Are You Prepared to Close the Books?

Are You Prepared to Close the Books?

A Special Series from North American Wholesale Lumber Association

BY DONALD SCHNEIDMAN, SHERWOOD LUMBER

Managing your company’s financials is probably not the most exciting aspect of your business, but it is one of the most crucial. There are many approaches to how companies can keep track of the money coming in and going out of the business, and while there is not one specific way to do this, there are some general guidelines you can follow, particularly when it comes to preparing to close the books for year-end.

The year-end closing is an important piece of your operations and accounting process, and, ideally, preparations should be made throughout the year. While all leadership should have a view into the financials regularly, the chief financial officer (CFO) and/or controller are typically the individuals who are responsible for maintaining the books and records of the company. They monitor any and all account activity, making adjustments where necessary, and they should own the process of closing the books for year-end. 

At Sherwood Lumber, we perform a close each month. While this may not be the requirement for all, it certainly eases the burden of closing the books at year-end. A monthly close, through management review and corrective action, can improve organizational profitability and cash flow, as well as reduce exposure to potential losses and fraudulent activities.

Technology is also important when managing the financials and preparing for closing out the year. Accounting software that is fully integrated with your system and updates detailed reports along with the ledger simultaneously, allows for a more efficient reconcilement process and a quicker close. 

The best software will have strong controls built in that limits users’ abilities to write transactions to the books and to alter those transactions once they have been written. QuickBooks is probably the most well-known accounting software on the market, but there are others. No matter which one you have or choose to implement in the future, it should coincide with your company’s needs and provide useful, relevant information in a manner that is efficient for those who manage the process.

Obviously, the actual closing process at each company will vary; however, most companies will complete similar tasks, which are outlined below:

  • Confirming proper cutoff of purchasing/inventory and sales/accounts receivable for the period. 
  • Bank account reconciliations are prepared for each bank account.
  • Detailed accounts receivable reports are reconciled to the general ledger.
  • Detailed inventory reports are reconciled to the general ledger.
  • Detailed accounts payable reports are reconciled to the general ledger.
  • Bank loan balances are agreed to bank records.
  • Payroll journal entries are prepared and reconciled to payroll reports.
  • Investment accounts are reconciled to statements received from broker.
  • Accruals are reviewed for completeness and cut-off.
  • Fixed asset schedules are updated for additions and disposals, and agreed to the general ledger.
  • Depreciation entries are estimated each month and then finalized at year-end.
  • Pre-paid expenses are reviewed and adjusted accordingly.
  • Revenue and expense accounts are reviewed and reclassifications are made if appropriate.
  • Financial statements are prepared and reviewed.
  • Print all necessary year-end reports.
  • Back up data to prevent any data loss.

This is by no means an exhaustive list; it simply gives an example of the steps that may be involved in the process of closing the books. Your company may have its own template; or if it doesn’t, this list can be adapted for your business.

Keep in mind that financial vigilance is key to ensure accurate reporting during year-end. The biggest mistakes business owners can make when it comes to the process of closing the books are, (a) not reconciling accounts regularly to the ledgers during the course of the year, leaving a very challenging process at year-end, and, (b) improper cut-off of sales and expenses, resulting in misstating the company’s income for the year. 

No matter how your company decides to prepare for year-end, you want to ensure that your process is sound, accurate, consistent and complete. Utilize the necessary resources and plan ahead. 

– Donald Schneidman is chief financial officer for Sherwood Lumber, Islandia, N.Y.

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