Standard Operating Procedure for Accounts & Finance

1. Accounts Receivable SOP (Sales & Invoicing)

Accounts or trade receivable is the amount owed to a company when it provides goods and/or services on credit. The accounting SOP manual helps to streamline and optimize the collection cycle time, credit policy, sales, invoicing, and billing process, with a focus on the legitimacy and accuracy of bills and invoices. Accounts standard operating procedure helps to define the following:

• The credit approval process, including payment cycles
• Procedure for invoices, billing, and sales (including invoicing software, digital documentation, and electronic billing & payment)
• Procedure for handling payment delays or defaulters
• Procedure for maintaining customer data, including customer acknowledgment
• Tracking accounts receivable data, and tallying it with balance sheet numbers
• Tracking shipping documents

2. Accounts Payable SOP (Purchase & Payments)

Accounts Payable consists of all short-term debts owed to creditors (to be paid off within a year or so) and are shown as a current liability on the company’s balance sheet. The Accounts payable process is an integral part of the P2P (procure-to-pay) workflow. Part of the accounts SOP, P2P covers the entire process chain, right from procurement, purchase, and invoice processing to the final vendor payments. The standard operating procedure of accounts department consists of all the components of this cycle, including:

• Proper invoice data capturing
• Coding invoices with accurate account and cost center allocation
• Invoice approvals
• Invoice matching for purchase orders
• Posting for payments.

3. Tax Compliance SOP

Tax compliance is adherence to legal tax-based requirements and norms, with systematic protection of the company’s internal tax-related policies. With tax reporting standards having changed after the globalization of accounting, and tax legislation increasing and becoming complex, tax compliance SOPs have become key. An effective SOP for finance department, it helps drive the tax compliance management system (Tax CMS). Tax compliance SOPs need to monitor and take care of the following:

• Identification of the object and evaluation of tax risks based on the company’s tax objectives
• An org structure/ organogram & governance process based on company size or industry-specific tax requirements
• Proper documentation & communication of tasks, responsibilities, authorization, and tax processes
• Identification and implementation of legal and regulatory changes in tax law or accounting
• Identification of the object and evaluation of tax risks for all types of taxes
• Punctual and error-free tax reporting and tax forecasting
• Accurate calculation, evaluation, classification, and disclosure of tax assets and liabilities
• Timely payment of tax liabilities, including retention amounts and withholding tax
• Presenting extrajudicial and judicial remedies
• Accurate and complete calculation of tax provisions
• Interpretation of laws about real-life business processes.
• Adjustment of systems and processes, and deployment to production systems.
• Once a new legal requirement has been interpreted, making adjustments through change management
• Looking into appropriate audit or assurance frameworks from third party vendors
• Ensuring that the tax compliance process is well documented and viable, to enhance credentials.

4. Banking & Investment Management SOP

Banking and Investment management SOPs seek to establish a system in which sourcing of long-term financing (beyond the day-to-day working capital needs), portfolio holdings of financial assets, budgeting, and investments are efficiently managed. These directives mainly consist of short and long-term strategies for the acquisition and disposal of funds and assets. The SOPs here generally cover the following:

• Long term financing through banks/private lenders/other sources
• Financial statement analysis
• Portfolio allocation, which could be an optimal mix of bonds and stocks
• Equity research and buy and sell recommendations
• Financial planning and advisory
• Estate and retirement planning, along with asset distribution

5. Roles & Responsibilities of Accounts Team

The accounts department or team has an administrative function or back-office role, to ensure smooth operations for the company. SOP for accounts department lists these crucial responsibilities:

