What is Record to Report (R2R)?
Record to Report is an accounting and finance process which starts with the capture and processing of transactions, and finishes with the reporting of financial results. The capture and process is the record stage, finishing with the report stage which includes not only internal reporting to management but also external authorities. Businesses that suffer with late and inaccurate reporting will normally find that their transaction recording is inefficient and unreliable.
It is critically important that any business with requirement of having quick (including real-time) and accurate financial information start by analysing and putting into place process improvements at the transaction capture stage.
The 4 stages of Record to Report
RECORD – The daily capture and processing of operational business transactions such as sales, purchases, bank, and payroll. This is often referred to as cash-based accounting as it focuses mainly on business transactions that involve cash. Frequent reconciliation of the bank ledgers to bank account balances are important to ensure the completeness. Additional critical non-cash activities will include the recording of sales and purchases made on credit where cashflow will occur later.
A R2R specialist will primarily focus on this area as the capturing of financial transactions provide a strong basis on which reporting depends. In the same way that you would expect a house to develop cracks without strong foundations, you cannot expect to have accurate and on-time financial reporting without having comfort that all operational activities have been recorded correctly.
FINANCIAL CLOSE – Often the area that causes a finance team pain is the monthly cycle of converting your cash-based accounting into a form consistent with generally accepted accounting principles. They are non-cash based and often require manual calculation. For example deferred revenue adjustments when an invoiced sale relate to a performance obligation after the current period close, expense accruals for expenses incurred but which have not yet been invoiced, provisions for doubtful debts, and expense prepayments.
Technology can however help at this stage and will be the feature of a future blog.
TECHNICAL CLOSE – A process that is normally limited to thoses business with more than one entity, this includes the consolidation to ensure that financials are reported as if the group was a single entity. The elimination of intercompany revenues, expenses, receivables and payables requires a strong recording stage that is compliant with your transfer pricing policies. Tax provisions will need to be booked. Revaluation and Restatement will be required to entities dealing with more that one currency.
Again technology can help in this regard and often come as standard even in the most basic of accounting systems.
REPORTING – Now that we have “closed the books” we can move on to reporting. The sooner you can perform the technical close the sooner you can perform financial reporting, and critical to performing the close is accurate and complete recording of transactions.
Reporting is not just limited to management. Annual accounts can become highly streamlined. Reporting employments taxes and submitting VAT returns become simplified. With a strong record stage you can be sure that you are in compliance with external authority requirements.
Benefits of Record to Report
ADMINISTATIVE COSTS – As R2R is predominantly focused on the automation of transaction capture, a business will not only have comfort in the accuracy of their financial data but also minimise the costs associated with these processes. As a business grows these processes are scalable ensuring that it will not have to recruit new staff to deal with increased volumes,
DECISION MAKING – A big win is the ability for a business to make decisions – both operational and strategic – quickly. Imagine having real-time information relating to the success or otherwise of an online promotional campaign. Or being able to report to investors without delays.
COMPLIANCE – Accurately recording financial transactions provide assurance that the basis of external reporting is complete. Compliance with accounting standards, VAT & payroll reporting (often a major headache for entrepreneurs that need to focus on their business) can be achieved without pain and distraction. Assuming of course that the record and close stage have been appropriately designed.
TAX PLANNING – Your tax accountant or external provider will be able to accurately calculate tax estimations safe in the knowledge that all transactions have been recorded correctly. They will also have better reporting information on which to base strategies to reduce your tax liability.
CASHFLOW FORECASTING – Cash is King – really it is! Safe in the knowledge that all of your sales have been captured, purchase invoices processed etc, a business will now be able to accurately forecast future cashflows.
Conclusions
- Automation of the capture of financial transactions is fundamental to achieving accurate reporting and compliance.
- Maximising the efficency and minimising the cycle allows for near real-time reporting,
- Focus on R2R also provides opportunities to minimise the administrative costs of your accounting team.
Want to know more?
Pensapos has a depth of experience in the transformation of the R2R process, and helping businesses to remove unnecessary stress to the entrepreneur.