what is the purpose of an accounting system?

The intent of a holistic accounting system, including the people, systems and processes, is to get useful information that helps everyone make well-informed business decisions. If your accounting system is not providing the needed information accurately and in a timely manner, it’s not fulfilling its purpose.

Determining whether the problem lies in an outdated and broken system or in the data being input to the system requires an evaluation of both. Failures in accounting procedures can be traced to a number of sources, including financial and accounting skills, limited finance department staffing, human error during data entry, outdated software and ineffective use of software security features, among other sources.

Many business owners may know when something is wrong with their accounting system. They might see incomplete revenue being recorded because of a breakdown in the revenue cycle, or a drop in invoices being recorded because of a breakdown in the accounts payable processing.

Or there may be a sudden realization that cash flows no longer line up with the financials. Although it is not always as easy to pinpoint the solution, management often notices something is not adding up.

Pinpointing the Problem 

Financial accounting systems are often integrated with apps and other software systems through which data should flow seamlessly. But if one piece of software is outdated, or permission levels are not properly set, problems can occur.

For example, an accountant may check an inbox every day to find invoices from vendors, then enter the invoice data into the system to gain the proper approvals before paying the invoices. But, unbeknownst to the accountant, a key person in the approval chain is out for three weeks on medical leave. So, one of two things may happen: the accountant goes ahead and pays invoices without proper approval or the invoices will become overdue.

There are a couple of solutions to this type of issue, one technology-based and the other people-based. On the tech side, the software security permissions can be set so that an invoice cannot be paid without approval from a certain person or staff level. On the people side, a backup person can be assigned to approve invoice payments.

This is just one example of the types of problems a business owner may notice that are a tip off that the accounting system is broken. Other warning signs may include: 

  • Monthly revenues are more than adequate to cover monthly expenses, but the business checking account is sometimes empty. 
  • Bank reconciliations are not being done in a timely manner, exposing the business to double recording of income or expenses. 
  • Long-outstanding items on the books, such as checks paid to vendors that have not cleared. 
  • Long-outstanding receivables that are 90 to 120 days overdue. 
  • Aging details do not agree with the general ledger, which typically happens when journal entries are being made against balance sheet accounts rather than using the financial modules in the software.  
  • Poor revenue cycle management, which has a major impact on the difference between what’s in the financials and what’s happening in the bank account. 

Evaluate People, Processes and Technology to Find Solutions

For a decision maker inside the company, it may be difficult to know where the problems lie or what the solutions are. An outsourced accounting consultant can evaluate a company’s technology stack and finance staff and help determine where small fixes may help. 

In short, an outsourced accounting consultant will evaluate people, processes and technology to find the vulnerabilities and suggest solutions. 

A consultant can advise you as to whether the accounting technology in use is the most appropriate for your business. An accounting platform that is great for a construction contractor may not be the best for a dental office, and a consultant can help you make an upgrade or even a lateral change that will put your financials back on track. 

Solutions for a broken accounting system typically fall into three categories: 

  • Provide staff training with the software platform the company is already using. This ensures that the platform’s modules and capabilities are being used properly. 
  • Consider a new accounting platform. Not all accounting platforms are equal. Some provide outstanding solutions for certain industries but are weak in other industries. Moreover, the accounting platform should be matched to the capabilities of a company’s finance staff. Adopting a new accounting platform need not be expensive. It’s possible that a lateral move to a platform with similar capabilities that is better configured for your industry and your finance staff may be the way to go. An outsourced accounting consultant will help migrate your company’s data to a new platform and provide training for your staff. 
  • Consider outsourcing certain accounting functions, either on an interim basis – while the company ramps up its finance department staffing – or on a permanent basis. 

It’s possible that a combination of solutions will work best for certain companies. If you are concerned about problems in your accounting system, contact an Adams Brown advisor.