Internal Accounting Systems for Small Business
January 10, 2017
Business managers maintain many responsibilities in both the day-to-day and long term planning of an organization. This ranges from corporate strategic management through to product/service delivery, and usually means there are a lot of decisions in between. In an effort to efficiently complete tasks and to ensure that the organization continues to move effectively towards its goals, it is important to accumulate the positive momentum of several small daily interactions. Many of these small victories contribute to the overall corporate objective.
It comes as no surprise then that major business decisions made without analysis are more likely to fail because planning requires the foresight of risks faced and resources demanded by a project. A business that stumbles over daily interactions runs the risk of delaying or failing to achieve its objectives.
The solution of course is developing a strong internal managerial accounting system – one that provides decision makers with accurate, reliable, and timely financial information.
A strong internal managerial accounting system incorporates all of the administrative processes which are used to track a company’s daily activity. Often, this starts with an accounting software packages like Sage 50 or Quickbooks, but quickly expands to all of the systems put into place to facilitate internal reporting and tracking of activity. Timesheets, inventory management software, purchase orders, etc. all fall under a company’s internal managerial accounting system. These systems often have several functions beyond financial reporting and are used by a company’s employees, managers, or owners to varying degrees in their day-to-day decision making.
BENEFITS OF INTERNAL ACCOUNTING SYSTEMS
A properly implemented accounting system can significantly improve the efficiency and accuracy of internal reporting and contribute many of the following benefits:
- Automation of manual tasks – functions to speed up recordkeeping of daily transactions and reduces the risk of data input errors. Users of an accounting system have access to a database of customer information. This database will display the customers’ contact information, payment status, past purchases, and special sales terms. The result is improved customer service and efficiency of administration work.
- Production of financial reports – financial reports (both year-end and interim) lend a valuable perspective when analyzing the results of operations. For example, a production job’s cost budget can be compared to the actual costs reported to determine if there were cost overruns over the production run. The result is a spotlight on inefficiencies which are noticed and dealt with sooner.
- High-level planning – forward planning anticipates the results of proposed operations. Potential resource shortfalls can be predicted and avoided by planning for labour, production capacity, or inventory needs. The result is improved customer service as orders are completed on time. The company will also benefit from cost savings from limiting purchases to only those required.
- Cost Benefit Analysis – An internal managerial accounting system can also provide reports on gross profit. If the results show that Widget A yields a higher gross profit than Widget B, more effort can be directed to promoting sales of Widget A. The result is improved overall profit without expanding the company’s production capacity.
CONTROLS PROVIDED BY INTERNAL ACCOUNTING SYSTEMS
A strong internal accounting system can also play an integral role in ensuring that activities are done correctly and are properly authorized. Internal accounting systems can be relied upon to prevent and detect errors before transactions are finalized, minimizing the possibility of errors. The following are some examples of controls implemented through an internal managerial accounting system:
- Access restrictions – requiring user names and passwords from employees allows the system to restrict access to information to those who are properly authorized to access the data. For instance, most administration staff will need to access the internal accounting system, but only payroll staff should have access to sensitive information regarding employee wages and salaries.
- Segregation of bookkeeping duties – one individual should not have authority over enough functions to secretly complete fraudulent transactions. One example of such activity is creating a fictitious A/P vendor and invoice, then writing a cheque to essentially pay yourself. By segregating the duties of creating cheques and entering A/P invoices this plan cannot be executed. Simply asking your employees not to perform tasks outside of their assigned duties may not be enough. An internal accounting software system helps by assigning access restrictions to certain functions.
- Self review – rules of logic are written into the computer code so that potential errors are flagged. This assists smaller companies who may not have the staff resources to review each other’s work. Self review is a simple yet powerful accounting control for detecting manual errors. Effective accounting software is a low-cost tool to help identify unbalanced entries or flaws in data entered based on field expectations.
Some common attributes of an effective accounting system are:
Customizable – This allows the software to meet the needs which are specific to a company and its industry. For example the information needs of a retail store could focus on age of inventory held before it is sold, where a widget manufacturing plant might require complex tracking of job completion and the costs of materials used per job run.
User-friendly – Functionality and an intuitive user interface is important to reduce the amount of time to perform tasks. If the technology is convoluted then staff may revert to manual recordkeeping and the benefit of the software will be lost. Simplicity of the system will also expedite training of new employees
Accessible – It is important that the information be made available to all employees who need the data for decision making while being secured against all unauthorized parties. Electronic firewalls can be added to the technological infrastructure in order to keep information private from those outside the business.
Separate levels of authorization – It is also important to limit the accessibility of sensitive internal information or the ability to perform certain functions from those employees not authorized for such tasks. The most common examples of such sensitive information are employees’ payroll rates and personal information which should only be viewed by human resources employees and their management. Setting authorization levels and limits on the approval of purchases can ensure the appropriate decision maker is involved while remaining efficient.
So as it turns out, whether it is a data entry clerk processing invoices or the CEO using projections to decide on expansion opportunities, the resulting quality of the work completed and decisions made will always improve with the aid of a more effective internal accounting system.
As organizations begin to grow in complexity, the internal accounting system becomes important in the management of daily activities, as well as a key planning tool for management teams to guide decision making processes. And for those organizations receiving financial reporting, SR&ED, or perhaps audit services from external advisors, information from the system provides accountants and government review personnel the supporting documentation they require to validate requests that are being put forward.
So although the implementation of such systems requires some planning and decision making, the benefits gained in the process become invaluable over time. For those considering implementing an internal accounting system, it is important to do your homework. It is obviously more cost effective to do it right the first time – a proper system will meet the requirements of the organization, be tailored to the demands of the operations, and be practical for the staff to use and maintain.