Closing the year: Our preparations for a smooth annual close

Editor's note: Like many companies, Ramp’s fiscal year ends on Dec. 31, so our finance team is hard at work preparing our annual close. In this article, our Finance Controller Edwine Alphonse shares how she manages the process over the span of five weeks. Access Ramp's free year-end close checklist template.‍

Week 1: Making a checklist

Do all accountants stress over the annual book close? Yes! For a Controller, the annual book close is the culmination of a year of operations. It is like writing the last chapter of your financial book for the year and every element and details need to be thought through. Careful preparation is key to success.

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What needs to be done? The big ticket items that keep me awake include preparing 1099s for contractors and ensuring that our 409A is updated for our stock compensation value. But there are numerous smaller tasks that when added together can overwhelm even the most prepared team. 

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To help me remember everything, I’ve started keeping a running list of the different components of the close. Here’s what is on the list so far.

Accounting close

• Bank accounts and bank reconciliations to be done
• Investments in securities and alternative assets
• Capital expenditures, fixed assets, intangible assets, leasehold improvements and related depreciation and amortization schedules 
• Prepaid expenses
• Customers receivable, allowance for doubtful accounts, etc.
• Deferred expenses, leases, income 
• Other receivables
• Accounts payable reconciliation
• Accrued expenses reconciliation
• Revenue reconciliation
• Review of COGS
• Review of operating expenses
• Equity reconciliation
• Payroll reconciliation
• Equity and stock compensation 

Tax compliance

• Review of the corporate tax situation to ensure that all deductions and credits are being used appropriately.
• W2s for all employees 
• Form 1099s to be sent to contractors
• 3921 - 3922 to be sent to employees or individuals that have exercised their options during the year
• FBAR (if company has foreign bank accounts)
• Sales tax filing (if applicable)

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Next, I’ll share more details on how we’re approaching our accounting close.

Week 2: Clean our balance sheet

Preparing the annual accounting close is a great opportunity to do some bookkeeping clean up our financial statements, in anticipation of our annual financial audit. I like to start with the balance sheet. Here are the questions we run through for different accounts.

1. Cash 

Financial reporting is the story of money, how it's being used, allocated, spent, and collected. Your bank accounts are at the epicenter of any financial statements. Questions to ask your team:

• Do you have a list of all the bank accounts, their rationale, their location and contact information at the bank? No accounts should be “left behind,” including operating accounts, checking accounts, letter of credits, foreign accounts, testing accounts, accounts with restrictions, petty cash funds, etc..  
• Each account should have a raison d’etre. Do you have accounts to consolidate, clean up, or close? 
• Have you prepared bank reconciliations and ensured that consistent recording was done during the year? For most accounts, the process is as easy as updating the monthly reconciliation prepared during the monthly close.
• I am not a big fan of clearing accounts. Do you have unnecessary clearing accounts that you can clean up and empty?
• Do you have foreign bank accounts with ending balances over $10,000? If so, prepare FBAR for tax compliance.

2. Accounts receivable 

This is one of the most important accounts in every organization. Unfortunately in many startups, it is also the most challenging account to manage and understand since it is directly linked to the revenue and collection processes.

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I don't know anybody who is fond of accounts receivable. The best advice is to always keep it tightly reviewed and reconciled to avoid any bad surprises. The key is to build accurate and timely reports that detail activities and support subledger balances. This is a work-in-progress for my team at Ramp; I work closely with our data team along with our engineers to build these reports.

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Questions to ask your team:

• Can you reconcile statements sent to customers with internal reports? Auditors will select a sample of customers from the ledger to confirm this. 
• Have you reviewed estimates and assumptions related to bad debts and provision for losses?

3. Investments

I prepare an inventory of the different types of investments held by the company. Each type has its own set of considerations, leveling, and financial reporting disclosures. Questions to ask your team: 

• If you have parent and subsidiary entities, have you reconciled the balance of investments in the parents to the balance of contribution received in the subsidiaries?  Luckily at Ramp, this process is simple since there is a limited number of subsidiaries.
• For investments in fixed income, have you listed the maturity, rate, dividend, and interest income earned during the year? Make sure the income earned is properly recognized and classified. Investments held to maturity carry distinct reporting and measurement than investments held for sale. Discuss these subtleties with your technical accounting team or auditors. 
• Do you have other alternative investments such as cryptocurrencies, real estates or other startups? These investments are usually challenging to fair value and can annoyingly burden your annual audit. You might wish to reconsider the investment and if it makes sense fiscally to get rid of them. Believe me, that will save you hours of painful documentation with your auditor.

