Monthly Closing

What is a monthly closing?

Monthly closing (also called month-end close) is the orderly closing of the bookkeeping for a calendar month. All business transactions of the month are recorded, the material accounts are reconciled, and expenses and income are accrued to the correct period. Accruing means assigning each amount to the month to which it economically belongs, regardless of when the invoice or payment arrives. Someone who buys an annual bus and train pass in January has not used up twelve months of journeys in January, but one twelfth each month. The result of the monthly closing is an interim set of figures made up of the income statement, the balance sheet and the liquidity position, which is kept methodologically as close as possible to the annual financial statements.

Only the annual financial statements are required by law. The monthly rhythm, however, is already set by the VAT advance return (Umsatzsteuer-Voranmeldung) and the payroll tax return (Lohnsteuer-Anmeldung). As a rule they are due by the tenth day of the following month; the VAT advance return, with a permanent extension of the deadline (Dauerfristverlängerung), one month later. The monthly closing goes further: it is the basis for management by the managing directors and for reports to investors and banks. In every funding round and every due diligence, investors and buyers require current monthly figures.

Preparing a monthly closing: process and checklist

1. Complete recording as at the reporting date: All outgoing and incoming invoices, bank statements and payroll postings of the month are booked; services are assigned to the month in which they were performed (cut-off).
2. Reconciliation: Bank accounts with the bank statements, lists of unpaid customer and supplier invoices (open item lists) with the control accounts, VAT accounts with the advance return; clearing accounts holding amounts not yet assigned are cleared up.
3. Accruals: Posting of the month's recurring and one-off accruals.
4. Plausibility check: Comparison with the previous month, the previous year and the plan; conspicuous deviations are explained before sign-off.
5. Reporting package: Income statement, balance sheet, liquidity, key figures and budget-versus-actual comparison with brief commentary, that is, the core of management reporting.
6. Review meeting: The managing directors discuss the figures and decide on measures.

The most important accruals

Prepaid and deferred items (Rechnungsabgrenzungsposten, Section 250 of the German Commercial Code, Handelsgesetzbuch, HGB) spread amounts paid or received in advance over the months to which they economically belong, such as annual insurance premiums or annual licences invoiced in advance. Provisions record expenses attributable to the month whose invoice or payment is still outstanding: services received without an invoice, pro rata annual bonuses and a pro rata share of the costs of the annual financial statements. Depreciation is booked monthly instead of once at year end. Completed and accepted services that are not invoiced until the following month belong in the month of performance as revenue.

Quality criteria: speed, completeness, consistency

Speed measures the time from month end to signed-off figures. According to a widespread rule of thumb, a closing by the tenth working day of the following month is considered solid; well-organised finance functions manage five working days (fast close). The prerequisites are documents booked on an ongoing basis, a checklist with fixed responsibilities, templates for recurring accruals and a materiality threshold below which no accrual is made.

Completeness means that all material accruals are booked and every balance sheet account is backed by supporting evidence. Adjustment postings after the report has been sent are the exception. Consistency requires that accruals follow the same rules every month, because only then are time series comparable. The overall verdict comes at the end of the financial year: if the sum of the twelve monthly results deviates only slightly from the annual financial statements, the monthly closing was reliable.

Worked example: accruals in the monthly closing

A software company with 35 employees reports a provisional result of EUR 48,000 for June after all documents have been recorded. Five accruals are booked in the monthly closing:

• Annual licence of EUR 36,000, booked in full as revenue in June, term starting in June: EUR 3,000 relates to the month, so minus EUR 33,000 must be deferred
• Pro rata annual bonuses for June: minus EUR 7,000
• Hosting and external developers for June, invoices not yet received: minus EUR 6,500
• Monthly depreciation, previously booked only at year end: minus EUR 2,500
• Implementation project completed and accepted in June, invoice not until July: plus EUR 9,000
• Result after accruals: 48,000 minus 33,000 minus 7,000 minus 6,500 minus 2,500 plus 9,000 = EUR 8,000

Before the accruals, the month appears six times as profitable as afterwards. The EUR 33,000 deferred is not lost; it is recognised as revenue in the following eleven months at EUR 3,000 each. Without accruals, June would overstate revenue and the other months would understate it. Investors therefore check whether the monthly results add up to the annual financial statements.

