The end of month close process plays a vital role in ensuring the accuracy, integrity, and transparency of financial records for businesses of all sizes. Making this monthly ritual effective and efficient can mean the difference between informed decision-making and costly errors. Read on to learn the benefits of streamlining and optimizing the accounts payable month-end close process, including information on best practices and the role of automation in achieving operational excellence.
What Is the Month-End Close Process in Finance?
The month-end close process, often referred to as the financial close, is a crucial accounting procedure that organizations undertake at the end of each period, typically on a monthly basis. Its primary purpose is to ensure the accuracy and completeness of financial records so that financial statements can be prepared for internal and external reporting purposes. The process involves a series of steps and tasks that are designed to reconcile financial accounts, verify transactions, and produce accurate financial statements.
How AP Ties Into Month-End Close
The Accounts Payable (AP) function plays a significant role in the month-end close process because it involves the management of an organization’s outstanding liabilities and expenses. As part of the process, the AP team takes steps to ensure the past month’s financial records are accurate. For example, they may reconcile vendor statements with the AP ledger to ensure there are no discrepancies or missed invoices. Ensuring that the AP function is properly integrated into the month-end close process is essential for accurate financial reporting and compliance with accounting standards.
Steps in the AP Month-End Close Process
The month-end close process for AP can vary across industries, but it generally involves several key steps:
Closing Out Open Invoices
AP teams need to ensure that all open invoices are properly accounted for and closed out. This includes verifying that invoices match purchase orders and that any discrepancies are resolved.
Getting Invoices Posted
Invoices need to be accurately recorded in the accounting system. Manual data entry can be time-consuming and prone to errors, so automation can help streamline this step.
Getting Invoices Approved
Invoices typically require approval from relevant departments or individuals before payment. Automated workflows can route invoices to the appropriate approvers, reducing delays.
Sorting Out Appropriate Accruals
Calculating accruals involves estimating the value of any outstanding invoices and recognizing them as liabilities on the balance sheet. This is important for recognizing expenses in the correct accounting period.
Challenges in Month-End Close for AP Teams
AP teams encounter many hurdles on their way to conducting an efficient, accurate month-end close. While these challenges tend to rear their ugly heads at month’s end, most of them have roots in issues with processes like invoice approval that are ongoing throughout the month. The most pressing difficulties include:
Lack of Speed
One of the key challenges in the month-end close process is the lack of speed. Only 53% of companies finish their monthly close within six business days. A slower close means that financial reporting is slower, and the information used to make business decisions is less timely.
Lack of Information or Incorrect Information
Manual AP processes can lead to inaccurate data entry, resulting in discrepancies that need to be reconciled during the month-end close. Additionally, AP teams may waste valuable time tracking down information buried in paper invoices that wasn’t transferred accurately to their ERP system. Of the companies that cite receiving timely information from their finance department, 62% are closing within 6 days or faster, vs. 39% that take seven or more days.
Lack of Visibility
When AP processes aren’t digitized and automated, it can be challenging for AP teams to track the statuses of invoices, approvals, and payments during the month-end close. Lack of visibility can lead to delays and errors in financial reporting.
Inaccurate Expense Reporting
Manual processes increase the risk of inaccurate expense reporting, due to the risk of human error, lost or misplaced documentation, and an absence of automated controls and validation checks. Inaccurate expense reporting can impact financial statements and can create errors that the AP team must take time and resources to reconcile.
How to Improve the AP Month-End Close Process
There are several steps AP teams can take to increase speed and minimize errors during the month-end close process. One improvement is to follow best practices for invoice workflows, such as setting up a multi-tier invoice approval process that gives higher-dollar invoices more scrutiny. This can save your team time and reduce bottlenecks. In addition, consider investing in an AP document management system to help maintain good historical records of invoices. Having easy access to historical data can streamline the month-end close.
The Benefits of AP Automation in the Month-End Close Process
Ultimately, however, automating your end-to-end accounts payable processes will have the biggest impact on month-end close. In this section, we explore how it streamlines tasks, enhances visibility, and accelerates financial reporting, ultimately elevating the efficiency and effectiveness of your AP teams.
Faster Speed
Automation significantly improves the speed of the month-end close. Research shows that 60% of companies with automated reconciliations complete their month-end close within six business days, compared to only 38% of businesses without automation.
Easier Access to Documentation
AP automation software helps companies convert paper invoices and records into machine-readable files that can be stored in the cloud. This both promotes accuracy and provides easy access to the documentation needed for the month-end close process, reducing the time spent searching for information.
More Time to Analyze Data
A faster close process allows finance teams more time for data analysis, which is crucial for making informed business decisions. More time for analysis is the number one advantage of a faster close process, with 34% of respondents citing it in recent research.
Increased Visibility
Automation provides real-time visibility into the status of invoices, approvals, and payments. This visibility helps identify outstanding bills that may need to be accrued and overdue invoices that the AP team should follow up on.
Improved Access to Analytics
While some AP automation tools charge extra for analytics, MineralTree includes dashboards for AP aging, DPO and other key metrics free of charge. These features can assist in real-time financial analysis and further accelerate the month’s end-close process.
More Ability to Share Workloads
Many ERP systems charge on a per-user basis, which can limit AP teams’ access due to budget. In contrast, MineralTree allows an unlimited number of users to work on the close process at no additional cost, enabling many AP team members to share the month-end workload.
Final Thoughts
Incorporating automation, especially with solutions like MineralTree, can transform and accelerate the AP end of month close process primarily by improving operations in the 24 days prior to closing. Automation not only enhances speed but also improves accuracy, provides better visibility, and frees up valuable time for financial analysis. As businesses strive for efficiency and timely financial reporting, automation has become a critical tool in achieving these goals.
Frequently Asked Questions
How Long Does the Month-End Close Process Take?
The duration of the month-end close process can vary widely depending on the complexity of the organization’s financial operations and the level of automation in place. However, with automation, it can be completed within a matter of days.
What are Month-End Reports?
Month-end reports are financial statements and reports that summarize an organization’s financial performance and position at the end of a given month. These reports include income statements, balance sheets, and cash flow statements.
What is the Month-End Reconciliation Process?
The month-end payment reconciliation process involves comparing and reconciling various financial accounts to ensure that they align with the organization’s records. This includes reconciling bank statements, accounts receivable, and accounts payable, among others.
How Do You Reconcile AP at Month’s End?
Reconciling AP at month’s end involves verifying that all invoices and expenses are accurately recorded and accounted for in the financial records. Any discrepancies or outstanding items are identified and addressed during this process.
What are Month-End Accruals in Accounts Payable?
Month-end accruals in AP involve recognizing expenses that have been incurred but not yet recorded as payable. This ensures that expenses are accounted for in the correct accounting period, even if the invoices have not been received or processed.
