The power of automation in managing accruals and provisions

Accruals and provisions play a crucial role in financial reporting, ensuring that accrued expenses and liabilities are recognized in the correct accounting period within each fiscal year. However, traditional manual processes for managing these financial transactions are time-consuming, prone to errors and can lead to compliance risks. Automation has become essential for ensuring accuracy, efficiency and financial control.

We’ll take a look at the challenges associated with manual accruals and provisions, the economic benefits of automation and how your business can use modern technology to transform financial management.

Common challenges in accruals and provisions

If your team is still relying on spreadsheets and manual calculations for accruals and provisions for items such as prepaid expenses, you could be exacerbating the impact of several detrimental factors:

• Human error: Manual journal entry and estimation introduce a significant risk, potentially leading to inaccurate financial statements that can erode investor confidence and regulatory trust. Even a small error in accrual calculations can result in material misstatements of your financial position, triggering compliance concerns, audit issues and the need for financial restatements.
  
  Manual processes are prone to inconsistencies and key differences across departments and can create discrepancies in financial reporting. These errors delay the financial close process and require more resources to investigate and correct, further straining your finance team’s workload and increasing operational costs.
• Time-consuming processes: Reconciling accruals and provisions is often cumbersome and requires extensive data gathering, validation and cross-referencing across multiple departments and systems. Your Finance team must manually track and verify transactions, extract data from multiple sources, post manual journal entries and align them with accounting standards and current liabilities in financial reporting, all of which significantly delay the financial close process. 
  
  You’ll likely extend closing cycles and risk last-minute adjustments and errors, making it difficult for your organization to operate with agility. Reliance on manual effort results in burnout and reduced efficiency.
• Compliance risks: Regulatory standards such as IFRS and GAAP impose strict requirements on future liability recognition, documentation and reporting, making compliance a critical challenge if your processes are manual. Keeping complete and accurate records across multiple entities and jurisdictions is complex and increases the risk of non-compliance and the associated costly penalties, audits and reputational damage. 
  
  Staying compliant with evolving regulatory frameworks and prudent financial management requires continuous monitoring and updates, which can be difficult to manage without an automated system.
• Lack of real-time insights: Traditional methods of managing accruals and provisions often rely on periodic reconciliations, which create a lag in financial reporting. It’s common to struggle to obtain up-to-date visibility into financial performance, which could result in cash flow mismanagement and delayed decision-making, which may cause impairment due to unrecognized past events or present obligations. 
  
  Without real-time insights, leadership can’t respond quickly to financial fluctuations or unexpected liabilities. This lack of timely data forces them to be reactive rather than proactive, increasing business risks and reducing strategic effectiveness.
• Scalability issues: As your business grows and expands across multiple geographies, the complexity of managing accruals and provisions increases exponentially. You must account for varying regulatory requirements, currency fluctuations, tax structures and local accounting standards, all of which make manual processes unsustainable. Having to manually adjust accruals for each entity increases the risk of errors and inconsistencies.
  
  Furthermore, it can hinder financial transparency, making it difficult to maintain a unified view of financial positioning across global operations. Administrative burden also scales with growth, so you need additional headcount and resources to manage financial reconciliations efficiently.

How automation transforms accruals and provisions

Manually managing accruals and provisions is both labor-intensive and time-consuming, and the potential for errors and omissions challenges the integrity and trustworthiness of your financial reporting. 

Automation eliminates manual effort and risks by consistently and accurately calculating and recording accruals and provisions. This ensures compliance with accounting standards while improving efficiency and reducing the likelihood of errors. 

Transforming accruals and provision processing means automating data collection, assessment and processing, so it’s easier to calculate the adjustments required. At the same time, posting journals to your ERP system’s general ledger with the necessary controls, approvals and audit trails ensures you meet compliance accounting standards and generate accurate income statements and trustworthy balance sheets.  

Automated data collection and processing

Automating accruals and provisions eliminates reliance on manual spreadsheets by integrating with financial systems to collect and process data in real time. This ensures accuracy and reduces the risk of errors while also allowing for seamless data reconciliation.

Integration with ERP systems

Automation tools seamlessly integrate with ERPs such as SAP, allowing you to calculate and record accruals and provisions as financial transactions within the general ledger in compliance with accounting standards and generally accepted accounting principles. This minimizes discrepancies and keeps your financial reports consistent across all business units within each reporting period and across fiscal years.

