For businesses to track and report on their financial performance, they need to follow a specific set of steps that verify the accuracy of their financials. These steps are referred to as the accounting cycle, a holistic 8-steps procedure of recording and processing a company’s financial activities. The process, often referred to as ‘record to report’ or R2R, begins when a transaction occurs, runs through its inclusion in the financial statements, and ends at the closure of the account. This process ensures that all the finances within an organization are accounted for throughout the accounting period, thus protecting investors from fraud.
Eight Steps of the Repetitive Accounting Cycle
1. Identification of transactions
Your accounting cycle begins when you identify financially applicable business transactions, meaning those that involve the collection or disbursement of money. This process usually requires the involvement of multiple departments across various systems within the organization. Additionally, the collected data tends to come in a variety of formats, including vendor billing details, bank statements, and employee expense reports.
2. Recording transactions to the journal
Once you’ve gathered your transaction data, the information needs to be captured in your team’s journal. Although most companies have moved away from handwritten journals, many are still using outdated systems, such as simple spreadsheets, to record journal entries. This is a tedious, time-consuming process that’s often fraught with errors.
3. Posting transactions to the general ledger
One the journal entries have been approved, they need to be posted to the general ledger. When done manually, employees are required to post each transition individually. When someone is tasked with posting hundreds of entries, this can literally be a full-time job that takes the staff member away from more important things he or she could be doing with their time.
4. Calculate unadjusted trial balance
As the accounting period comes to a close, the finance team will need to run a trial balance. This process ensures that all transactions were recorded properly and ensures the accounts balance as expected. If you’re using a complicated process that incorporates long, complex account codes, this can be a very daunting practice for the persons tasks with performing it.
5. Reviewing the worksheet
It’s not uncommon for the trial balance process to reveal some postings that don’t balance. When this occurs, the accounting team has to investigate the accounts to determine where the issue lies. Because this normally occurs at the end of the accounting cycle, there’s pressure for employees to resolve the problems quickly, which is often easier said than done. Automation eliminates much of this pressure, and often, removes the errors that cause unbalanced accounts in the first place.
6. Making adjustments
Accountants not only need to correct mistakes, they also need to adjust accounts and posts to account for things like deferrals and accruals, among others. If you’re using a spreadsheet to track adjustments, you’re opening yourself up to big risks regarding data entry problems and calculation errors.
7. Preparing financial statements
When everything has been corrected, adjusted, and balanced, your team is ready to produce financial statements. If your team’s managers are known for asking for changes to final reports, an inflexible accounting system can really make the revisions process hard to navigate. On the other hand, if you’re using a robust tech platform, it’s easy to format financial reporting to meet the needs of various stakeholders within your organization.
8. Closing the accounting period
If it takes you more than four days to close your books, you’re probably working with zero-to-limited accounting functionality. Best practice is to be able to close your books within three or four days of the accounting period ending. Every additional day spent on closing the accounting period is time wasted where your team could otherwise be doing something that makes your company money.
Best Practices for Automating the Accounting Cycle
While some of these steps are done using technology, the accounting cycle is pretty much a manual process. As a result, it’s often associated with multiple issues, including the risk of errors, as well as time-consuming, labor-intensive, delayed reporting, and lack of security.
On the contrary, automating the accounting cycle has multiple benefits, including avoiding cash flow crises, saving time, cloud access, comprehensive analytics, flexible systems, storage and organization, fast data retrieval, and enhanced security.
Often, companies hesitate to adopt automated processes for fear of messing up existing financial processes and creating data discrepancies. However, such issues can be eliminated by following simple guides provided by experts who know what they are doing. Below are four steps that can help to automate the accounting cycle:
1. Assessing the current accounting processes and tools
The first step toward successfully automating the accounting cycle is to analyze the company’s existing tools and techniques to identify recurring problems. This stage determines the systems that are working and those that need improvements for effective prioritization and resource allocation.
2. Selecting a suitable core software
Automation requires more than simple spreadsheets for support. Instead, it needs a more advanced financials platform with features that can store and process massive amounts of data, allow collaboration, and support robust team manipulation activities.
An example of such software is NetSuite, which helps increase accounting processes’ efficiency and saves time. It has multiple benefits that include:
- Increased visibility into every business transaction through a centralized repository of financial and operational data;
- Automation of the invoice scanning, payment, and assignment of the general ledger account codes, thus simplifying accounts payable;
- Low risk of errors through automated journal entries posting and rules-based transaction matching;
- Support of automated schedules that ensure consistent recording of depreciation, amortization, deferrals, and accruals and proper application to cost centers;
- Flexible tools to conduct multiple functions and meet the needs of each stakeholder.
3. Migrating your data and allowing for an adjustment period
After identifying the compatible software solutions, the data should now be migrated from the older infrastructure to the updated ecosystem. While manual data migration is an option, using available software to streamline the process is recommended to eliminate potential errors and reduce the time and labor required to complete the migration.
Following the transition, it is critical to allow an adjustment period. During this time, the accounting team will learn how to use the platform, figure out the technicalities, modify integrations, and familiarize themselves with the automated workflow.
4. Monitoring the rate of the automation process
After successfully automating the accounting cycle, the performance of the processes and software should be actively monitored to identify areas that need modifications. Some questions to ask include:
- Have the previous recurring problems been resolved?
- How well are the employees adapting to the new software?
- Which aspects of the new system show high efficiency and which are not?
- Are there any redundancies or errors affecting the automated workflow?
- Have there been any changes in data quality and process timings? If yes, what are the impacts on complex tasks?
Final Takeaway – Learn More From the Experts at MIBAR
While automated processes can cause uneasiness, they are essential in eliminating errors, reducing costs, and making accounting work less labor and time intensive. An automated accounting cycle liberates the accounting staff, allowing them to focus on providing strategic insights.
MIBAR can help you leverage the awesome power of the NetSuite financial management system like nobody’s business. Whether its multi-company consolidations, a complex chart of accounts re-design, cash flow management or financial reporting know how, MIBAR consultants have the experience to help you stay in control with more timely financial reporting, transaction level audit control, expense approval management and budgeting. Contact MIBAR today to talk to one of our experienced consultants about your situation today – and let us Supercharge Your NetSuite Implementation!