Raise your hand if you’ve ever ended a month with a stack of receipts, a blank Excel expense report form, and no recollection of the last 30 days’ mileage and meal expenses. After going back through credit card statements and emails to mentally reconstruct your month, you bashfully hand off the stack to an admin or CPA and hope you’ve included everything.
How many times have you then found lost receipts and had to make a second report? It isn’t very comfortable, and it also impacts other employees’ time and the company’s financial accuracy.
With over 40% of companies relying on manual or semi-manual bookkeeping and expense reporting, there’s a dire need for better solutions. And it’s not only large companies that need such solutions—even small businesses may process thousands of expense reports over a year, each needing research and corrections.
Pre-accounting is one such solution. It can reduce the accounting work, uncertainty, and backlogs involved in end-of-the-month reporting by doing much of the heavy lifting up front. It streamlines the accounting process for AP and ensures timely and accurate reporting of expenses at the time they occur.
This article will cover the basics of pre-accounting methods:
- What pre-accounting is
- Why it’s especially important for small businesses
- The advantages of using pre-accounting
- How software can enhance the benefits of pre-accounting
What is pre-accounting?
Pre-accounting is the practice of gathering, coding, and aggregating data when it’s produced. It may involve using a mobile device or a user entry system to capture the details of an expense, such as a receipt or invoice. Pre-accounting aggregates this data into a centralized system so that accounts payable can process and reimburse expenses in a more streamlined manner.
You can implement pre-accounting in a few ways. Most often, companies use software to capture paper receipt data at the point of purchase. This data is automatically digitized by mobile-native apps and devices using optical character recognition (OCR) capabilities. Software immediately centralizes and codes the data uploaded from these digitized receipts.
Why businesses can't ignore pre-accounting
Business expenses and incidental expenditures are big line items for businesses. Organizations may spend as much as 10% of revenue on reimbursement for travel-related expenses and other employee-led buying.
In many cases, expense reports are a last-minute, end-of-month activity. When Accounting gets an influx of last-minute expenses, it creates an extra burden for the department and increases the likelihood of issues.
Those issues can be costly. Some reports say the general exception rate for invoices exceeds 20%. Add in managing multiple codes over many dozens of small purchases, and you get an even higher potential for errors.
Pre-accounting reduces both the burden of processing expenses and the error rate associated with manual processing.
Advantages of pre-accounting
Pre-accounting has many advantages over traditional, end-of-month reporting. It allows accounting professionals a granular view of expenses as they occur, improving their purchasing processes and cutting down on many of the challenges associated with travel and expense reporting.
Lower exception rates
As with manual invoice processing, manual expense reporting results in high error rates. The accounting department must spend hours researching and remedying issues with reports, chasing down lost receipts, and adjusting reimbursements to maintain accurate books.
With pre-accounting, the various manual tasks associated with expensing are replaced with a digitized, automated system. This reduces the time spent on expensing and lessens the occurrence of expense report exceptions.
Traditional expense reporting reduces spending visibility by withholding most of the data until the end of the month. While Accounting may indicate upcoming expenses in some categories (for instance, flights and car rentals booked using a corporate credit card), end-of-month reporting cannot capture impending incidentals, mileage, dining, and other expenses.
This lack of visibility results in budget overruns and cash flow issues, especially for small businesses. Pre-accounting captures data at the point of purchase and brings it into the workflow automatically. This boosts visibility and reduces the likelihood of missing or late expenses.
More accurate coding
Excel-based expense reporting makes categorizing purchases more difficult and leads to inaccurate expense reporting and budgeting. Using reporting software allows Accounting to code and report individual expenses more accurately. Some software automatically categorizes expenses or provides data fields for end-users to categorize expenses as they’re produced.
Using pre-accounting cuts down on the end-of-the-month rush to submit expense reports, allowing Accounting to process small expenses as they arise. This improves reimbursement time for any employees reporting expenses.
Better month-end close
Pre-accounting for expenses closes the loop on outstanding payables. It gives Accounting confidence that all liabilities for a specific pay period have been captured. This allows for more streamlined reporting and finalization. It also speeds the time to close and helps Finance prepare accurate financial statements for monthly reporting.
Lower fraud risk
While the majority of employees accurately report expenses, up to 5% of an organization's revenue is lost to fraud, according to a recent ACFE study. Inflated and fictitious expense reporting is a common source of these losses.
Pre-accounting captures receipt and expense data at the point of purchase, creating a source of truth for expense documentation and centralizing it in an accounting database. This can reduce the incidence of unintentional or intentional increases in reported expenses and create a reliable system for monitoring expense levels.
Steps to implementing pre-accounting
Setting up a pre-accounting practice in your organization requires technology and new policies. A strong change management approach and education for stakeholders make moving to a pre-accounting approach faster and easier.
1. Define your pre-accounting policies
Organizations move toward pre-accounting practices with certain goals in mind. These may include time savings, reducing Accounting burden, saving money, increasing compliance, and reducing risk.
With these desired outcomes in mind, outline a pre-accounting policy. It should include details on how and when to submit expenses through pre-accounting software and spending guidelines for buyers. Also include parameters for non-travel expenditures, such as spot buys for corporate card purchases. Make your policy detailed enough to guide stakeholders without belaboring the process.
2. Select software for reporting method
In most cases, expense reporting using pre-accounting is implemented using expense reporting software.
Select software that is flexible enough to meet the purchasing needs of your entire organization. Consider tools that create ease in the reporting process, such as OCR or a mobile app for uploading receipts and other accounting data.
3. Educate stakeholders on the new policy
Once policies are in place, educate all buyers on the new process and any software used to carry out pre-accounting and expense submissions.
Create a point of contact for questions or concerns about using the process or the software. By listing a point of contact and implementing change management, you can better understand your stakeholders' experience and address any issues that arise during implementation.
4. Implement and refine
With policies and software in place, launch the first version of your pre-accounting process. As with any large change, your change management process dramatically improves your outcomes by providing insight and information about the user experience.
Once users begin uploading expense information, consider a user survey to gather learnings and improve the experience. Track relevant KPIs such as exception rate, cycle times, and compliance rates to ensure your program is helping meet expectations.
How Order.co streamlines pre-accounting
For certain types of transactions, such as spot buys, supply replenishment, and other expenses, procurement software reduces the burden on Accounting. It illuminates the need for employees to use previously allocated funds for procurement.
Order.co helps every buyer in your organization purchase the items and supplies they need to drive the business forward. The platform offers a variety of features to cut down on manual processes and improve indirect spend, such as:
- Seamless ordering from a pre-approved supplier or any vendor your stakeholder chooses
- Spending guidelines and budget limits set by individual user, role, department, or location
- Automation to centralize workflow for orders, invoices, and payments
- Automatic GL coding that is instant and accurate
- Integrations with Quickbooks Online, accounting systems, and ERPs
Order.co helps organizations keep a handle on indirect spend and encourages users to follow proper protocol when sourcing goods for your business. If your organization needs software that frees up time and saves money, schedule a demo of the Order.co platform.
Schedule a demo to see how Order.co can simplify buying for your business.
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