Closing out the fiscal year can be daunting for many small business owners using Xero.
This comprehensive guide promises to walk you through the entire year-end closing process step-by-step, ensuring accurate financials and valuable insights to propel future growth.
You'll learn key preparations like reconciling accounts, best practices for generating financial statements, executing closing procedures, and planning activities to leverage your fiscal year analysis strategically.
Introduction to Year-End Closing in Xero
This article provides a step-by-step guide to closing out your fiscal year in Xero. We cover reviewing unpaid bills and account balances, updating your year-end date, generating key financial statements, and other important year-end tasks.
Understanding the Importance of Year-End Closing
Performing a year-end closing in Xero is critical for:
-
Maintaining accurate financial records. Reviewing unpaid bills and account balances ensures all transactions are properly recorded before closing out the fiscal year. This provides a clean slate for the new year.
-
Preparing accurate financial statements. Updating the year-end date and generating Profit and Loss, Balance Sheet, and other reports provides insights into the business's performance over the past year.
-
Completing tax returns. With precise financial statements for the fiscal year, taxes can be filed correctly and on time.
-
Strategic planning. Analyzing full-year financial reports enables data-driven decision making, budgeting, and goal-setting for the future.
Navigating Xero for Year-End Closing
Xero provides several features to streamline year-end closing:
-
The Year End Date field allows you to specify the final date of your fiscal year. This date will be used when generating year-end reports.
-
Tools like Reports, Balance Sheet, Profit and Loss, and Aged Payables provide up-to-date visibility into account balances.
-
Amanda's year-end checklist guides you through key tasks like reviewing unpaid bills, updating account balances, and creating financial statements.
With its user-friendly interface and robust reporting, Xero enables businesses to efficiently wrap up their fiscal year.
How do I close a fiscal year in Xero?
To close a fiscal year in Xero, follow these steps:
-
Go to the Accounting menu and select Advanced, then click on Financial Settings.
-
Under Financial Year End, click on Change.
-
Select your desired financial year end day and month. For most businesses, this would be December 31.
-
Click Done to set your new financial year end date.
Xero will then guide you through the year-end closing process. Here are the key things to check and steps to take:
-
Review Accounts Payable: Make sure all bills and vendor invoices for the fiscal year have been entered and approved. Pay any outstanding AP balances.
-
Review Unpaid Bills: Double check for any unpaid supplier bills that need to be paid or accrued.
-
Verify Balances: Confirm all balance sheet balances are accurate, including bank account reconciliations.
-
Update General Ledger: Review all general ledger accounts and make any adjustments needed, including pre-payments.
-
Run Reports: Print or export final year-end financial reports and statements for your records.
Following these steps will ensure your fiscal year end is closed properly in Xero. Let the software guide you through the tasks and have your books ready for the new year!
How do I process year end in Xero?
Because Xero does not have a formal year end close process, no roll-ups are required. Instead, reports like the profit and loss statement are generated in real-time. From the start of the financial year specified in your Xero setup, these reports will automatically run and reset to zero at the close of the fiscal year.
To prepare for year-end in Xero, here are some steps you can take:
-
Review Any Unpaid Bills: Go through your Accounts Payable and ensure all bills for the current fiscal year have been entered and approved. This gives you an accurate picture of expenses.
-
Confirm Balances: Double check balance sheet balances like bank accounts, credit cards, assets, and liabilities. Make any adjustments needed.
-
Run Key Reports: Download full-year reports for the Profit & Loss, Balance Sheet, General Ledger, and any other important financial statements. Review for accuracy.
-
Set Year End Date: Confirm your organization's year-end date in your Xero organization settings. This ensures all reporting follows your fiscal schedule.
-
Start New Fiscal Year: Once your year end date passes, Xero will automatically start tracking financial data for the new fiscal period while retaining access to past years.
Following these steps helps guarantee you enter the new fiscal year with current, precise financial data across your organization. Let me know if you have any other questions!
How do you lock end of year in Xero?
To lock the end of year in Xero, go to the Accounting menu and select Advanced > Financial settings. Under the Lock Dates section, enter the date you want to lock transactions at for year-end closing. Typically this would be the last day of your fiscal year.
For example, if your fiscal year runs January 1st to December 31st, you would enter December 31st as the lock date. This prevents any changes to transactions dated on or before December 31st.