4. Prepaid expenses

I hate wasting time on prepaid assets, but staff accountants and junior auditors spend a lot of their time reviewing these capitalized expenses.

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Setting up a prepaid policy at the beginning of the year or period can save you a lot of time. For example, at Ramp, we don't categorize any long-term expenses under $5,000 as prepaids. As the company grows, this threshold will be adjusted as needed.

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Questions to ask your team: 

• Do you have a prepaid policy in place?
• Are you using a consistent daily or monthly formula to record the expenses over the different accounting periods for all the different vendors?

5. Fixed assets, intangible assets, and goodwill

For fixed assets: 

• Do you have a consistent fixed assets policy for capitalization and depreciation? It will save you significant time at the end of the year. 
• Do you have a fixed asset capitalization threshold? We use one at Ramp to lighten our reconciliation work since the company is adding new employees and assets daily. There is still a lot of room for progress and consistency, and I plan to spend some time preparing an initial reconciliation and fixed asset roll forward per category to support my auditors and tax preparers (the fixed asset schedule is a must during the tax preparation process).

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For intangible assets and goodwill, you’ll need a more technical analysis. Due to the conflictual judgmental and technical nature of the account, get a subscription to the AICPA website and have a good technical discussion with your auditor. Questions to ask your team:

• Do you need to assess any potential impairment on these assets? At Ramp, we do, given our M&A activities. 
• Do you understand the strict measurement and disclosure requirements for goodwill? 

6. Other receivable and assets

Are there other deposits accounts, employee loans, and assets that fall outside the previous categories? The end of the year is a good time to take a closer look at these assets and recategorize them based on the use of the assets. Make sure that you have on file all the appropriate documentation for any significant transactions.

7. Accounts payable and accrued liabilities

• Are there invoices you can pay before the end of the year, in accordance with your cash flow management policy? The less invoices that are left unpaid, the less stress in the new year and the less inquiries from auditors. A clean AP ledger makes the process easier as well. 
• Are invoices properly categorized? Thanks to our finance automation software, we’re able to ensure that 99% of our invoices are categorized at the time of payment. 
• Have you determined your accrued liabilities? With Ramp, I have an updated overview of what invoices and vendors have been paid in real time, which makes this process less painful. 

8. Other liabilities

This reservoir category usually doesn't carry a lot of risks but can require a lot of hours for reconciliation and understanding. I try to create the documentation for these accounts as they are being established. The end of the year is a good time to review the calculation of any deferred lease benefit (or the accounting on leases), or any liabilities and notes that the company might have.

9. Equity

Equity is by far, the most important section of the financial statement and my favorite accounting category. It's technical, revealing and unfortunately often overlooked. Controllers usually devote a lot of attention in managing the equity section, either through leading the 409A process, maintaining the cap table or preparing the assumptions needed for stock compensation. Questions to ask yourself: 

• Do you have equity transactions to review with your legal counsel? Do you need to update your Statement of Shareholders’ Equity? 
• Have you reconciled your accounting ledger with your cap table? I create different accounts for each fundraising round. 
• Have you separated different additional paid-in capital accounts (APIC) to facilitate the reconciliation process? 

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Since equity and stock compensation carry considerable disclosures and usually command many pages in the financial statements, be prepared to spend a lot of time and sweat on this category.

Closing thoughts

A clean balance sheet is the sign of a good accounting function and leads to an easy audit. In a fast paced startup and many competing priorities and daily fire drills, this is, of course, wishful thinking. While setting the right accounting policies at the beginning is important, the end of the year is usually the best time to do all the cleanup work needed for the balance sheet.

Week 3: Review our income statement

This week, we're reviewing our income statement. The annual close on the income statement is usually pretty straightforward if you've been following a monthly close process that involves a review of all significant accounts. Here are a few questions to keep in mind as you review each part of your statement.

1. Revenue

• Do you have an understanding of the different revenue lines in the company? 
• Are you recording revenue gross or net? Why?
• What is the revenue recognition policy for each revenue line? Do you have any multiple deliverables agreement? Any alignment to be done with ASC 606? If you work with auditors, have they blessed your policy?
• Are there any doubts about the collectability of revenue already recorded?
• Have you reviewed revenue balances month-over-month for consistency in recording the transactions?
• What explains swings in revenue during certain periods or months, if there are any?
• Are there any “miscellaneous revenue” or “other revenue” categories that need to be reclassified or documented? 

