Before a company can look forward, it must have a clear understanding of its financial history. The two main components of an accounting system are the company’s “front-end” transaction processing software and its “back-end” accounting software. Front-end systems handle a company’s interactions with customers and include point-of-sale, time tracking, and order entry systems. These systems are increasingly leveraging the web to improve user access, link to centralized databases, and decrease transaction costs.
While smaller companies may utilize accounting software to track customer transactions, as a company’s transaction volume increases, they should seek out a front-end system that will aggregate the financial impact of each transaction into “batches.” In a perfect world, all front-end systems would interface seamlessly into the accounting software currently being used. This is rarely the case due to a number of reasons:
•The front-end system designed for specific industries does not have an integrated accounting software solution. •The accounting software associated with a front-end system may have weak financial reporting, limited general ledger capabilities, missing functions, limited trained user base, etc. •A company manages transactions manually, using Word or Excel, because the accounting software is too complex for its users or it requires heavy customization.
While out-of-the-box integration is not available in all industries, there is good news. First, front-end system designers are routinely building their systems to plug into popular accounting software packages like Peachtree, QuickBooks, and Deltek. This allows companies to have the best of both worlds. They can utilize a robust front-end system designed specifically to track the details surrounding their customer interactions and then integrate it directly with comprehensive accounting software. In many cases, this method of building an accounting system results in lower costs and improved functionality.
Second, the sophistication of accounting software, its supporting hardware, and connectivity have all increased significantly over the past 10 years. Today, off-the-shelf accounting systems are flexible, able to handle more users, able to process more transactions, and are accessible from just about anywhere. This makes them a viable alternative for a growing company that is not ready to invest in a middle market accounting package.
What Information Should Front-End Transaction Processing Software Provide?
•Real-time or near real-time access to transaction summary reporting •Revenue and expense reporting that reconciles with accounting software •Non-financial metrics that indicate company performance •Detailed customer transaction reporting
One mistake that many business owners make is relying on their company’s accounting software to provide real-time information. While many larger corporations have decreased the number of days it takes to close their accounting books, to just hours after month-end, smaller companies can take 5 to 25 days to reconcile their accounts and issue financial statements. Even when a company shrinks its close time to less than 5 days after month end, the financial information is only accurate after the books are closed once a month. A front-end system is a better source for real time transaction summaries that will allow management to monitor revenue and direct costs for more effectively.
What Information Should Accounting Software Provide?
•Cash Balance tracking and reporting •Accounts Receivables tracking and reporting •Accounts Payables tracking and reporting •Balance Sheets •Income Statements •Cash Flow Statements •Budget to Actual reporting •Monthly confirmation that the front-end systems are functioning
Keep in mind that reports provided by any accounting software are dependant on the software being updated on a timely basis. In many cases, transactions are processed manually but are not updated in a timely manner within the accounting software. Common examples of this include bank deposits or wire transfers not being posted, hand checks not being entered, payables not being processed, monthly billings, etc. With that in mind, certain reports should be run only after confirming that all relevant entries have been made.
The Key Components of an Effective Accounting System Include:
•Trained Accounting Staff: skilled people are the foundation of entire system •Infrastructure: computers, backup systems, connectivity •Software: accounting software, transaction tracking and reporting software •Business Intelligence Tools: combines disparate financial and non financial data to provide meaningful information for more effective decision making •Processes: purchasing and disbursements processes, billing and receivables, payroll, monthly close, tax compliance, financial reporting, etc. •Procedures: document flow, approval procedures, internal control structure, etc.
You will notice that accounting software is only one component of an effective accounting system. By far, the most important component is having trained accounting staff. These accounting professionals should be trained to use the company’s software, to interpret accounting and tax issues, and to produce meaningful financial information. Without the right personnel, the most sophisticated infrastructure, software, processes, and procedures will just gather dust.
How Can I Improve My Company’s Accounting System Today?
•Have your accounting system managed by an experienced controller •Ensure your accounting system provides real time revenue and direct expense reporting •Right size your accounting system: larger accounting software packages can be
•Utilize front-end systems to track and report on customer transactions: integrate your systems when possible •Utilize business intelligence tools to analyze and better understand your company’s financial and non financial metrics
Source: Ted Rose is the President of Rose Financial Services, based in Rockville, MD. If you have any comments or questions, he can be reached at email@example.com or 301.527.1130.