Once you've entered the lock date, click "Save" and your year-end will be locked in Xero. Going forward, you won't be able to edit, delete or add transactions dated on or before the lock date. This locks in your financials for end of year reporting.
Locking the year is an important step for performing year-end closing tasks like:
- Reviewing and reconciling accounts payable/receivable
- Confirming unpaid bills are accounted for
- Verifying balance sheet account balances
- Checking no transactions are missing from your general ledger
- Finalizing profit and loss accounts
Locking the year provides certainty over your end of year financial figures for tax and compliance purposes. We recommend locking your prior fiscal year several weeks after it ends, once all pending transactions have cleared. This gives you a buffer to ensure no late transactions are excluded.
Can I change my year end on Xero?
You can set the financial year end date (day and month) in Xero's Financial Settings. However, Xero does not have financial "years" as such for reporting purposes. You can manually enter custom date ranges like the 2020/21 financial year when running reports in Xero.
Here are a few things to keep in mind regarding changing the year end date in Xero:
-
The year end date applies to all organizations set up within your Xero account. It is not possible to have different year ends for each organization.
-
When you change the year end, Xero will close off the previous financial year and create a new one starting from the date you specify.
-
Any existing budgets will remain tied to the previous financial year. You'll need to create new budgets for the new financial year.
-
Your chart of accounts, account groups, tracking categories etc. will not be affected by the year end change.
So in summary - yes, you can easily change the financial year end date in Xero to match your business requirements. Just be aware it affects all organizations and resets the financial year reporting.
sbb-itb-beb59a9
sbb-itb-beb59a9
sbb-itb-beb59a9
Pre-Closing Preparations in Xero
Before you can officially close your books, certain preparatory steps are necessary to ensure accuracy and completeness.
Review AP and Unpaid Bills in Xero
Carefully review your accounts payable in Xero to confirm all unpaid vendor bills for the fiscal year have been entered and approved. Double check that invoices match purchase orders, verify any discrepancies, and ensure unpaid bills are assigned to the correct expense accounts. This prevents unexpected liabilities from carrying over into the new fiscal year.
Audit Balance Sheet Balances for Accuracy
Perform an in-depth review of all balance sheet accounts to validate that balances accurately reflect your financial position at year end. Scrutinize asset, liability, and equity accounts. Investigate any questionable values and make adjusting entries as needed. Accurate balances ensure your financial statements reflect reality.
Reconcile Bank Accounts and General Ledger
Reconcile all bank and credit card accounts with your general ledger in Xero. Resolve any discrepancies between your bank statement balances and ledger balances. This confirms that all transactions are properly recorded in your books before closing out the year. Preventing errors now simplifies your year-end close.
Set the Year End Date in Xero Settings
Navigate to Settings > General Settings in Xero and update the financial year end date to match your fiscal calendar. This date determines the last day of the fiscal year for financial reporting. Set it correctly so that your year-end closing and reporting are aligned properly. Choose a future date to ensure you have time to complete closing tasks.
Generating Year-End Financial Statements
Once your unpaid bills, account balances and year-end date are finalized, generate your Profit and Loss and Balance Sheet reports in Xero to review fiscal year performance.
Create a Profit and Loss Account Report
To assess your business's profitability over the past fiscal year, generate a detailed Profit and Loss statement in Xero. Follow these steps:
- Navigate to Reports > Profit & Loss
- Select the date range for the full fiscal year
- Review total sales, cost of goods sold, gross profit margin percentages, operating expenses, EBITDA, net income, and other metrics
- Compare to previous fiscal years and internal targets
- Identify areas of strong or weak financial performance to address
Having an accurate Profit & Loss enables you to make informed, data-driven business decisions and financial projections moving forward.
Review and Finalize the Balance Sheet
Your fiscal year-end Balance Sheet presents a financial snapshot of your business on the last day. To finalize, take these steps:
- Reconcile all balance sheet accounts like bank accounts, accounts receivable/payable, inventory, fixed assets, payroll liabilities etc.
- Review long term debt balances and record any new loans
- Verify owner’s equity account balances
- Scrutinize all calculations and entries to avoid misstatements
- Make any required adjustments for accuracy
- Account for any audit adjustments provided by your accountant
With an accurate, up-to-date Balance Sheet, you can make key assessments of your business's financial health and net worth at year end.
