Month-end closing is a challenging process for many businesses. It is not uncommon to struggle with finding a balance between dedicating too many resources and not quite enough. Before you begin to approach this, you must understand there are two basic fundamental approaches to closing the books for a period: a hard close or a soft close. It is essential to understand each strategy to determine what’s best for your business. The following is a breakdown of these two approaches as well as some key considerations when choosing which strategy to implement.
The Hard Close Approach:
When a business completes a hard close at the end of a month, they are going to treat that month almost as a “year-end.” The accounting staff will reconcile the balance sheet accounts (receivables, payables, other accruals, deferred/unearned revenue, etc.) and hone in on the corresponding revenue/expense cutoff as it applies to the income statement. The previous period’s books stay open in the accounting system for the duration of the period-end closing process. This allows the appropriate entries to retroactively be made to true-up the end of that period. It is beneficial for the company to do this every month as they ultimately would produce generally accepted accounting principles (“GAAP”) full-accrual basis financial statements for each month. Another benefit of this method is that management will then able to use this information to make critical business decisions. A drawback is that this method is a time-consuming process, and there are many resources devoted to executing it.
The Soft Close Approach:
On the other hand, a company can utilize the soft-close process. In this case, the soft-close process does not include a significant portion of the month-end close reconciliation process. Under a soft close, the previous month’s books are generally not allowed to stay open for very long. The accounting software is locked down and editing is not allowed. With this method, after the last month’s books have been closed out, the accounting staff will book any new invoices for expenses attributed to the previous month in the current period.
Consideration should be given to the following when deciding between a hard or soft close:
Is it necessary for your company to have full GAAP accrual-basis statements in the interim?
Will it be an issue for your company if revenues and expenses are recorded in the following month?
What about third parties? Do any require monthly or quarterly GAAP financials?
While a soft close process may work for you in the interim, it is important to note that you will likely need to perform a hard close subsequent to year-end. If your company opts for a soft close for the first eleven months of the year and then a hard close for the year-end, it is essential to consider any pitfalls that could make it more difficult to reconcile the year-end numbers, having not done that work prior. If any issues present themselves, a viable option is to perform a hard close at the end of each quarter and soft closing for the remaining eight months.
If you have questions or need assistance with determining which month-end close procedures suit your business best, contact our professionals at BrightBooks USA at 203-987-4111. Or contact us online via our contact form.