Small organizations and startups typically use spreadsheets, entry level accounting or bookkeeping systems, and/or outsourced bookkeeping for accounting, financial reporting, and taxes. This manual accounting works for millions of small, simple businesses, but problems arise when organization grow in size and complexity.

Now remote or hybrid workplaces, and documented Accounting staff shortages add to the problems associated with manual accounting. In sum, manual accounting cannot scale, is error prone, and can lead to staff burnout and turnover.

Let’s take a deeper dive into these manual accounting problems, along with possible solutions.

Problems with Manual Accounting

Spreadsheets along with entry level accounting, bookkeeping and tax software rely on manual accounting. With the advent of cloud accounting solutions, there has been more than enough reason for Controllers and CFOs to stop the use of manual accounting and embrace digitization. Following are five areas manual accounting processes consume resources.

Cost

Most organizations run a labor-intensive type of accounting system. Thus, proposing cost reduction may seem like something impossible. The efficiency of accounting processes is always affected by physical data extracts, manual adjustments, spreadsheets, and data entry. These operations are the glue that connects accounting processes across various systems, entities, and data sources.

The cost of running manual accounting can be very costly, especially in firms with large sizes, and the effect of this cost often determines the difference between top and bottom performers. Cost reduction of accounting processes often helps companies save more. An example of this was seen a few years ago when Coca-Cola reviewed its manual reconciliation processes across 500 ledgers. It was observed that associates were spending 14,000 hours on reconciliation alone which prompted a switch from manual processes to automation. After the switch, Coca-Cola could reallocate 40% of the team in manual reconciliation. The reallocated teams could focus on other activities like reporting, IT control, and metrics. The shift to automation helped them recover millions of dollars in efficiency that were invented back into accounting functions.

Risk

Manual accounting is often associated with financial statement integrity and risk. It also increases the chances of fraud.  In a recent survey by BlackLine, involving over 1,100 C-Level executives and financial experts around the world, it was observed that 55% respondents said they could identify financial errors before making reports.

Also, 70% of leaders stated that they made important business decisions with inaccurate financial data. Only 38% of professionals could vouch for the financial data they use. Several reasons were given for the trust issues with financial data. 41% of these reasons were blamed on manual input of data, while 56% stated issues due to lack of automation, labor-intensive data extraction processes, and spreadsheet errors.

Another problem with manual accounting is its association with fraud. The drivers of these include overreliance on spreadsheets and other files that can be easily altered. According to the Association of Certified Fraud Examiners (ACFE), 40% of fraudsters used fraudulent physical documents, while 36% made alterations to physical files.

Time

If you’re into the accounting process, it’s not a secret that manual accounting consumes time. Valuable time is spent on compiling, validating, spreadsheet processing, and paper binders. Also, allocations, general ledgers, journal entries, and intercompany accounting reconciliation all consume time.

While all these are going on, there is little transparency regarding who is doing what. As such, more time is wasted on the status of reconciliation completion. At times, more than a week can be spent on closing books which is often a factor that determines top and bottom performers.

According to The PwC Finance Benchmarking Report 2019-20, 30% to 40% of the time can be reduced by introducing automation into financial processes. For instance, eBay’s intricate system of financial close always consumes time. At times, it can take up to 10 days, but by moving away from manual financial close, eBay was able to reduce its financial close from 10days to three days.

Staff Burn Out

Due to the repetitive processes involved in manual accounting processes, staff easily experience burn out leading to loss of top talents. However, automation of these processes can reduce repetitive, boring tasks and allow staff to focus on new and strategic initiatives.  A recent report has shown that the adoption of automation is an excellent way to retain talents and increase efficiency in accounting processes. CFO’s and Controllers are therefore urged to embrace automated accounting models to attract and retain talents.

Audit and Compliance

Manual accounting in the audit processes is another factor that consumes resources, especially the lack of follow-up on aged items, incomplete reconciliation processes,  inability to answer auditors’ questions in a timely way, and absence of overall visibility that also contributes to the tie-up of accounting resources.

Automation can help in reducing the resources consumed by audit processes. A practical example of these was seen as Ascension—one of the biggest non-profit health systems in the United States employed a decentralized finance model in its audit and reconciliation processes. With this, they were able to handle 20,000 to 25,000 reconciliation tasks in the shortest time possible. By moving into automation and a more centralized approach, Ascension was able to devote 400 fewer hours to audit, thereby reducing audit fees

The Problem and the Solution

Manual accounting processes increase costs for Controllers and CFOs in a number of ways including additional staffing, the potential for fraud, and delayed reporting. Manual accounting errors increase risk, and may compromise audit and compliance requirements. Finally, manual accounting is not scalable and cannot be effective for organizations that are growing in size or complexity. In sum, manual accounting is not sustainable.

The solution: a growing availability of cloud accounting systems and solutions, including enterprise resource planning or ERPs with core accounting and finance functionality. Modern cloud-based technologies allow applications to integrate easily with open-source APIs. Today ERPs can integrate with point solutions including AP, AR, FP&A, BI, Financial Reporting and Close Management, CRM, and more. Manual accounting can be further reduced with automation technologies including artificial intelligence (AI), machine learning (ML), and robotic process automation (RPA).

Accounting and corporate finance have unlimited opportunities to replace manual processed with automated systems that can deliver streamlined and timely information and reporting.

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2022 Corporate Finance Outlook – Webcast Panel DiscussionWebinar Tuesday, January 25

Nearly two years into the pandemic, the business and corporate finance outlook remains in constant flux. Domestic and global economics, new tax regulations and compliance requirements will prove challenging to Controllers, CFOs and corporate finance executives.

To understand and manage these uncertainties, learn from our subject matter experts in this upcoming webinar.