2. Cost of services or products (COGS)

• Is there a good mapping of the cost of services or products? 
• Is there appropriate documentation of what should be included into COGS as per the company’s operating model?
• What is included in these categories? Any allocated payroll expenses? Any allocated operating expenses?
•  Have you applied the classification to COGS consistently?

3. Operating expenses

• What is the categorization for operating expenses? At Ramp, we have categorized these expenses by functions such as 1) Research and development expenses, 2) Sales and marketing expenses and 3) General and administrative expenses.
• Is your mapping consistent during the year? Are vendor invoices booked consistently in the same account throughout the year?
• In what buckets are all the various expenses recorded? What are the miscellaneous expenses that should be looked at?
• Did you perform a reasonableness test on some monthly recurring expenses? For example, rent expenses should be consistent month over month and a quick reasonability calculation can be done to determine if the balance of the account is correctly stated.
• Did you prepare a payroll reconciliation? Payroll is the most significant expense for any company and also the most predictable one. Auditors usually require a payroll reconciliation for their audit and maintaining a monthly payroll reconciliation is a good starting point.
• For expenses that require separate disclosure, such as advertising and stock compensation expenses, have you reviewed these accounts?
• Are non-expenses properly stated? Always make sure to review depreciation and amortization expenses as these balances are usually reviewed for tax purposes.

4. Other income and expenses

• What expenses or incomes are booked in this category? “Below-the-lines” balances are always scrutinized, so it is important to review what is included in this section of the income statement and to ensure that they are outside of the operating functions of the company. 
• If interest/dividend balances are presented there, ensure that they are presented appropriately.
• Did you review the latest US GAAP guidance on where extraordinary expenses such as restructuring expenses and severance payments should be recorded?

Don't forget to discuss presentation

Last but not least, be sure to discuss the overall presentation of the income statement with your management team. The income statement is a financial display of the management’s performance. Management should be fully comfortable and committed to the presentation and understand that it should stay consistent year-over-year. Once a presentation is agreed upon, it should not be changed in subsequent years unless there are significant reasons to do so.

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Next, we'll turn our attention to everyone's favorite topic: tax compliance.

Week 4: Tackle tax compliance

Tax is usually the afterthought in the annual close process. This is ironic because taxes are the end result of any financial reporting. Applying the same review rigor to all the different components of your tax compliance is a must for any successful accounting team. This week, I'm focused on the to-dos below, with the support of our payroll accountant.

1. Preparing W2s

If you have employees or if you are an employee, you know how important W2s are and how crucial it is for them to be accurate and timely (you don’t want all your employees to conspire against you around tax filing time). W2s for 2021 are due by January 31, 2022.

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Usually W2s are processed and posted by the payroll providers. However, the accounting department is responsible for making sure that their contents are accurate and complete. With the assistance of the People Ops team, we review all the personal information and any address or name changes to ensure that the data imprinted in the forms is accurate and complete. We also ensure that stock compensation activities, such as grants, exercises, and vesting, are properly included and proper calculations were made for payroll tax withholding. 

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Additionally, because Ramp offers a suite of fringe benefits to our employees such as wellness, working-from-home, and education allowances, we need to ensure that these benefits (for the employees who use them) are properly reflected in the W2s. To prepare for this task, we issue these benefits via a card program in Ramp that properly categorizes to the fringe benefits general ledger. At the end of the year, we run a report on fringe benefits expenses by employees and provide that report to our payroll provider.  

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The payroll reconciliation that I mentioned in the income statement review is of vital importance in making these steps easier.

2. Preparing 1099s

1099s are used to record non-employer income earned by a taxpayer. Most companies have contractors that offer them different services or provide them with needed products. No company can pretend to have a flawless 1099 reporting process. If you do, I'd love to have a chat with you.

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Needless to say, we've made the reasonable decision to outsource this process to our external accounting firm. Under my direction, they'll compile a full list of vendors that we paid during the year and confirm that there is an updated W9 or W8-BEN for each vendor. I anticipate this compilation task to be challenging since we paid contractors through different means in 2021 and we did not consistently require our vendors to provide us with the needed forms. In the case that there is no W9 or W8-BEN, they will contact the vendor to obtain the form. Once the forms are completed, they will prepare a 1099 for any vendor whom we paid more than $600. We'll also review that any relationships that received referral payments or other types of compensation are listed and provided with the forms.