Monthly closing in investor reporting and in transactions

After a funding round, the participation agreement or shareholders' agreement usually provides for information rights of the investors. These include monthly or quarterly reports within a fixed deadline, a budget-versus-actual comparison against the annual budget (budgeting) and the annual financial statements. Independently of this, every shareholder of a GmbH (German limited liability company) can demand information and inspection of the books and records (Section 51a of the German Limited Liability Companies Act, GmbHG). The regular investor update and the review of the financial ratios that banks agree as conditions (covenants) in loan agreements build on the monthly closing.

In a transaction, the quality of the monthly closing counts twice. During due diligence, new months accumulate that must fit the figures already reviewed. In a company sale, the monthly balance sheets form the basis for the analysis of working capital, that is, the capital tied up in ongoing operations. A reliable monthly closing can also serve as the reference balance sheet for a locked-box mechanism, in which the purchase price is fixed on the basis of a balance sheet before completion. The business management evaluation (BWA, betriebswirtschaftliche Auswertung) and the trial balance that investors request are produced from the same monthly figures.

Distinction: monthly closing, BWA, annual and interim financial statements

• Business management evaluation (BWA): a standardised condensation of the booked position. Without booked accruals, it shows what was booked, not what economically belongs to the month.
• Annual financial statements: required by law, with stocktaking, full valuation and, for corporations, usually notes to the accounts. The monthly closing is an internal, simplified picture under the same principles.
• Interim financial statements: financial statements as at an intra-year reporting date, often at quarter or half-year end. In transactions, they are sometimes reviewed by an auditor in a limited review and then serve as the reference balance sheet.

Common mistakes

• Not accruing at all. The month then mainly reflects payments and invoice dates and fluctuates for no economic reason.
• Accruing differently every month. Changing methods destroy the comparability of the months; consistency matters more than accuracy in an individual case.
• Accruing to the exact euro. Without a materiality threshold, the closing is not finished on time.
• Annual prepayments as monthly revenue. Especially in subscription models, immediate recognition overstates the revenue of the invoicing month and distorts growth rates.
• Adjustment postings after the report has been sent. Several versions of the same monthly figures weaken investors' confidence faster than a deviation communicated openly.
• Closing without a review meeting. Figures that lead to no measures do not justify the effort.

Frequently asked questions

By when should the monthly closing be available?

As a rule of thumb, by the tenth working day of the following month, and after five working days where processes are well established. Figures that arrive later are of little use for management, because by then half of the current month has already passed.

Is a monthly closing required by law?

No. The HGB prescribes only the annual financial statements, and tax law the monthly or quarterly tax returns. Whoever closes monthly under the HGB, however, applies the same rules, above all the assignment of expenses and income to their period (Section 252 (1) no. 5 HGB). An obligation to produce monthly reports often arises from loan agreements or from the information rights in participation agreements.

Who prepares the monthly closing?

Postings are made in the bookkeeping department or by the tax adviser. The information for accruals comes from the business units, for example on project status or open purchase orders; sign-off and commentary lie with the managing directors, the finance lead or controlling.

Is a monthly closing worthwhile for smaller companies too?

Yes, in reduced form. A few standard accruals such as depreciation, bonuses and outstanding invoices often cover the largest part of the distortion.

Which monthly figures do investors require in due diligence?

As a rule, the monthly results and monthly balance sheets of the last 2 to 3 financial years and of the current year. They must be reconcilable to the annual financial statements.

The Roemer Capital view

A funding round typically takes 6 to 8 months, a company sale 6 to 12 months. During this time, investors and buyers ask for every new month. A closing that reliably arrives within the first working days keeps the process moving and prevents reviewed figures from becoming outdated.

As part of its fractional CFO services, Roemer Capital therefore sets up the monthly closing as a fixed routine: checklist, standard accruals, reporting package with budget-versus-actual comparison and commentary for the managing directors and investors. The postings remain with the bookkeeping department and the tax adviser; Roemer Capital makes sure that their figures become a report that withstands the reporting expected after a round.