Financial Close

Financial Close Meaning

Financial close is the process of verifying, reporting, and adjusting the financial accounts at the end of every accounting cycle. It is carried out by every business, corporation, or entity irrespective of its size and is mainly initiated at every quarter's or year's end. It enables businesses to check and comprehend the financial condition at a particular date.

It also helps consolidate accounting data and reports of multiple branches, subsidiaries, intercompany expenses, and growth in multinational corporations. With the help of financial statements, a business can generate historical data and compare trend analysis and Key Performance Indicators (KPIs).

• Financial close is all about accumulating all the accounting reports over a specific period to verify and adjust the accounts.
• The last step of the whole procedure leads to the closing of the books, resetting the account's income statement to zero, and locking the account's balance sheet.
• Primarily, it was done manually and consumed a lot of time. However, using modern technology, this can effectively be carried out through software.
• In the case of a project, a financial and commercial close work concurrently.

Financial Close Process Explained

Financial close is the accounting practice of completing all the necessary transactions and official records and reporting them for a given fiscal period, be it monthly, quarterly, or yearly. Every company, irrespective of its nature and size, carries it out after the sale of stocks and bonds and upon receipt of payments for all goods and services.

As per the financial close, the financial close is considered complete only after all the steps of accounting are accomplished and the statement is reported to stakeholders. These stakeholders include the shareholders, directors, and management. That's when the company books finally close for the period.

The financial close management is the responsibility of the finance and accounting department, which takes care of all the transactions and records and ensures the details are up to date. The process is mandatory for a firm or entity to remain compliant with all standard accounting rules and regulations. Once the board members approve the entries, the company considers a financial close. 

Primarily, the whole process was conducted by accountants and would take one to two weeks, depending on the size of the company. However, the process is now supported and automated with the help of financial close software, which one can use to ensure everything from the consolidation of the data to the reporting of each financial record.

The financial close solutions offer clear and accurate information concerning the financial standing of an organization, which shares the same with its stakeholders and board of directors so that they can make better decisions based on it. Whether to offer dividends is also decided after the close is reached. The process works in compliance with government policies and regulations, thereby ensuring the reporting of their accounting books to concerned authorities for taxation and transparency from time to time.

Checklist And Steps

The financial close checklist that constitutes the eight critical steps for the successful closure of a fiscal period is as follows:

• Identifying transactions: All transactions made are accumulated in this step. A company may have multiple accounts and vivid transactions. A consolidated list is prepared to make it easy to read and understand.

• Recording transactions: Once the transactions are identified, the accountants record them in a journal. This step might be time-consuming, but proper data entry is crucial for the accuracy of the next steps.

• Posting in the general ledger: All the entries are then posted in the general ledger, which lists all past transactions of different accounts of a company. A financial close is based on multiple work and revaluations, as it has to be accurate.

• Creating unadjusted trial balance: The next step is to record the transaction as it is in a trial balance. These unadjusted entries, when listed in a single place, could be serially attended for adjustments as required.

• Reconciling debits and credit: The entries are then reconciled based on their nature as a debit or credit transaction. In this process, the entries in the business records are matched with those in the bank accounts. In addition, the debit-credit sides for respective transactions are compared for accuracy.

• Adjusting journal entries: All the journal entries are further adjusted to ensure that the final value matches and makes sense with all the transaction entries based on the following time.

• Running adjusted trial balance: Before preparing the final reports, the statements and trial balance are rechecked for any error or a human mistake that can disrupt the calculations and accounting.

• Book closing and reporting: This is the final step of a financial close. Here, the companies declare their books closed for a fiscal year. The financial reports prepared and presented to stakeholders inform them of the corporation's growth, decline, or prevailing financial situation.

Examples

Let us consider the following scenarios to understand how the process works in an organization:

Example #1

Suppose Yelena runs a clothing company, and every year since its establishment, the company has shown reasonable growth. She is now planning to launch an initial public offering (IPO) of its enterprise in September 2022, at the end of the US financial year and looking forward to a financial close to understand the economic stability of her company and finally decide whether to launch the company's IPO.

She doesn't have accounting automation installed. Therefore, her company's accountants start the financial close process by identifying the transactions, adjusting journal entries, and finalizing the book closing and reporting. It took the accountant nine days to relentlessly work and report to Yelena with financial statements.

In the end, the detailed report helped Yelena observe good growth in the accounting cycle of her business, and hence, she decided to launch her IPO. 

This example shows how the process helps in the decision-making process of an organization.

Example #2

In 2016, AMAYA Capital Ltd revealed that it was investing in a green project - Azura Edo Independent Power Projects (IPPs) - in Nigeria, as it announced a financial close on the West African power investment. There was a transaction worth $876 million for IPPs, which included $190 million in equity and $686 million in debt from local, national, and international financiers.

It is the second significant investment by AMAYA Capital after Seven Energy, a gas infrastructure company. At the same time, the firm has become a lead sponsor in two companies and has now deployed $3 billion in the gas and power segment in Nigeria's energy sector. The financial close figures reflected the ability of Nigeria to attract investments from major market players despite the unstable economic growth reported from all across the globe. 

Financial Close vs Commercial Close

When it comes to closing records, there are two types of closures found in a business – financial and commercial. Though they might sound similar, they differ widely. Let us have a look at them below:

• A financial closing involves verification and adjustments in a financial statement. In contrast, commercial close is the point of agreement where all commercial conditions are met and a contract is signed.
• While the former is an accounting-based process, the latter is a project-based process.
• The financial close of a project is the procurement of finance. This is what marks the beginning of a new financing contract based on the analysis of financial reports. On the other hand, the commercial close of a project is the point where a contract is signed.
• Both financial and commercial closes are interlinked as these are executed concurrently.

Frequently Asked Questions (FAQs)

Recommended Articles

This article has been a guide to Financial Close and its meaning. Here, we explain its checklist, differences with commercial close, steps, and examples. You may also find some useful articles here –

• Accounting Records
• Accounting For Financial Analysts Course
• Matching Principle of Accounting