A robust financial management system is critical to the success of any business. At the heart of this system lie well-designed accounting processes and policies that serve as the blueprints that guide financial operations to ensure efficiency, accuracy, proper management, and compliance. However, crafting effective accounting frameworks requires incorporating certain processes and policies.

Additionally, you must thoroughly understand various aspects of your business, the financial landscape, and the regulatory environment to design effective accounting processes and policies to ensure your accounting framework is effective.

In this article, we will guide you into understanding these factors that you ought to consider when designing effective accounting processes and policies.

Considerations for Designing Effective Accounting Processes and Policies

Here are some major factors to be considered when designing your accounting processes and policies to ensure their effectiveness.

1.     business operations

The knowledge of your business operations will guide you on the kind of processes and policies to incorporate into your business. As a senior manager or business owner, you ought to identify and clearly state the nature of your business transactions, the volume of the transactions, your business processes and workflows, and the risk inherent in your business processes. Let’s look at these factors one after the other for proper understanding.

a. Nature of Transactions

You must identify the types and complexity of transactions that occur in your business. What is the nature of your sales, purchases, payroll, and expense transactions? Here are some breakdowns that can help you in the identification process.

• Sales: Does your business deal in cash sales, credit sales, or online transactions, or does it incorporate all three?
• Purchases: What kind of purchases occur in the business? Is it raw materials, inventory, supplies, and fixed assets?
• Payroll: What are the deductions in your payroll? They can be salaries, wages, bonuses, benefits, and taxes.
• Expenses: The expenses can be in the form of operational expenses, utilities, rent, insurance, and depreciation

After identifying the type of business transaction, the next step is to evaluate the complexity of the transaction. If your business transacts in multiple currencies, consider foreign exchange rates when designing your accounting processes. Your accounting system should also give consideration for industry-specific transactions; for example, long term projects and construction progress billing in the construction industry.

b. Volume of Transactions

The next step is to evaluate the volume of transactions that occur in your business, and how often they occur- daily, weekly or monthly. This will influence processes such as data collection, reconciliation of information and record keeping.

If you deal with high-volume transactions, you need an automated system to handle data efficiently, and you have to ensure that the processes are scalable to support increasing transaction volumes without compromising accuracy or efficiency.

c. Business Processes and Workflows

After identifying the nature and volume of transactions occurring in your business, take time to analyze the current or existing business processes to understand how transactions flow through your organization. This will help you identify bottlenecks and processes that need improvement or change.

While designing the accounting processes, ensure they are well integrated with other business workflows such as sales, inventory management, accounting, and procurement to ensure accuracy and efficiency. Also, incorporate the best practices and technology to boost efficiency.

d. Risks Inherent in Business Processes

You have to identify existing risks in your current business processes, such as fraud, errors, and inefficiencies within business processes. Identifying them will help you develop mitigation processes and structures while redesigning your accounting processes and policies.

Risk mitigation structures or processes that you can incorporate include:

• Dividing responsibilities among individuals to prevent fraud and errors.
• Implementing multi-level approval processes for critical transactions.
• Conducting periodic internal and external audits
• Access to accounting systems and sensitive data is limited to authorized personnel only.
• Performing regular reconciliations of accounts

2.      Size and Structure of the Organization

Recognizing the size and structure of your organization is important in helping you determine the type of accounting controls and policies to implement. If your business is small, simple controls can be sufficient given the number of employees and transaction volumes. For larger and more complex organizations, sophisticated accounting controls and policies are required.

Additionally, you have to decide on the accounting structure to implement. It can either be decentralized or centralized. For small and medium businesses with diverse operations, decentralization is more suitable, while centralization is ideal for larger organizations due to the need for standardized processes, improved control, and efficiency.

3.      Level of Automation of Business Processes

The nature and volume of transactions, as well as the size of the business, will determine the level of automation and the kind of accounting software and ERP systems to use. Not all accounting software and ERP systems are suitable for larger businesses. Accounting software programs built specifically for small businesses are usually free and cheap. Meanwhile, those for medium and large businesses are more complex, have more functions, and thus are pricier.

Additionally, you must ensure that the chosen accounting software and ERP system seamlessly integrate with other business systems, such as HRM, CRM, inventory management, etc.

4.     Internal and External Reporting Requirements

The designed processes should provide timely and accurate internal reports to management for decision-making. This can be departmental performance reports, budget variance reports, work completion reports, etc. It is essential that you state the reporting frequency of each department. It can either be daily, weekly, or monthly. 

Additionally, the processes should comply with external accounting standards and meet the reporting requirements of external stakeholders (investors, creditors, and regulatory bodies). The frequency of the external reporting should also be specified and stated.

5.     Regulatory Requirements for Accounting

Stay updated with industry-specific regulations and policies to ensure the accounting processes comply with all statutory requirements. For instance, statutory deductions such as tax compliance, accurate calculation, and timely payment are crucial. To make this easier, incorporate structures that allow for accurate and timely remittance of statutory deductions like taxes, VAT, and other mandatory reserves.

Additionally, your business accounting processes and policies must comply with industry-specific regulations. If you are in financial services, it can comply with regulations such as Basel III. Note that regulatory bodies differ in regions and countries.

6.     Financial Reporting Framework

If your business operates on an international scale, your accounting processes must adhere to International Financial Reporting Standards (IFRS) standards. Additionally, there are country-specific accounting standards your business must abide by. Ensure you know the local accounting standards in your country or region.

The accounting processes and procedures should be designed to allow for transparency and accountability. Also, the business accounting software should provide data and information in real time to ensure the stakeholders are regularly updated. This gives the stakeholders confidence in the business’s operations and dealings.

Final Words

At Mac Adebowale Professional Service, we handle your financial and accounting complexities while you focus on what you do best. Reach out to us today at emails@macadebowale.com or macadebowaleadvisory@gmail.com for a consultation and see how we can make your financial management stress-free and effective!