Why are Accounting Procedures Needed for Your Business? (Part I)

What are accounting procedures and why should I consider developing them for my business?

A procedure documents a business transaction.  It lists the specific steps to complete a transaction, and helps to enforce a high degree of uniformity in how the steps are completed.  A procedure often incorporates controls, which are used to lessen the risk of various types of losses.  A procedure has 3 purposes:

1. To encourage uniformity in completing the business transactions, which leads to greater efficiency.
2. To enforce the use of controls
3. To train your employees.

Why do you need Accounting Procedures?

They are needed to ensure that a company is able to complete its objectives, whether the company is produces products or services. Procedures give structure to the activities that are done in order for the company to complete its business objectives, broken down by the various stages of production or providing of service.

For very experienced employees they may be able to handle the tasks without a formal written procedure, however that approach may not work for junior employees because it relies on the verbal transfer of information from the experienced employees to the junior employees, which we all know is problematic no matter how well the team of employees seems to work together.

We need procedures to accomplish the following best business practices:

• Document Best Practices- The documentation process often brings to light questionable  or inefficient practices, giving the chance for management to change company processes to a more efficient and effective level.
• Increased Efficiency.
• Decrease the number of errors.
• Computer Systems require procedures to operate properly.
• Controls- To strength weaknesses in the operating of the company.
• Efficiency of Routing between departments.
• Governance- Procedures are needed to ensure that the decisions made by management are carried out properly.
• Consistency in processes.
• Training- Procedures can be the basis of employee training manuals that cover the basic functions of the business.

How many procedures do I need to develop?

Even a small business can have a large number of processes, but how many of them really need to be documented in a formal procedure?  If a business would document them all, they may find they have spent an excessive amount of time and resources to do so that does not pay the benefits in doing so.  You should consider the following 4 factors when deciding if you need to create a procedure for your company.

1. Auditor concern- If your auditors have pointed out control weaknesses in a particular area, you will want to develop a procedure that includes any controls that they recommend.  To not do so may cause your auditors to do additional auditing procedures, thus causing the price of your company’s audit to increase.
2. Risk-  If there is no procedure, is there a risk that the company will suffer a monetary or reputational loss?  If the loss is significant a procedure should probably be created, even if the procedure will be rarely used.  If the risk is low, then you would not have to have a procedure.
3. Transaction efficiency-  There may be multiple ways in which a business transaction can be completed, however there is one that clearly more efficient.  Thus, create a procedure that directs employees to the most efficient method.
4. Transaction volume- As a general rule, there should be a procedure for the 20% of all transactions that comprise 80% of the total transaction volume in which a business engages.  These procedures cover most of the day to day activities of the business.  These would define the various roles of the employees as well as outlining the various tasks for the employees by the preferred manner.

Transaction volume is a key determinant of the need for a procedure.  There are many low volume activities where it simply makes no sense to create procedures for.  Instead allow employees to follow their best judgment to determining how to complete. 

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About Convergence Technologies, Ltd. - The mission of Convergence Technologies, ltd. is to provide quality business technology with exceptional service for our clients while promoting an enjoyable environment of continuous learning and growth for our staff.   Convergence Technologies, Ltd. Is based in Fort Wayne, IN and proudly serves the area and the nation helping clients grow their business.  Contact us at 877-483-0717 or visit http://www.converg-tech.com/contact-us.html  to learn more how we can help your business grow!