liability accounts are complete and accurate and the beginning net asset balances line up with the prior period ending balances. Be sure to check various revenue and expense accounts as you’re reconciling the related asset and liability accounts.
- Distribute the monthly and year-to-date financial statements to your management team. Have them analyze whether the statements appear reasonable and if there are any surprises. If so, look closely at these transactions to see if anything was posted in error and make adjusting entries as needed.
- Determine precision levels for internal reports. How precise do the accounting records need to be throughout the year? You could decide to perform an abbreviated month-end close for the first two months of each quarter and a thorough month-end close at quarter-end.
- Use a month-end closing checklist. This will help ensure that all steps are performed in the correct order and none are left out.
Improve Your Decision Making
By implementing a formal month-end closing process, your nonprofit will benefit from more timely and accurate financial information that improves your overall decision making. Talk to your CFO or controller about how this might look at your organization.
We can provide more detailed best practices regarding your month-end closing process to make it as effective as possible for your organization. Contact us to learn more.
Sidebar
What’s Included in a Month-End Close?
A formal month-end close usually includes the following areas:
- Cash and bank accounts
- Accounts receivable and revenue
- Grants and donor restrictions
- Accounts payable and expenses
- Payroll and benefits
- Fixed assets and prepaid expenses
- Investments and endowments
- Net assets and fund balance tracking
- Financial statements and internal reports
- Compliance and internal controls
- Period-end close documentation and sign-offs