Analyze Cash Flow Statements
Examining your annual Cash Flow Statement reveals useful insights into your business's liquidity and cash management. Be sure to:
- Review cash from operations, investing activities, and financing activities
- Assess changes in working capital elements like inventory, receivables, and payables
- Determine where cash was generated and used over the year
- Check for cash flow gaps or surpluses month-to-month
These learnings allow you to predict future cash needs, identify issues with profitability or collections, and make decisions to improve cash flow.
Assess Other Financial Metrics and Reports
Along with your primary financial statements, analyze things like:
- Sales metrics by product line, channel, region
- Customer profitability analysis
- Accounts receivable aging report
- Inventory turnover ratio
- Fixed asset depreciation schedules
- Operating expense benchmarking
These supplemental reports provide greater context around your year-end numbers and overall financial performance. Identify areas for improvement next year.
Following this comprehensive year-end closing process in Xero leads to financial statements and metrics you can rely on to make sound business decisions. Reach out to your accountant for any guidance needed along the way.
Executing Year-End Closing Procedures
With all preliminary reviews complete, it's time to carry out the actual year-end closing procedures in Xero.
Run Amanda's Year-End Checklist in Xero
Xero provides a helpful year-end closing checklist called "Amanda's year-end checklist" that guides you through all the necessary steps to close out a fiscal year. This checklist ensures you review unpaid bills, balance sheet balances, general ledger activity, and more. Following Amanda's checklist methodically is an easy way to ensure no tasks get missed during the important year-end closing process.
Some key things Amanda's checklist will walk you through:
- Reviewing accounts payable for any unpaid bills and recording accruals
- Confirming all bank account reconciliations are complete and up to date
- Checking balance sheet balances and activity to identify any discrepancies
- Reviewing profit and loss accounts to check for inaccuracies
- Confirming the year-end date to finalize fiscal year financials
Executing all checklist items will verify your Xero data is fully prepared for year-end closing.
Lock in the Year End Date to Prevent Changes
Once Amanda's checklist is fully completed, the next vital step is formally locking in your fiscal year-end date in Xero. This prevents any further changes to the closed fiscal year's financial records.
To set the year-end date in Xero:
- Go to Settings
- Under Organization settings select General settings
- Under Financial year, select the drop down next to Year end date
- Choose the final calendar date of your fiscal year
- Click Save
Locking the year-end date gives assurance that your final fiscal year financial statements reflect complete and accurate data.
Back Up Xero Data for Record Keeping
With your fiscal year closed and year-end date locked in Xero, another best practice is to back up your Xero data for record keeping. This provides a storage copy you can access for historical reporting and ensures your financial records are preserved for reference.
To back up your fiscal year's Xero data:
- Go to Settings
- Select General settings
- Click Back up data
- Choose file format (QBXML or CSV)
- Select date range for backup
- Click Back up
Storing Xero backup files externally provides an archive of your fiscal year accounting data for auditing, filing taxes, or reviewing past financial performance.
Prepare Xero for the Upcoming Fiscal Year
With the previous fiscal year fully closed out, the last step is setting up Xero to begin accounting for the new fiscal year. This includes:
- Checking account balances rolled over correctly
- Enabling invoicing for the new fiscal year
- Updating reporting periods and dates for the new fiscal year
- Making any necessary adjustments to the chart of accounts
Following Amanda's checklist ensures you start the new fiscal year with the same clean slate you achieved from closing out the past year. Maintaining diligent year-end procedures keeps your Xero accounting running smoothly across operational cycles.
Executing structured year-end closing checklists, locking closed fiscal period data, backing up records, and prepping for the new year provides assurance your accounting data remains organized, secure, and error-free. Following best practices for the year-end process in Xero leads to clean financial reporting.
Post-Closing Activities and Planning for the New Fiscal Year
With your year-end complete, wrap up any final accounting items for the fiscal period. Then look ahead and start planning for continued success in the new year.
Finalize Any Remaining Accounting Entries
Ensure that all financial activities are recorded and the general ledger is up to date for the closed fiscal year. Here are some tips:
- Review your accounts payable and receivable to ensure all invoices and bills have been accounted for properly. Record any remaining unpaid customer invoices or vendor bills.