• Billing: Collecting information from shipping and customer order departments to create invoices for customers.
• Budgeting: Preparing a company-wide budget, helping to plan for future annual expenditure, including fixed asset purchases.
• Collections: Tracking overdue invoice payments from customers and extracting it from them through various tools.
• Financial statements: Adjustment of journal entries to ensure compliance of the company’s initial financial results under the applicable accounting framework.
• Internal reporting: Calculating profitability of various products, product lines, services, customers, sales regions, stores, etc. and different business aspects, to improve financial results.
• Payables: Collection of supplier invoices and employee expense reports, verification of billed amounts for payment, and issuing of payments to recipients on scheduled payment dates.
• Payroll: Collection of the employees’ time-work and pay rate information from HR, calculation of tax and other pay deductions, and issuing net pay in cash or digital modes.
• Taxes: Computing taxable business income and remitting income tax payments to the government. Tax filings are also done for areas like franchise taxes, sales taxes, use taxes, and property taxes.
• Credit: Granting customer credit is normally a treasury function, but could be under the purview of the accounts department in smaller companies with no treasury staff.
• Human resources: The payroll staff has to determine employee gross pay and pay deductions. This function could be kept within accounts, or as an entirely separate department or within the HR department.

6. Accounts & Finance KPI’s for business

Accounts & Finance KPIs (Key Performance Indicators) are measurable parameters that indicate a company’s fiscal health. They help to quantify its revenues, profitability, and financial acumen, to fulfil its long-term goals and attract potential customers, shareholders, and investors. The following are the key Accounts and Finance KPIs for businesses:

i. Operating Cash Flow (OCF): is the money generated daily by a company’s business operations. It indicates whether positive cash flow can be maintained for growth, rather than external financing. It is normally compared to the total capital employed, and is calculated by adjusting net income for depreciation, changes in inventory, and accounts receivable.

ii. Current Ratio (CR): indicates an organization’s ability to pay all its short-term financial obligations, or those obligations due within a year. This KPI considers a company’s current assets like account receivables and current liabilities like account payables. A healthy current ratio is between 1.5 and 3, but companies could show a CR < 1 if they are investing in growth or accumulating debt. A high CR could indicate that a company has assets and cash, but lacks innovation and growth.

iii. Quick Ratio / Acid Test Ratio: is a liquidity ratio that measures whether a business has sufficient short-term assets to cover its liabilities, without needing to sell its inventory or get additional finance. Compared to the current ratio, the quick ratio provides a more conservative overview since it factors in fewer items, including only those assets that can be converted to cash within 90 days or less.

iv. Burn Rate: reflects the rate at which a company is spending money on a weekly, monthly, or annual basis. This KPI helps smaller firms who are unable to carry out an extensive financial analysis. The burn rate indicates whether the organization’s operating costs are sustainable in the long term.

v. Net Profit Margin (NPM): shows how a company is generating profits compared to its revenues. Mostly calculated as a percentage, this KPI indicates how much of every rupee earned by the company translates into profits. The net profit margin is calculated by dividing net income by total sales revenue.

vi. Gross Profit Margin (GPM): measures money left over from revenue after accounting for the cost of goods sold. This is a key indicator of a company’s financial health, estimating if it is capable of paying for operating expenses while having funds left for growth.

vii. Working Capital: evaluates an organization’s currently available assets to meet short-term financial obligations. Working capital includes assets such as available cash, short-term investments, and accounts receivable, demonstrating business liquidity. Readily available cash is working capital and it is calculated by subtracting current liabilities (financial obligations) from current assets (resources with cash value).

viii. Current Accounts Receivable: measures the amount of money owed by debtors. It helps to estimate upcoming income and calculate the average debtor days, showing how long it takes for an average business partner or client to repay their debt. A high current accounts receivable score shows a business’s inability to handle long-term debtors, resulting in financial losses.

ix. Current Accounts Payable: Opposite to receivables, this metric estimates the sum owed to suppliers, banks, and creditors. To calculate current accounts payable, organizations have to consider all liabilities that need to be paid within a given period.

x. Inventory Turnover Ratio: estimates how efficiently a company sells and replaces its inventory within a time frame. Thus, it reflects an organization’s ability to generate sales and quickly re-stock. The inventory turnover ratio can be estimated by dividing the cost of goods sold by the average inventory for the same period.

xi. Return on Equity (ROE): measures a businesses’ capacity to use shareholder’s investments efficiently, to generate high profits. The KPI shows how much revenue a company generates for each unit of shareholder equity.

xii. Debt-to-Equity Ratio (D/E): Similar to ROE, this KPI shows how effectively a business is using its shareholder investments. A high D/E Ratio indicates that an organization is losing investments and gathering debt, instead of generating new profits out of its investments.

