When are Accounting Policies and Procedures Optional?

Do you really need to document accounting policies and procedures, or are there times when formalized accounting procedures just aren’t necessary? The answer is probably what you’re expecting, but don’t really want to hear.

Formal accounting policies are always necessary! (And we’re not just saying that because we’re accountants.)
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Many small business owners think they don’t need to write down their accounting processes and procedures because with limited staff they may only have one person doing everything bookkeeping-related and that person doesn’t need to tell themselves what they do regularly. However, even small companies open themselves up to significant risk if they don’t document their accounting policies because doing so is a fundamental element of doing business regardless of the size of the organization. 

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Let’s take a look at where this risk exists and explore how creating an accounting policies and procedures manual can help to mitigate it.

Understanding Accounting Risk
Operating with informal or ever-changing accounting policies can result in:

Inconsistency
Operating with inconsistent practices across A/R, A/P, and payroll increases the risk of fraud and errors. Consistency is the hallmark of good accounting because it forms a solid foundation for everything the business needs to succeed.  

Formalized accounting policies and procedures establish clear instructions of what should be done, when, and by whom, reducing the opportunity for fraud to occur in the first place and limiting the ability for it to be hidden if it does. This is a key step in preventing financial loss as well as reputational damage.

Furthermore, establishing guidelines around how things like revenue and expense recognition, inventory valuation, and AFDA (allowance for doubtful accounts) will be handled ensures that the accounting activities will be handled the same way regardless of who is responsible for them. This both reduces errors and instills confidence in the company’s financial reports. Both are essential for future growth.

Knowledge Siloes
When accounting policies and procedures only live in the heads of the personnel using them, a siloing of critical knowledge occurs. In these instances, often critical information regarding accounting systems, methodologies, practices, and timelines isn’t well conveyed to decision-makers and adjacent staff. As a result, when accounting personnel are out of the office or leave the role, significant knowledge gaps exist that make it hard for the company to execute daily functions and sustain long-term growth.

In some instances, knowledge silos can also breed resistance to change because when policies are only known by some, there isn’t much of an opportunity for the kind of review and examination that is likely to identify opportunities and lead to positive change. As a result, organizations can fall into a rut of “we’ve always done it this way” thinking that stymies ongoing improvement.  

Poor Strategic Decision-Making
Inconsistent bookkeeping/accounting practices and knowledge siloes combine to prevent smart, timely decision-making. When there is no consistent basis for how accounting activities should be handled and little to no transparency around how things are being done, business leaders are forced to make decisions without the assurance that they are working with the most accurate or timely information available. Critical business decisions can’t be based on errors, estimates, or muddy numbers, but when that’s all a company has to work with, leadership must either make tactical decisions very slowly to gauge the impact a little at a time, or act quickly based on their intuition and simply hope that their decisions pay off. However, gut decisions rarely generate the kind of return that decisions based on accurate data can.

Hindered Growth
Informal accounting policies tend to result in day-to-day inefficiencies and are difficult to scale over the long-term. Neither of these are conducive to sustained growth, but that’s not the only way that a lack of formal accounting policies can hurt a company’s growth potential.
Typically, lenders and investors are not going to provide funding without a formal accounting manual in place, which means that not having one will hurt your chances to obtain the cash needed to grow. It’s easy to see why lenders and investors require that companies have an accounting manual when you frame it the way Eric Moore does:

An accounting manual is invaluable for maintaining the integrity, efficiency, and compliance of an organization’s financial operations. It ensures that all accounting activities are performed according to a standardized set of processes and procedures, thereby supporting the organization’s overall financial health and sustainability. Furthermore, it maintains the internal controls needed to appropriately safeguard the company’s assets.

A company’s accounting manual should be thorough enough to cover its daily, monthly, quarterly, and annual accounting activities and be updated whenever changes to those activities occur to keep lenders and investors in the loop. Communicating transparently keeps the institutions happy that fuel business growth.

Compliance Issues
Businesses without formal accounting policies not only operate less efficiently and tend to exhibit reduced growth but may also experience compliance issues and audit difficulties as a result.
 
Compliance across tax and reporting is one of the biggest areas where having formalized accounting policies and procedures can pay off significantly. By putting the pieces in place to regulate what a company does, it can prevent itself from running afoul of compliance requirements and incurring the penalties associated with doing so.

And, if a business does get audited, an accounting manual can serve as the company’s financial backbone to auditors, so they understand how a company’s books are structured what to expect. When organizations have clear accounting policies and adhere to them, they can often avoid the kind of audits that drag on and tie up key staff, resulting in a financial drain on the business.   

Formalizing Accounting Policies and Procedures
Hopefully, by now you understand that an accounting manual is important for both the short-term operations of the company as well as its long-term success.
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Remember, an accounting manual doesn’t need to be incredibly fancy or complex. It just needs to clearly document what your company does, how it does it, and when it does it. The goal is to clearly convey vital bookkeeping and accounting information to internal personnel and external stakeholders, as well as identify internal and remedy control weaknesses to strengthen your organization.

Find out How to Write an Accounting Manual

When you need help establishing formal accounting processes and procedures or handling day-to-day accounting activities while your team works on this important documentation project, we can help! Our team of consulting accountants has helped organizations of all types and sizes improve their accounting departments. Let us do the same for you! Whether it’s writing an accounting manual, implementing internal controls, managing your day-to-day accounting activities, or cleaning up your books, we have the experience your business needs. Contact us today to find out more!