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It does make perfect sense to outsource this process as much as possible if your accounting team is small and already engaged in other more important close procedures. The deadline to send the forms is also January 31, 2022.

3. Reviewing the Cares Act Provision

Given the times that we are in, I suggest paying special attention to understanding how the Cares Act Provision impacts your company. If PPP loans were received and forgiveness were applied for, discuss their IRS guidelines with your tax advisor. At Ramp, we're looking closely at our Social Security deferral and ensuring that half the balance is repaid before the end of the year. We'll also review the provision to ensure that any interest is to be imputed if needed and that a repayment schedule is planned for the remainder of the deferral.

Don't forget

• Issued stock option exercises? You'll need to prepare the forms 3921s and 3922s. Again, this is a process that can be outsourced to a knowledgeable counterparty if your accounting team is stretched thin. The deadline to send the forms is—you guessed it—January 31, 2023.
• FBARs for foreign bank accounts are due later in the year on April 15, 2023 and, if you file a tax extension, on October 15, 2023. However, I think that FBARs can be prepared early in conjunction with the review of the bank accounts and bank reconciliations.
• You can kick off work on your R&D tax credit while preparing your payroll reconciliation. An accurate categorization and accounting of employees by department and tasks will help significantly with the calculation. Also ensure that you have supporting documentation for all the research and development activities that can be reported. Although we did use an external provider for this task for 2020, I am thinking about moving the work internally since we did significant work during the year to clean up our recording by department. 

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Above all else, remember to consult with tax advisors and accountants to get the latest updates on tax regulations and requirements that might affect your annual close process. There are numerous pieces of pending legislation that can affect your tax filing. It's important to understand them before finalizing the financial close process so you can make the appropriate adjustments to your financial statements.

Week 5: Close as a team

There are a lot of steps involved in preparing the annual close.

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Here's the key to getting them all done: Not everything can and should be done by your finance team. Indeed, the most detailed list and thoughtful process can go awry without the proper work distribution, prioritization, and support system.

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While creating our task lists, we did a thorough inventory of our resources, the “whos” behind the “whats.” How can the different tasks be distributed? One of the first things we did was to create an allocation plan outlining what can be done externally, what can be automated, and what should be done internally. We prefer to use as much automation as possible. For example, we're relying on our equity software for the preparation of the 3921s and focusing on ensuring the integrity of the data. We also allocated certain recurring and simple tasks, such as the preparation of 1099s and the recording of payroll entries and bank reconciliations, to our external accountants. Last but not least, we worked closely with our data and engineering team to generate all the reports and information needed for the close.

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Prioritization is also crucial. Be realistic and focus on what should and needs to be done instead of what you want to get done. For example, it might not be realistic and fair for the team (and to yourself) to implement an ERP in the final months of the year, no matter how smart it is to have a clean start of the year. As we're contemplating our ERP transition in 2022, we've decided to schedule that project to the springtime, after our audit deadline.

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The annual close is a process that involves the whole organization, not only because it is a financial report card for the company, but also because every employee’s story is ultimately digitized in this report as the result of receiving financial compensation. Management's support is necessary to anchor and solidify the process. Luckily at Ramp, given the nature of our products and services, the whole company supports and follows our financial and accounting processes. I see our finance team as the first customer and beta tester for Ramp's platform. Not every accounting department has a comparable privilege, and accordingly controllers and their team need to educate and train their stakeholders. Take pride in your annual close and emphasize your role and the importance of the process. It is not a boring and routine exercise. Quite the contrary, it is exciting and unpredictable!

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And because of this unpredictability, especially at startups, you'll need to prepare yourself for the first trimester of the financial year. During the holidays, take the time to rest and celebrate all the challenges met in the closing year and all the achievements. I will be taking the week off and celebrating the holidays with my family in the sun. Happy holidays and happy New Year!

Your turn

How do you prepare for your annual close? Do you have a checklist that you prepare? What accounts or tasks give you the most headache? Tell us on LinkedIn.

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The information provided in this article does not constitute legal or financial advice and is for general informational purposes only. Please contact an attorney or financial advisor to obtain advice with respect to the content of this article.