Journal entries are the foundation of the accounting process, recording vital financial transactions that impact the accuracy of financial statements. However, manual journal entries are remarkably inefficient, consuming countless person-hours while remaining prone to errors and fraud.
In 2023, the priority for finance teams will be driving operational excellence and minimizing risk through increased automation. Journal entry automation delivers transformative benefits that directly address these pressing needs.
This article will explore the problems with manual journal entries and demonstrate why automating this critical process should be a top priority this year.
The Critical Role of Journal Entries
Journal entries record day-to-day transactions like accounts payable, accounts receivable, payroll, inventory adjustments, and other business events. These entries update account balances in the general ledger and serve as the basis for generating accurate financial statements.
Without properly recording financial transactions through journal entries, companies lack reliable visibility into their financial position. Flawed or fraudulent journal entries distort financial reports.
Unfortunately, manual journal entries are enormously inefficient, time-consuming, and risk-prone, undermining financial integrity.
4 Major Pitfalls of Manual Journal Entries
Manual journal entry methods create the following critical issues:
1. Consume too much time
- For large companies, accounting staff spend copious amounts of time on repetitive journal entries each month. APQC finds top performers take ~5 days while median performers take 7 days to close books each month[1].
- Since journal entries represent up to 50% of the accounting cycle, automating this process directly accelerates monthly close.
- With average accounting salaries of $52,000[2], and closing taking 189 hours annually[1], manual journal entries cost companies ~$20,000 per accountant each year.
2. Rife with errors
- Manually entering data inevitably leads to typos, duplicate entries, mispostings, and other errors. On average, employees make ~118 mistakes each year[3].
- Fixing journal entry errors requires rework and delays monthly close. These mistakes also lead to inaccurate financial reporting.
- A study found that just typos and bad data cost businesses $3 trillion per year[4]. Clearly, manually entering journal data is untenable.
3. Vulnerable to fraud
- Manual journal entries lack controls and oversight, enabling fraud either by internal staff or external hackers.
- Undetected fraudulent entries can massively distort financial statements. For example, coffee chain Luckin fabricated $310 million in sales through phony journal entries[5].
- According to the ACFE, typical organizations lose 5% of revenues to fraud each year[6]. Journal entry fraud is a major enabler.
4. Doesn‘t scale effectively
- As a business and its transactions grow, manual processes fail to scale. More staff get added but closing still takes weeks.
- There is a cap on how many journal entries an individual can handle accurately. Automation solves the scalability problem.
Case Study: Manual Journal Entry Pain at Growing Company
As an example, consider a fast-growing software company that reached $100 million in revenue. Their manual journal entry process was no longer sustainable:
- Closing cycle took 15 business days. AP staff worked nights & weekends to finish on time.
- Each period had ~250 journal entries requiring ~1,000 man hours.
- Despite adding 2 accounting staff, they saw little improvement in cycle times.
- Journal entry errors delayed closes and led to reporting mistakes.
- Lack of oversight enabled potential fraud such as unapproved changes.
This demonstrates that once a company reaches a certain size, manual journal entries become highly problematic.
Benefits of Journal Entry Automation
Purpose-built journal entry automation software addresses these problems through the following capabilities:
- Automated data capture from source systems
- RPA bots to handle manual steps like data entry
- Matching algorithms to pair entries with source documents
- Workflow for transaction review, editing, and approvals
- Rules-based systems to classify and post recurring entries
- Centralized audit trail capturing all journal entry data
- Real-time dashboards and reporting for process visibility
As a result, automating journal entries delivers major benefits:
1. Saves Time and Money
Automation eliminates the manual effort of data entry, reviewing, correcting, and posting journal entries. This accelerates the monthly close by reducing cycle times by 30-50%.
Accountants are liberated to focus on value-added tasks instead of repetitive data work. Companies save ~$10,000 per accountant annually.
2. Improves Accuracy
Automated solutions all but eliminate manual errors caused by re-keying data. This enhances the integrity and compliance of financial reporting.
3. Increases Transparency
With centralized audit trails, all changes are tracked enabling detailed forensic analysis. This deters and detects fraudulent or erroneous activity.
4. Enables Scalability
Systems can handle growing transaction volumes without proportional manual labor. This facilitates scaling while controlling headcount costs.
5. Provides Real-Time Insights
Analytics dashboards give leadership process visibility for continuous improvement and risk reduction.
Infographic showing 5 key benefits of journal entry automation
Top Drivers of Automation in 2024
Several emerging priorities will accelerate journal entry automation initiatives in 2024:
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Digital transformation – Finance teams need scalable digital systems to keep pace with business growth.
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Hybrid work – With remote accounting staff, companies need enhanced visibility and financial controls.
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Data-driven insights – Real-time reporting of journal entry processes enables continuous improvement.
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Risk reduction – Fraud and errors have greater ramifications due to economic uncertainty.
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Operational efficiency – Companies seek greater productivity from existing accounting staff.
Journal entry automation delivers against these critical priorities that will take center stage in 2024.
The Top 5 Benefits of Journal Entry Automation in 2024
Given the urgent need for digital acceleration, risk reduction, and leaner operations, here are the top 5 benefits that will drive adoption of journal entry automation this year:
1. Transform productivity & efficiency
Automating repetitive manual work delivers staggering productivity gains. Top performers automate journal entries to close books in just 5 days instead of the industry median of 7 days[1].
2. Mitigate fraud & compliance risks
Centralized audit trails create accountability. According to the Association of Certified Fraud Examiners, automation reduces fraud by 60%[7]. This also aids compliance.
3. Support business growth
Systems that can handle large transaction volumes enable scaling without explosive hiring. This facilitates growth in any market conditions.
4. Gain data-driven insights
Real-time dashboards with journal entry status, productivity, and risk metrics deliver transparency. Management gains insights to continuously refine processes.
5. Expedite monthly close
Shortening the monthly close to 5-10 days allows leadership to make decisions faster amid market uncertainty.
Start Delivering Results Now
The business imperative for closing efficiency, risk reduction, and digitization make 2023 the year to prioritize journal entry automation. Significant bottom-line benefits await.
Leading solutions integrate with major ERPs like NetSuite, Sage, SAP, and others to get you up and running quickly. Get matched to the top-rated journal entry automation system for your needs and start accelerating your monthly close.
Your accounting team will thank you! Reach out via comments if I can elaborate further based on my decade of experience in the field.
