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A financial close is a situation in which all necessary events and conditions related to a financial agreement or process have been fulfilled in some manner, making it possible to take into consideration any draw-downs that may need to take place. The term is often identified with satisfying accounts connected with investments such as currency trading accounts, but may also have to do with the end of period reconciliation that takes place with company payables and receivables. The purpose of a financial close is to make sure all financial documents are in order before proceeding to the next accounting period.
The actual financial close process calls for making sure all documentation related to the enterprise has been executed and posted accordingly. The idea is to make sure all transactions relevant to the period have been addressed, qualified, accounted for, and posted correctly. This includes any activity to waive certain conditions until the next period, provided the activity is properly documented. The end result is the ability to identify both the gross and net balances connected with the financial records, since the process will call for allowing any transactions that have been begun but not yet completed.
One of the chief benefits of a financial close is the opportunity to look very closely at the current status of finances. This approach makes it possible to ensure that all documents have been accounted for properly, that accounts within the records are balancing as they should, and that all in-process transactions that will not be completed before the close of the period are properly recognized and allowances made for the amount of those transactions. From this perspective, the financial close paves the way for entering the next accounting period with a clear understanding of what resources are on hand and which ones are already committed. As a result, the entity is in a much better position to avoid excessive spending that could create hardship.
Many companies manage the process of a financial close using in-house resources. It is also possible to outsource this and other accounting functions to professionals who can manage the detailed analysis of documentation and posting within the records without being distracted by other essential business tasks. Whether managed using employee labor or relying on the expertise of partners who excel at accounting functions, making sure to employ the basic strategy before considering a billing period properly closed will go a long way toward keeping a company accountable for the state of its finances.