Cashflow Management SOP

Cash flow management SOPs track money inflow and outflow. It identifies the amount of money necessary to cover debts, for example, for paying staff and suppliers. The SOP for Finance also helps to calculate how much money is available in the future for business needs. It standardizes the cash flow control procedure, thereby optimizing the Cash to Cash Cycle (i.e. Stock Days + Debtor Days – Creditor Days).

7. Delegation of Authority Matrix

Delegation of Authority can be defined as the sub-division and sub-allocation of powers to subordinates to achieve effective results in an organization. More specifically, documentation of the Delegation of Authority Matrix is a key requirement of the internal control process for business entities. It helps to define financial and administrative responsibilities, with authorities delegated to the incumbents approving decisions and transactions within these business entities.

8. Recurring Tasks Management & Payment Reminders

Recurring tasks are regularly occurring repetitive jobs. Recurring task Management processes can be set up or automated using project and task management software like JIRA, Microsoft Project, Basecamp, Trello, ProofHub, etc. Recurring task management functionalities in software enable quick duplication of existing tasks, without having to manually create them.

Payment reminder systems can be customer-friendly or can be predefined, encouraging timely payments. They are normally built-into invoice terms & conditions, making tracking easier. These reminders can be suitably automated and sent via email, SMSes, app notifications, or by using WhatsApp, Telegram, and other messaging tools.  Software or tool-based invoice payment reminder systems can specify the frequency of sending such reminders to customers.

9. Approval Methodology & Process flow

An approval methodology and process flow is the way a business approves its content, documents, invoices, budgets, purchase orders, or any other items. Creating an approval process defines the procedure to be followed for approving work. It helps to standardize internal processes and create a reliable repetitive system. Approval processes are workflows, which are approved work sequences from start to completion.

Automated Approval Processes & Workflow: Since manual approval systems are time-consuming, organizations have now shifted to automated approval processes and workflows. Companies use software to create customized and standardized approval processes that save time, improve efficiency, transparency, compliance, and decision making. Examples of such tools are SmartSheet, SharePoint, Salesforce, and Microsoft Office programs like Microsoft Flow.

10. Petty Cash Management SOP

Petty cash management SOP creates a record keeping system to track the usage of petty cash funds (PCF). Petty cash is normally stored in a secure location like a lockbox with controlled access, and are used to make small, one-time purchases. A typical SOP will cover the following areas:

• Establishment of the PCF
• Monitoring, recording, and reporting the PCF
• Petty cash accounting and disbursement
• Petty cash reconciliation & replenishment
• Petty cash voucher management

11. Bank Reconciliation SOP

A bank reconciliation SOP lays down the procedure for tallying the cash account balances in business records with corresponding information on a bank statement. The process helps to ascertain possible differences between the two and to book changes to the accounting records. A bank reconciliation SOP follows a step-by-step approach as shown below:

• Getting bank records with a list of transactions: This could be from a bank statement, online banking, or from the bank data sent to the accounting software.
• Getting business records: The ledger of income and outgoings could be obtained from a logbook, spreadsheet, or an accounting software package, through data capture and extraction tools.
• Finding the starting point: The reconciliation should start from the point where the business book balance matched the bank account balance previously.
• Running through bank deposits: with each deposit shown as income in accounts, with missing data added if applicable.
• Checking the book income: Each entry should match a bank statement deposit. Reasons for missing entries should be ascertained.
• Running through bank withdrawals: All bank withdrawals (including those not accounted for) should be recorded in the books.
• Checking book expenses: Each entry should match a bank account withdrawal.
• End balance: After all deposits and withdrawals have been checked, the bank balance should match the business account total. This will be the starting point for the next reconciliation.