- Make any necessary adjusting journal entries to account for accrued or deferred items. Common examples are accrued expenses like payroll, interest or taxes that have been incurred but not yet paid.
- Record depreciation and amortization expenses for fixed assets.
- Confirm all bank and credit card accounts have been reconciled through the year-end date with no outstanding items.
Analyze Fiscal Year Performance and Set Future Goals
Reflect on the past fiscal year's performance using the finalized financial statements and set objectives for the upcoming year.
- Generate comparative financial statements in Xero to analyze year-over-year trends and metrics. Look at changes in revenue, expenses, profitability, assets/liabilities, etc.
- Identify what worked well this past year, such as fastest growing products/services, most profitable customer segments, areas where you gained market share, etc. Consider how to build on these strengths.
- Pinpoint problem areas that underperformed, such as declining revenue streams, loss-making business units, customers with high acquisition costs or low lifetime value, etc. Develop plans to turn these around or divest.
- Based on this analysis, define clear and measurable financial goals for next year. Common examples are increasing revenue by 30%, boosting gross margins by 5 percentage points, reducing operating expenses by 10%, paying down 20% of debt, etc.
Develop a Financial Strategy for the New Fiscal Year
Based on the year-end analysis, create a financial plan to guide your business's decisions and investments in the new fiscal year.
- Project your income statement, balance sheet and cash flow statement for the upcoming year. Build in your performance goals and business growth assumptions.
- Make decisions on pricing of products and services, taking into consideration your revenue goals and competitive landscape.
- Determine an optimal marketing budget allocation across channels and campaigns to acquire valuable customers cost-effectively.
- Decide which areas of the business to double down on vs. deprioritize based on profitability outlook. This will guide hiring, capital expenditures, etc.
- Establish policies on issues like target gross margins, cost controls, accounts receivable terms, inventory management, etc. to improve financial performance.
Schedule Regular Financial Reviews in Xero
Plan for periodic check-ins throughout the new fiscal year to monitor financial progress and make timely adjustments.
- Set reminders in Xero to review key reports on a monthly, quarterly and annual basis. Examples are the profit and loss statement, accounts receivable aging summary, inventory turnover ratio, customer lifetime value metrics, etc.
- Establish regular meetings with stakeholders to assess financial results compared to budget. Identify any gaps and determine corrective actions.
- Update forecasts as needed based on latest performance. Reforecast full year numbers if there are significant variances observed mid-year.
- Tweak strategies and reallocate resources to get back on track towards meeting fiscal year targets if you fall behind at any point.
Staying on top of your finances with regular analysis and agile course correction will help you achieve your growth and profit goals for the new year.
Conclusion: Embracing Year-End Closing as a Strategic Advantage
Recap of Year-End Closing Steps in Xero
Closing out the year in Xero provides an opportunity to review key financial information and set your business up for future success. As discussed, important steps include:
- Reviewing accounts payable and ensuring all unpaid bills are recorded
- Confirming balance sheet account balances are accurate
- Updating general ledger transactions and settings
- Entering the correct year-end date
- Evaluating profit and loss statements
- Assessing balance sheet health
Taking the time to thoroughly complete these closing tasks creates a solid foundation for the year ahead.
The Value of Accurate Year-End Financials
Precise year-end financial statements allow businesses to make informed, data-driven decisions about their strategy and operations. By having an accurate picture of revenue and expenses, cash flow, account balances, and profitability from the prior 12 months, companies can:
- Identify what's working well and what needs improvement
- Develop realistic budgets and growth targets
- Make changes to increase efficiency and control costs
- Invest resources into productive areas
- Raise funding based on financial performance
In short, a clean closing enables smart planning.
Looking Forward: Leveraging Insights for Future Growth
The clarity provided by the year-end closing process is invaluable for mapping out the company's direction in the new fiscal year. Businesses can capitalize on the visibility they've gained into:
- Profit drivers to expand and maximize
- Loss-making activities to optimize or eliminate
- Customer segments to focus sales efforts on
- Emerging opportunities worth investing in
- Efficiency issues requiring process changes
With these insights, leadership can chart a course for improved financial performance, increased competitiveness, and accelerated growth in the year ahead. The annual closing routine lays the groundwork for strategy and success.
