Month-end closing

Definition of

Monthly financial statements prepared in accordance with the German Commercial Code (HGB) are a set of financial statements based on a reconciliation of all revenues and expenses for the past month. Like quarterly or semiannual reports, they are classified as “interim reports” and thus constitute a subcategory of annual financial statements.

Is there a requirement to prepare monthly financial statements?

Monthly financial statements are not mandatory. The interim reporting requirement, which has applied to publicly traded companies since 1986, generally involves only semi-annual financial statements as a supplement to the annual financial statements. In contrast to monthly financial statements, the preparation of annual financial statements is mandatory for business owners. The only exceptions are self-employed individuals and small business owners who have generated less than €600,000 in revenue and €60,000 in profit over the past two years. These individuals are only required to prepare a cash-basis income statement.

What are the benefits of preparing monthly financial statements?

Even though monthly financial statements are not mandatory, they are of great importance to many companies. They provide a comprehensive overview of a company’s financial situation and serve as a valuable source of information, particularly for management accounting. If the monthly financial statements reveal negative trends, these are identified early on—rather than only at the end of the year—allowing the company to take prompt action to address them.

In addition, preparing monthly financial statements on a regular basis makes it much easier to prepare quarterly, semiannual, and annual financial statements. Potential errors in these financial statements are minimized because the individual components are already reviewed as part of the monthly financial statements.

In addition, depending on the scope of their operations, these systems enable companies to be nearly ready for closing each month, since all supporting documents from previous months are organized and readily available. This also creates an optimal starting point for audits or tax examinations, which is particularly beneficial for large companies with a high volume of business transactions.

In addition, the monthly financial statements round out a company’s financial records and thus provide transparency to third parties, such as investors.

What are the disadvantages of preparing monthly financial statements?

Despite the advantages, preparing monthly financial statements can present challenges for a company. While annual financial statements are prepared only once a year, preparing monthly financial statements requires time and resources twelve times a year. To ensure that the necessary workload can be managed, it may be necessary to bring in additional staff. If that is not feasible, it may be necessary to reallocate existing internal personnel resources. This can lead to individual employees becoming overburdened or can impair the efficiency of other processes. Ultimately, planning for the preparation of monthly financial statements therefore requires a careful balancing of resources and priorities to ensure that the associated drawbacks can be minimized.

The short intervals between individual monthly closings also mean that the lead time for compiling all necessary documents is considerably shorter than for the annual financial statements. This increases the pressure on the accounting department to obtain all required documents on time. Requesting missing documents—for example, from employees—takes time. If the financial statements must still be ready by a fixed date, there is a risk that they will be incomplete and therefore inaccurate. Furthermore, real-time data is not always available. If invoices are entered only after the fact, the monthly financial statements must be adjusted afterward. This requires additional time.

Components of the Monthly Financial Statements

Like the annual financial statements, monthly financial statements consist of various reports that present the company’s financial position. Since there is no requirement to prepare monthly financial statements—and therefore no prescribed format—they can vary depending on the company’s specific needs and requirements.

The following are typical components of a monthly financial statement:

Monthly Balance Sheet: The monthly balance sheet is a snapshot of the company's financial position—that is, its assets and liabilities—at the end of a given month.

Income Statement: The income statement records revenue and expenses for the month and ultimately determines whether the company has made a profit or a loss.

Cash Flow Statement: The cash flow statement shows the company's cash flows for the month, which reflect its liquidity.

Notes: The notes provide additional information regarding the figures in the balance sheet and the income statement.

Depending on the company's needs, other reports and analyses may also be included in the monthly financial statements.

When should the monthly financial statements be prepared?

There is no mandatory deadline for preparing the monthly financial statements; however, it is recommended to prepare them as soon as possible after the end of the month to ensure that the company’s financial data is always up to date. In addition, preparing the monthly financial statements early enables management to respond quickly to financial developments, identify potential problems, and make informed decisions. Companies have the option of establishing internal deadlines or guidelines to ensure that the financial statements are prepared in a timely manner.

