Why Finance Can’t Afford To Wait For Invoices

There is often an underlying assumption that the accountancy department in any business has a complete picture of everything occurring at shop floor level. This would seem to be logical, as it would appear to be the job of the accountancy department! However, the reality is that most organizations are actually very much siloed in nature, meaning that the left arm of the accountants often doesn’t know what the right arm is doing.

Even in smaller companies, month-end can be a hectic period. It is a time when the accountancy and finance departments in an organization need to draw together all of the invoices that are relevant for the accounting period. This can be considered critical information, as it provides the relevant people with an approximate picture of spending over the previous month.

Planning Problems

However, months-end doesn’t always go as planned. With the best will in the world, it’s not always possible to draw together all of the invoices that have accumulated during the accounting period before finalizing month-end procedures. Often orders are placed at the eleventh hour, and this can cause insurmountable logistical problems.

There can be something of a technological gulf in this area that tends to cause problems. Many companies still rely on traditional invoicing, which is often good, old-fashioned pen and paper. These paper invoices can then be difficult to integrate with electronic systems, notably when this process attempted at the last minute. Equally, completely misplacing invoices, and failing to inform the finance team that something has been purchased, can also be a problem.

Obviously, this can then impact negatively on the accuracy of month-end figures. Considering that business planning is often made on the basis of this information, this can obviously have a big knock-on impact on the company as a whole.

Accrued Expenses

So-called accrued expenses have a significant impact on the invoicing process of many companies. The term accrued expenses refer to any obligations that a business has incurred for which invoices have yet to be received from suppliers. Accrued expenses can be taken into consideration in accounts with a reverse journal entry, which, as the name suggests, automatically reverses in the following reporting period.

Following this procedure, companies can advance the recognition of such invoices into the current accounting period, enabling the business to consider them earlier. They are then entered under short-term liabilities on the balance sheet.

Accounting Requirements

However, although accrued expenses can have a significant impact on the way that companies operate, there is no blanket requirement to take this classification of expenses into consideration. Accrued expenses do not need to be recorded if they are so negligible that they have no material impact on financial results.

Such expenses can be described as material accrued expenses, and removing these from the accountancy process can aid the logistical requirements for finance departments. In order to achieve this, many companies set a monetary threshold, below which expenses will not be accrued.

Accrued expenses are one of the primary reasons that many larger companies in particular opt to swap from cash-based accounting to an accrual system. When accounting is carried out on a cash basis, it is almost inevitable that the recognition of some expenses will be delayed, and this could be seriously detrimental for many companies. At the very least, it tends to result in an unclear impression of the current state of the business.

Communication Breakdown

Aside from the technical difficulties involved, often inter-departmental communication can also be an issue that plagues invoicing. This can occur for several reasons.

Department Silos – when one department makes purchases, these are not then necessarily communicated and logged with the accountants, and this can become a significant problem. When finance departments can’t see all of the invoices that they require to prepare accurate accounts, it compromises the whole process, potentially making cash flow and projections wildly inaccurate.

Lack of a Streamlined Process – another problem that many businesses encounter is a lack of joined-up and coherent thinking and procedure. It can be the case that, particularly in large organizations, different departments use different methods to log transactions and invoices.

Lack of Consolidated Reporting – a third issue that is particularly common is a lack of consolidated reporting within an organization. Often not everyone is on the same page with reporting, and this can cause various departments within a company to adopt an entirely different approach to submitting invoices.

This is why it is essential to get everyone on the same page from day one and ensure that there is a consolidated approach to the completion and submission of invoices.

Legal Reasons

While financial planning is undoubtedly a critical aspect of invoicing, there are also more profound reasons why this process and procedure must be accurate. Invoices are intended to provide legal protection for both parties in a business transaction, and they represent a record of all payments that a business wishes to claim.

This is important for the business making a claim, but also for the recipient of the product and service. Invoices enable clients to clarify what they are paying for and also project a professional image for the business in question. Indeed, it is hard to imagine a modern company operating without professionally-generated invoices.

Invoices have clear commercial implications, but will also prove to be particularly important in the event of a business being audited by a tax authority. An invoicing system is intended to substantiate reported income in such circumstances, as well as to provide businesses with accurate records of what should have been received from clients.

So there are several important reasons why companies should take invoicing particularly seriously, and ensure that all invoices are made available to the finance department at the first opportunity.