Continuous Close – Why It’s Important
Let’s face it — these days, everyone is used to getting information quickly. Hands now more than ever, information is expected to be almost instant. Unfortunately, within the world of business finance, real-time information is often scarce. One reason for this is the relatively slow process of tracking corporate expenses. Not only is the P2P process paperwork-intensive, but in many situations, there are also receipts for staff reimbursements. Every item must be documented carefully before your business can report financial transactions.
Fortunately, technology has opened up new horizons for corporate budget tracking and reporting purposes. In particular, the continuous close technique means that businesses can have verified financial information in real-time, or at least within a day. Armed with this information, line managers and management alike can make important decisions that impact corporate operations.
In the US, this process has several names, such as real-time reporting. However, we will use the more traditional accounting term “continuous close.” Let’s take a look at this technique, why it’s important, and how it can help benefit your accounting department.
Continuous Close Explained
Traditionally, companies close their books once a month and again at the end of the year. This process takes a long time, and it involves reviewing every bank statement and credit card bill that arrives each month. The information on these documents is compared to internal records, such as invoices, receipts, and ledgers. Then, accountants and bookkeepers will find and correct any errors.
What’s important to note here is that this reconciliation and closing process takes place at specific times. The process only reflects the accounts at whichever point the statement-issuing institution closes the month. So, you might have a credit card bill that’s issued every 15th, the rent paid on the first, and a supplier invoice that had to be paid on the 20th.
What this means in practice is that the monthly close has information that’s already out of date.
By contrast, continuous close is a process whereby records are constantly being compared with bank records. The rise of online banking, P2P procurement software, and accounting automation tools have made it possible to calculate a company’s effective cash position in real-time.
The reason this works is that the continuous close technique posts each item as it happens. That means, for example, that if your company pays a $500 invoice on Wednesday, the continuous close system recognizes this transaction on Wednesday. From there, the accounting software already knows that $500 is no longer available from your company’s bank account, and it also knows which budget item the expense came from.
Likewise, it’s possible for companies to track payroll expenses before they’re dispersed to employees. That’s because each employee, on average, is owed a specific amount for services per day. Using this technique, your accounting system can “anticipate” the daily labor expenses. Then, this anticipation is “corrected” at the end of each pay period.
Why Is Continuous Close So Beneficial?
There are several reasons why the continuous close technique can be beneficial for your process. Some of these involve real-time reporting, while others involve accuracy and staffing issues.
Knowledge Is Power
While companies have been used to analyzing their data once a month, the limitations of delayed reporting mean that it’s less valuable for strategic planning. For example, if your company’s overspending on office supplies, then the bean counters may not know until it’s very late. By that time, you might have a large supply of office supplies built up and not have the budget available for other things.
Likewise, in a vastly changing economic environment, it’s sometimes necessary to pivot quickly. For example, rising commodity prices may force a re-evaluation of budgets or even force that dreaded price hike. The sooner your financial team makes these changes, the better you will be able to maximize profits and minimize liabilities.
Increased Efficiency
Likewise, continuous close and the required technologies help make your team more efficient. For example, this type of advanced financial reporting requires that most data points be placed in a computer program as soon as possible. Furthermore, your company’s ERP or other linked applications will likely place the bulk of your transactions straight into the necessary accounting software. Combined with online access to financial accounts, most of the reconciliation process happens automatically.
Considering that the posting and comparison of transactions manually take a lot of time, automation and continuous close provide significant cost savings.
Help With Business Financing
Whether you’re looking for venture capital or a business loan, funders like to know that your business is in good shape financially. While some lenders may only be satisfied with end-of-month documentation, using the continuous close technique may help streamline the loan application and funding process. And even if you have to wait for “final” numbers, you can at least work with a banker on preapprovals.
Similarly, the continuous close process helps demonstrate to funding sources that you are responsible with money management. Almost nothing beats a business profile where the management knows where every penny is by the end of the day.
Continuous close empowers your staff
A major reason why workers may hesitate to enter the accounting or bookkeeping professions is its reputation for boring, repetitive tasks. Although many accounting tasks will remain manual processes for the immediate future, bookkeeping automation and the related continuous close will help reduce this aspect of working in finance.
Because your staff will not need to do as many repetitive tasks, they will be free to do high-value tasks instead. For instance, there may be more time to find cost-effective solutions to your business’s large expenses. Similarly, they can become part of your strategic financial planning more than ever before. Who knows? You might even reduce the need for outside consultants.
Final Thoughts
Especially in our modern environment of information now, continuous close will continue to be an important accounting trend. Especially for startups and smaller enterprises, having financial information almost in real time is incredibly valuable. Not only that, but it frees your staff to perform higher-value tasks. Once you have the technology set up for this important development, you’ll never go back.
Pranab Bhandari is an Editor of the Financial Blog “Financebuzz”. Apart from writing informative financial articles for his blog, he is a regular contributor to many national and international publications namely Tweak Your Biz, Growth Rocks ETC.
