Under a hard close (also known as a fast close), organizations audit and “close the books” after a set period of time. For most organizations, the time period coincides with the end of a month, quarter, and year. The term “hard close” is meant to describe the situation in which all of the transactions for the period (based on the transaction date) have been processed and there is no more financial activity allowed for that period.
The “hard close” process may have a number of steps and specific actions that vary depending on the business or organization, but the accounting team generally reviews the figures and checks all of the organization’s financial records for the time period. These can include revenue and expense accruals, overhead allocations, and updating reserve accounts.
Soft closing methods and flexible accounting allows the books to remain open longer. Soft closes generally mean the accounting team does basic auditing and skips the hard close steps. This allows them to have some measure of confidence in their books and to get back to their usual tasks sooner.
Hard Close Advantages & Disadvantages
The hard close takes longer to perform because there are many detailed steps involved. The accounting team must divert more attention and resources away from their day-to-day tasks to process the financial statements. So why would an organization choose to use a hard close?
There is one substantial benefit of hard closing that overshadows all of the drawbacks. A hard close is more accurate. Flexible accounting and soft closing are more ambiguous during the period the books are left open and more prone to errors when entries are added at a later date. Under hard closing, the books are closed so there is no possibility of future financial data changing the numbers. This substantially increases the confidence the business has in their accounting data and allows for quicker and better decisions.
How Often Should I Do a Hard Close?
Some organizations do soft closes every month and do a hard close one month before the end of the fiscal year. This allows the accounting team enough time to perform the tasks associated with hard closing before the fiscal year ends. Then they only have to audit the remaining month and plug in the numbers. Organizations typically do at least one hard close per year for tax purposes. Companies that must report to investors, regulators, or banks generally do them more often.
While a hard close takes more time and resources from your accounting team, it’s an essential task all companies must manage. Cougar Mountain Software’s Denali Accounting system can help your team perform their hard close and auditing tasks quickly and accurately.