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Continuous Accounting: The New Age of Accounting

See Also:
Reducing Your Cash Conversion Cycle
Key Performance Indicators (KPI’s)
Accounting Principles 1, 2, and 3
Accounting Principles 5, 6, and 7

Continuous Accounting: The New Age of Accounting

Continuous Accounting is the new age of accounting. It provides a more efficient way to review financial performance in a real-time automated process, and a trustworthy, repeatable accounting cycle to forecast future results. It also gives the financial department a larger role in strategy and planning.

The Old Model: Record-to-Report (R2R) Accounting

The traditional model consists of a linear record-to-report process for accounting. In order to complete a record keeping process, a company must report certain tasks and responsibilities pertaining to the company’s financials. Expect these to be completed by the end of the period – which can last anywhere from two weeks to two months. Store and manage the data in a large computer processor. Disadvantages of this process include:

  1. The data accumulated over a large period of time have a greater chance for error with unreconciled transactions
  2. Inaccuracy and misrepresentation
  3. Takes up too much time and loses effectiveness of team

The New ModelFinancial Strategies with Cloud-Based Technology

Managers and financial leaders cannot afford to wait a month to two months for reports to be processed. This is what bookkeepers tend to do. Continuous accounting changes the prolonging process from period-end to a day-to-day basis. The cloud platform is capable of recognizing and verifying information constantly and repeatedly, thus enabling it to be “continuous.”  This evenly distributes work rather than accumulating large amounts of tasks over time. Continuous accounting is an organized alternative to the old model of record-to-report accounting.


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Shifting Business to the Continuous Accounting Platform

In the past, bookkeepers would record with accumulated reports, which would process a month at a time at least. With the matching principle, the company matches the expenses that are incurred during the same period the revenue is recognized (or the time the service was performed). Instead of recording in batches, modify the accounting system record as they occurred. Now, the next progression is to continuously reconcile accounts and analyze detail. In order to do this, have companies automate their systems. Otherwise, bank statements and other records would have to be linked and reconciled daily.

The New Age of Accounting

Advantages of Continuous Accounting

1. Continuous Accounting processes financial information faster than before.

Certain companies depend on a faster cash conversion cycle, in which case this technology would be useful. Instead of reviewing financial information every month or so, continuous accounting will complete the processes day-by-day. The processing of financial information will be quicker, and key performance indicators will become more apparent and easier to fix. This allows financial leaders to eliminate risk and take action proactively and defensively.

2. Automated systems improve the productivity of the accounting departments.

Increased automation should result in the benefit of improved productivity. This reduces costs because taking the manual systems, rather than automatically through continuous accounting, and applying them everyday would be cost-prohibitive.

Disadvantages of Continuous Accounting

1. Adapting the finance departments to a new way of accounting.

Implementing change is always a challenge, especially when a department, trained for 10, 20, 3o years on how to properly perform accounting, does it. Larger companies would benefit from continuous accounting more than smaller companies, where new, younger, more adaptable people work. However, the disadvantage of switching from traditional accounting to this new automated technology is that the larger companies have employees that have worked as an accountant for 25+ years and aren’t as adaptable.

2. Financial statements may not be as accurate. 

Instead of waiting a couple of weeks before submitting invoices or reports, continuous accounting processes the information right away. This leaves little time to adjust and organize data. By using continuous accounting, the financial leader succumbs to having financial statements 90% accurate rather than the expected 100%.

How Continuous Accounting Affects the Future of Finance

Technology itself is changing finance departments globally. Continuous Accounting is just the start of new automation processes that pertain to large sources of data. Technology such as Continuous Accounting establishes a precedent for timely, cost-effective, and/or high-quality improvements for business.

New Age of Accounting, continuous accounting

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Vendor Finance

See Also:
Time Saving Tip for Filing Vendor Invoices
The Dilemma of Financing a Start Up Company
Mezzanine Debt Financing
Commercial Agents

Vendor Finance Definition

The vendor finance definition is the receiving of financing for an asset from the provider of the asset. Vendor finance is a common way to receive an asset before having the money to pay for it. In addition, vendor finance programs can come on a piece of equipment, real estate, software, and even intangible assets.

