A simple month-end close routine for small businesses

Many small business owners only find out how the business really performed when the annual accounts are prepared, months after the year has ended. By then it is too late to act on anything. A month-end close fixes this. It is a short, repeatable set of steps that leaves your books accurate and up to date at the end of every month, so the numbers you look at are numbers you can rely on.

It does not need to be elaborate. Once the habit is established, a close for a typical small business takes a few hours. Here is a routine that works.

Why a monthly close is worth the effort

• Decisions are made on real numbers. Pricing, hiring and spending decisions are only as good as the figures behind them.
• Your BAS becomes a by-product. If the books are right every month, preparing a quarterly BAS is mostly a matter of running a report and checking it. See our BAS preparation checklist.
• Problems surface early. A missing customer payment, a duplicated supplier bill or an unexpected bank fee is easy to sort out a few weeks after it happens and hard to untangle a year later.
• Lenders, investors and buyers expect it. If you ever want finance, or to sell the business, clean monthly records make the process faster and more credible.

Set a timetable and an owner

Pick a date by which the previous month will be closed, such as the tenth business day of the following month, and stick to it. Decide who is responsible for each step. In a small business that might be you and your bookkeeper, with your accountant reviewing the result each quarter. A close that belongs to nobody tends not to happen.

The routine, step by step

1. Get everything into the system

Before reconciling anything, make sure the raw material is in the accounting software:

• all sales invoices for the month have been raised
• all supplier bills and receipts have been entered or captured
• expense claims and card receipts from staff have been submitted
• any cash takings have been recorded

Chase anything missing now. Receipts that arrive after the close are the most common reason month-end figures are wrong.

2. Reconcile every bank account and card

Reconcile each bank account, credit card, loan account and payment platform (such as merchant facilities or online payment providers) to its statement as at the last day of the month. The closing balance in your software must equal the statement balance. If it does not, find the difference before moving on. Leave nothing sitting in a suspense or "uncategorised" account without a note explaining why.

3. Review what customers owe you

Run an aged receivables report. Check that the balances are real: payments that have come in should be matched to the right invoices, and credit notes should be applied. Follow up overdue accounts, and flag any debt that looks doubtful so a decision can be made about writing it off.

4. Review what you owe suppliers

Run an aged payables report and compare key supplier balances to their statements. Look for bills entered twice, payments not matched to bills, and credits you are owed but have not used.

5. Record month-end adjustments

Some costs and income do not arrive neatly as an invoice in the month they belong to. Common adjustments include:

• accrued expenses, for costs incurred but not yet billed, such as utilities or contractor hours
• prepayments, where an annual expense such as insurance is paid upfront and spread across the months it covers
• depreciation on equipment and vehicles
• unearned or accrued income, where you have been paid in advance or have done work not yet invoiced
• stock adjustments, if you hold inventory and do a count or a reconciliation

Not every business needs all of these every month. The aim is a profit figure that reflects the month's real activity, not just the month's paperwork.

6. Check payroll and tax accounts

Make sure each pay run for the month is recorded and that wages, PAYG withholding and superannuation liabilities in the balance sheet agree with your payroll reports. Check the GST accounts make sense against the month's sales and purchases. Our article on payroll, Single Touch Payroll and super covers the employer side in more detail.

7. Reconcile the rest of the balance sheet

Go through each balance sheet account and ask whether the balance is supported by something: a statement, a schedule or a calculation. This includes loans and hire purchase agreements, director or shareholder loan accounts, bonds and deposits, and clearing accounts that should be at or near zero. If you are unsure what each of these means, our guide to the balance sheet is a good starting point.

8. Review the results

Now look at the profit and loss for the month. Compare it to the previous month, the same month last year and your budget if you have one. Ask:

• Does revenue look right given what you know happened?
• Is gross margin in its usual range?
• Are any expense lines unusually high or low?
• Is anything coded to the wrong account?

Large or unexpected movements usually mean either a real change in the business or a bookkeeping error. Both are worth knowing about. Our guide on how to read your profit and loss walks through what to look for.

9. Lock the period

Most accounting software lets you set a lock date so that nobody can change transactions in a closed month without deliberately unlocking it. Set it once the close is complete. This protects the figures you have reviewed and makes any later change a conscious decision rather than an accident.

Common mistakes to avoid

• Closing without reconciling. If the bank accounts are not reconciled, nothing else can be relied on.
• Using suspense accounts as a parking lot. Unexplained balances grow quickly and are painful to clear at year end.
• Skipping the review. Reconciling proves the transactions are in the system. Only a review tells you whether they are coded correctly and whether the result makes sense.
• Leaving it to year end. Twelve small closes are far easier than one large clean-up.

Keep it simple and consistent

Write the steps down as a checklist, tick them off each month and note anything unusual. As an example, a business with one bank account, a credit card and a handful of employees might complete the whole routine in an afternoon. A business with stock, several entities or multiple payment platforms will take longer, but the steps are the same. Consistency matters more than sophistication.

A month-end close is not about perfection. It is about knowing, every month, that your numbers are complete, reconciled and reviewed.

How we can help

If your books are behind, or you would like someone to set up and review a monthly close routine with you, we would be glad to help. Learn more about our accounting services or contact us to talk it through.

This article is general information only and does not take into account your circumstances. Speak to a qualified adviser before acting on it.