The term“fast close” is used when the monthly financial statements are completed within up to 5 business days after the end of the month. This approach is particularly common among companies where investors or other groups of people need regularly updated financial data to make decisions about future actions. If invoices are received after the close during a “fast close,” they are typically recorded as non-period-related expenses for the following month.

How do we prepare the monthly financial statements?

Especially when a timely preparation of the monthly financial statements has been agreed upon, there is very little time left for this after the end of the fiscal month. If unexpected absences due to illness or other obstacles arise during this period, the deadline cannot always be met. Therefore, it is advisable to begin preparations for the monthly financial statements during the current month. It is important that the process and the assignment of tasks are clearly defined. The following tasks can be completed during the current month to ensure a smooth closing process later on:

Organizing Documents: Incoming documents should be entered promptly upon receipt—rather than waiting until the end of the month—checked for completeness, and, if received in paper form, scanned. This allows errors or discrepancies to be identified and resolved immediately. Checking all documents as soon as they are received increases the likelihood that all records will be error-free by the end of the month.

Timely Posting: In addition , the business transactions from received documents can be posted even before the month-end closing, for example, on a weekly basis. If all relevant transactions are recorded in a timely manner, this enables a smooth closing process. Furthermore, this ensures that an up-to-date, meaningful database is always available, even before the end of the month.

Note the principles of accrual accounting: It is important to apply accrual accounting principles. This involves correctly allocating revenues and expenses to the period in which they actually occur, regardless of when they are settled. To ensure accurate analysis, expenses that occur only once a year but extend over the entire year should be recorded on a monthly basis. These include, among other things, interest expenses and insurance costs.

Accounting for provisions: Posting provisions is also an important step in preparing for the monthly closing. It involves identifying contingent liabilities, recording them as liability items on the balance sheet, and subsequently reviewing and adjusting them during the closing process. This step ensures that potential liabilities are appropriately accounted for.

Recording Depreciation: It is important to record the depreciation of assets throughout the month in order to accurately reflect the company's financial performance.

Create a Structured Filing System: Since monthly financial statements form an essential basis for the annual financial statements, it is essential to ensure permanent, easy access to all documents created. A carefully designed digital filing system will save time and effort in the future.

How is a monthly financial statement prepared?

The monthly closing process—like its individual components—can vary greatly from one company to another. Nevertheless, for the majority of small and medium-sized businesses as well as startups, it can be summarized in the following five steps. The extent to which each of these steps must be completed at the end of the month depends on how much work has already been done during the current month:

1. First, all incoming invoices (accounts receivable) and outgoing invoices (accounts payable) for the previous month are reviewed and categorized to ensure that revenue and expenses have been recorded correctly. If there are any errors in the entries, they must be corrected.

2. Next, all dated entries are transferred to the journal, where all of a company's business transactions are listed in full and in chronological order.

3. In the third step, all transactions are reconciled with the activity in the various bank accounts. The accounts to be reviewed include, among others, bank accounts, receivables, cash on hand, and payables.

4. This is followed by a review of assets and liabilities, including the identification and documentation of current fixed assets and cash on hand. Any changes resulting from acquisitions or transactions should be noted to ensure an accurate picture of the company’s financial situation. Furthermore, all loans should be documented and their repayment history recorded. This is important for minimizing legal risks, creating financial transparency for stakeholders such as investors, and improving financial planning.

5. In the final step, the monthly closing reports are prepared. To do this, all monthly transactions from the various accounting accounts must be transferred to the general ledger accounts. These accounts are then closed and their balances calculated so that these amounts can be transferred to the income statement and balance sheet. The reports are then discussed and analyzed with the budget managers. If the monthly financial statements show significant variances, these must be explained. In such cases, it may also be advisable to conduct further analyses. Once all data is available, the Controlling department can use the information from the monthly financial statements to prepare a list of recommended actions and a forecast.

With our free checklist for the monthly closing process, you’ll get a detailed overview of the individual steps and can work through them using the list. By implementing a standardized workflow for the monthly closing, you’ll save time and minimize the risk of errors.