Predictive analytics for accrual forecasting

Advanced automation platforms use predictive analytics to assess historical data so you can forecast accruals more accurately and proactively manage your financial obligations. By using artificial intelligence and machine learning, you can anticipate trends and adjust your financial strategies accordingly.

Workflow automation and approval processes

Automation platforms provide structured workflows for managing accruals and provisions, ensuring that approvals are obtained efficiently and per company policies. This reduces bottlenecks and improves overall financial governance.

Governance and compliance in an automated system

Financial governance and compliance are critical aspects of managing accruals and provisions. Automation ensures that every transaction is logged and can be easily traced for audit purposes, providing transparency and accountability through comprehensive audit trails, which are created automatically.

In terms of regulatory compliance, automated workflows enforce accounting standards and internal policies, reducing the risk of non-compliance and penalties while consistent rule application prevents discrepancies in accrual calculations and provisioning. Thus, your reports remain accurate across all business units and geographies.

Role-based access controls ensure that only authorized personnel can adjust financial records or view specific financial data in accordance with their authority levels and responsibilities, maintaining compliance with company policies, regulatory requirements and data security standards.

Real-world use cases of accrual and provision automation

Here’s what successful automation of accruals and provisions looks like in various industries and use cases. 

• Financial services provider: Automating calculations and financial accounting postings for key future expense accruals such as salaries, bonuses, vacation and health insurance and other employee benefits enhances financial consistency, streamlines reporting and mitigates compliance risks. Read the story of how Allianz reduced manual effort by 70%.
• Manufacturing firm: By automating provisions for warranty liabilities and product recalls, manufacturing firms have been able to enhance forecasting accuracy and reduce unexpected financial impacts caused by underestimating current and future liabilities on the balance sheet, in accordance with IAS 37 provisions.
• Retail and e-commerce business: Automating accruals for accounts payable vendor payments and inventory-related expenses has enabled retailers to keep tighter control over cash flow and supplier relationships.

Learn more about automating accruals, provisions and reclassifications with this comprehensive guide.

Key considerations when implementing automation

Automation has the power to revolutionize financial processes in the short term, but successful implementation requires careful consideration and planning. Critical factors to address include:

Choosing the right solution

Selecting the right automation solution is essential for a smooth and effective transition. Businesses should prioritize solutions that offer seamless integration with existing systems, such as ERP platforms, to prevent disruption. The chosen solution must adapt and scale to meet growing organizational needs, and compliance features should be robust to help you adhere to regulatory requirements and industry standards.

Change management and employee training

Automation is not just a technological change; it also impacts workflows, roles and responsibilities. Employees must be well-prepared to adapt to these changes. Investing in comprehensive training programs to equip finance teams with the knowledge and skills needed to fully leverage automation tools is vital. Clear communication of benefits and ongoing support will reduce resistance and build confidence among your team.

Continuous monitoring and optimization

Regular reviews are crucial to ensure automated systems align with your organization’s evolving needs and regulatory requirements. Monitoring performance metrics will help you identify areas for improvement, whether it’s enhancing system functionality or refining workflows. Proactively updating and optimizing the system will maximize its long-term value and effectiveness.

Additional considerations

• Cost-benefit analysis: Evaluate the upfront investment against long-term savings to ensure the solution delivers the desired business benefits.
• Data security: Ensure the automation platform has robust security controls to protect sensitive financial information and help eliminate fraud.
• Vendor support: Choose a platform backed by a reliable vendor with comprehensive support for optimization, technical assistance and continuous improvement and updates.

By addressing these considerations, you can pave the way for a successful automation journey that drives efficiency, accuracy and compliance across your financial operations.

Transform your approach to accruals and provisions with Finance Automation by Redwood

Manual accrual and provision management are no longer sustainable. Automation offers a robust solution that enhances accuracy, compliance and efficiency. Using Finance Automation by Redwood, you can streamline financial operations, reduce risks and gain a competitive edge in financial reporting.

Now is the time to transition from outdated processes to an intelligent, automated approach to accrual accounting and provision management. Finance leaders who embrace automation will be well-positioned to build an automation fabric driving long-term success and operational excellence in their organizations.

See automated accruals and provision in action. Sign up for a demo of Finance Automation by Redwood here.