Breaking the mold of manual finance: A fresh approach to accruals, provisions and reclassifications

Accruals, provisions and reclassifications represent some of the most intricate and labor-intensive components of the financial close process. In a global business environment where speed and accuracy are paramount, accruals, provisions and reclassifications are a substantial burden for finance teams, resulting in highly skilled staff being entrusted to manage these critical tasks when their time could be better applied elsewhere. Accounting automation, specifically Record to Report Automation by Redwood, can transform these challenges into opportunities for efficiency and accuracy.

The complexity of accruals, provisions and reclassifications during month-end

Accruals accounting is the basis for financial reporting in most organizations. The accruals process dictates that revenues and expenses are recorded in the period they are earned or incurred, regardless of when payment is made or received. This practice, while ensuring a more accurate representation of a company’s financial position, introduces significant complexity during the month-end close. The process of identifying, calculating and recording the accruals needed is often a hugely manual process with a high dependency on spreadsheets. Inevitably, there are a large volume of last-minute adjustments, leading to inefficiencies and a high risk of errors.

Similarly, provisions — an amount set aside for as yet uncrystallized expenses or liabilities that need to be prudently accounted for — require careful estimation and judgment. The challenge lies in accurately estimating these amounts and consistently applying judgment across reporting periods. This task becomes even more daunting for global organizations dealing with different regulations and accounting standards.

Reclassifications, which are necessary for ensuring items are reported correctly, such as income, expenses, assets or liabilities, add another layer of complexity. Erroneous classifications of financial transactions and account balances cause financial misstatements, making the typically manual process of reclassification critical to ensure compliance and trust in financial disclosures among stakeholders.

The burden of manual processes

In many accounting teams, despite having sophisticated ERP systems, these tasks are still performed manually with minimal accrual automation, usually with spreadsheets. Manual processes are not only time-consuming but also increase the likelihood of errors. When finance teams are buried in spreadsheets and manual entries, they are more prone to make mistakes, especially under the pressure of tight deadlines. Moreover, manual processes lack the control, auditability and agility needed to respond to last-minute changes or corrections, further prolonging the closing cycle.

Global owners of record-to-report (R2R) processes face additional challenges in ensuring consistency and compliance across different regions and accounting standards. The manual handling of accruals, provisions and reclassifications in such a diverse and complex environment is not just inefficient but also risky, with financial misstatements a possible outcome.

Embracing automation: A new paradigm

This is where automation, particularly Record to Report Automation by Redwood, steps in as a game-changer. Automation streamlines these intricate processes, reducing the time and effort required to complete them while simultaneously enhancing accuracy, compliance, auditability and control.

Streamlining accruals

For accruals, automation can mean the difference between days of work and a few hours of review. Automated systems can integrate with various data sources, extracting and analyzing information to identify, calculate and post accruals accurately, ensuring they reverse automatically in the following accounting period. This not only speeds up the process but also minimizes the risk of errors associated with manual accrual processing and data entry.

Simplifying provisions

When it comes to provisions, automation tools can apply consistent rules and methodologies to identify and estimate these amounts. This standardization ensures that provisions are calculated and recorded in a uniform manner across all reporting periods and entities, enhancing the integrity and trust in financial statements.

Efficient reclassifications

For reclassifications, automation provides a robust framework for ensuring that entries are correctly classified in the first instance. Automated checks and controls can identify potential misclassifications and, subject to review and approval, automatically correct them before they impact financial statements, providing a full audit trail and significantly reducing the risk of financial misstatements.

The bigger picture: Enhanced compliance and strategic focus

Beyond the immediate efficiencies, automating these processes with solutions like those offered by Redwood Software also ensures greater compliance with accounting standards and regulatory requirements. It creates transparency through a comprehensive audit trail of all automated accounting transactions, crucial for both internal and external audits.

More importantly, automation liberates finance teams from the shackles of manual processes, allowing them to focus on more strategic, value-add tasks. Instead of spending hours reviewing and checking data, manually calculating adjustments and posting manual journal entries, finance professionals can spend time analyzing and interpreting data, providing meaningful insights and contributing more significantly to business decisions.

Transforming challenges into opportunities

For global process owners of R2R, the transition from manual to automated processes is not just a shift in how work is done; it’s a transformational change that elevates the role of finance within the organization.

Record to Report Automation by Redwood offers a path to this transformation, turning the challenges of accruals, provisions and reclassifications, among other core finance processes, into opportunities for efficiency, accuracy and strategic focus. By embracing automation, companies can move beyond the manual status quo, adopting a more sophisticated, reliable and insightful approach to financial reporting.

Sign up for a demo of Record to Report Automation by Redwood here.