Financial Closure is a stage when all the conditions of a particular financial agreement are fulfilled prior to initial availability of funds. It is accomplished when all the tie-ups with banks or other financial institutions for funds are made, and all the conditions precedent to the initial drawing of debt are satisfied.
One of the important stages in a project’s life cycle is to finalise the financial closure.
To provide clarity on the interpretation of the term ‘Financial Closure’, the Reserve Bank of India (RBI) has come up with a definition. For Greenfield projects, financial closure has been defined as “a legally binding commitment of equity holders and debt financiers to provide or mobilise funding for the project. Such funding must account for a significant part of the project cost, which should not be less than 90 per cent of the total project cost securing the construction of the facility”.
The completion of these following steps refer to a financial closure
- The finalization of the ‘sources of finance’.
Sources of income include things like equity shares, debt ventures, venture capital, etc.
- The amount of loan, syndicated loans, guarantee formalities, etc.
- The fixation of terms and conditions.
The fixation of the rates of interests.
- The release of funds.
- Deciding all the repayment schedules.
- The execution of loan agreements.
The process of Financial Closure includes the reviewing and reducing of the account balances before the accounting cycle closes. At the end of every month, businesses must close off the current period. They do it by documenting the transactions such that all the financial statements are in accordance with the accounting methods.
The process includes information from multiple departments within the business. Congestions need to be avoided to do it efficiently.
There are four mandatory steps which shall be followed in this particular process:
- Revenue Account Closing – This is the transfer of all credit balances to the Income Summary.
- Expense Account Closing – Implies the transfer of all debt balances to the Income Summary.
Note – Income Summary is a temporary account in which the balances of the revenue and expense accounts go to at the end of the accounting period. The net balance in the income summary is the profit or loss of the current period
- Income Summary Account Closing – The transferring of the balances of the Retained Earnings account.
- Dividends Account Closing – It is the transferring of the debit balances of the Retained Earnings account.
The whole procedure of these transactions ought to be done precisely. Any mistake can lead to costly compliance risk. The accuracy of the financial data is a must at all levels.
As time progressed, the Chief Financial Officers (CFOs) of the businesses and their financial teams have faced increased pressure and with the regulations getting stricter, they are pushed to give the output more quickly and precisely. The financial departments have adopted the financial technology to help keep up with the ongoing processes of the oversight of business management, transactions of the data-heavy landscape of information. The replacement of automatic tools in place of humans make the month-end processes more streamlined and precise.
Previously, the process took place across numerous spreadsheets and demanded an enormous amount of manual effort. But now, it can be completed within a matter of a few minutes with the newer innovations of financial technology and automation. Automation has altered the ways of financial processes that provide the reassurance that financial accuracy has been achieved, which leads to lower compliance risks and better decisions for the future.
In the movement of transactions across the ledgers and the preparation of documents, financial teams undergo pressure to complete the financial procedure accurately and on time each month. Automation makes it easy. The procedure’s prime goal is to be accurate and prompt. The process becomes seamless. It can never be forgotten because it has been programmed to take place at a particular time in a correct format and then be sent to the correct authorities on its own.
As technology continues to support the financial teams, continuous accounting helps the businesses as a newer approach to accounting methods. With the help of intelligent reporting and data management, continuous accounting gives the company an accurate and real-time insight. The software tools store data as it happens and is accessible to those who need to work with it. In today’s business environment, the old school model of record-to-report to provide monthly, quarterly and annual financial reporting is not adequate. With a non-stop business comes the responsibility of unending work for the financial departments. They need to be up to date with all the transactions to make the monthly reporting as soon as possible.
Leveraging different financial technologies, integrating data from various sources, automating the financial closure processes, continuous accounting renders the whole procedure more efficient and accurate.
When all the data is in one place, the chances of mistakes come down to a minuscule. The teams don’t have to work through long and complicated financial closure checklists. The automation technology increases data accuracy and lowers the compliance risk. It also reduces the time spent on producing necessary accounting reports. The saved time can be spent on analysis. Finance teams have the leverage of these easy-to-access statements rather than the outdated bookkeeping method. This, in turn, leads to better-informed business decisions, a reduction of costs and an increase in the company’s bottom line.
The external auditors can get quick access to audit trails and economic history. Paper trails are messy and would take a lot of time. With the proper software tools at hand, the trails do not get messy. It is easy to locate information when anyone asks for documentation and saves a lot of time for the finance teams during the audits. The finance teams can indulge themselves in the greater tasks of analysing and providing valuable insights to different business units in the saved time than performing the mere task of data entries. The finance teams will then be strategic advisors and analysts rather than being simple bookkeepers and auditors which will work in favour of the company.
Experts say that there are few things which you should always keep in mind regarding the financial closure. They are
- Do not procrastinate.
- Your financial statements should always be kept organised.
- Record keeping needs to automate.
- Enumerate all the deductions
Data is the prime subject of financial closure. The accuracy of the stored data must be taken into account daily. To have an easier month-end financial closure, you need to store data accurately throughout the month and automation helps in it.
Starting from financial consolidation to financial reporting and everything in between, the cloud technology system has changed how business complete the financial closure at the end of the month. Introducing new financial software automation solution requires some strategic change management and the buy-in of all relevant parties, but once the benefits are well-known and widely communicated, there should be no reason why the introduction of a software solution would go unwanted.