Vendor Finance Meaning

Vendor finance means receiving financing from a vendor rather than a bank or investor. This often creates a mutual benefit; the buyer wants the item now in order to pay for it through increased productivity, while the seller of an item appreciates increased income from selling and financing an item rather than receiving just the sales price.

Vendor financed companies can agree to either debt or equity financing. To phrase this another way, a company can receive vendor financing in 2 ways. First, the business can receive the item at a sales price with an agreed amount of interest, on the sales price, which accrues as time progresses. Alternatively, a firm can receive the item in exchange for a certain amount of company stock. Here, no monetary repayment of the asset is needed because the vendor has already been paid in stock. Generally, vendor finance in the form of equity is more common for startup businesses. A vendor finance association may be available in some areas to gain advice and planning on the subject.


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Vendor Finance Example

For example, Jonathan works at a business brokering firm. His employer, a company which arranges the sale of a business between the exiting entrepreneur and a buyer, is a successful company with a professional reputation. Jonathan enjoys his work because he assists people in their exit plan, assists people in starting a business, and gets experience in a variety of entrepreneurial firms while he does it.

Recently, Jonathan is brokering the sale of a small, yet successful, chain of ice cream shops. The exiting business woman, the founder of the firm, has worked to the bone to grow the company. She has earned her retirement with her application of sweat equity.

Jonathan eventually comes across a soon-to-be entrepreneur. His experience in the restaurant industry makes him a likely candidate. The buyer is interested in applying the expertise he learned, mainly focused on growing restaurants, to a company where he will be the main controller of company success. Jonathan arranges a meeting between the two business people.

At the meeting, Jonathan makes a discovery: the potential buyer has slightly less to invest in the business than the seller’s price. This appears to both to be a major issue which stands in the way of the sale of the company. Jonathan, at this point, steps in with another option: use a vendor finance plan on the remaining amount to be paid to the seller. Once Jonathan poses this option, the two parties restart negotiations.

Decision

The two decide on vendor equity financing for the remaining amount of money to be paid to the seller. To her this seems like an excellent idea: she can reduce risk while still taking benefit from growth of the company that she started. The buyer also appreciates this option: he can go into business by buying a reputable company which already has customers. The two resolve to complete the purchase. They also agree on a one year transition where the buyer will be able to receive consultation from the experienced manager.

Jonathan is pleased by his achievement. He takes great joy from helping one person harvest the benefits of their work while allowing another to begin the process without the struggles of the startup phase. He receives his commission from the sale. This achievement pleases Jonathan.

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Self-Liquidating Loans

See Also:
Loan Agreement
Collateralized Debt Obligations
When is an interest rate not as important in selecting a loan?
Debt Ratio Analysis
Debt Service Coverage Ratio (DSCR)
What Your Banker Wants You To Know
7 C’s of Banking
Budgeting 101: Creating Successful Budgets

Self-Liquidating Loans

The term “self-liquidating loans” is banker slang. It refers to a loan that is used to generate proceeds that are in turn used to repay the loan. Basically, a borrower takes out a loan used to finance business activities that generate revenue. Then the borrower takes the revenue generated from those business activities and uses it to repay the money that was borrowed to finance the activities.

Self-Liquidating Loan Example

The term can apply to a company that experiences seasonal fluctuations in business. During the busy season when business is booming the company needs to borrow money to finance short-term assets such as inventory and accounts receivable. The company borrows money to buy more materials to take advantage of the increasing demand of the busy season.

Then when business slows down the company will have less of a need for borrowed funds to finance short-term assets like inventory accounts – the need for financing will decline as the need for inventory declines. At this point, the company will have generated profits from the busy season, and will now be able to use those profits to repay the loans it took out to finance operations during the busy season. And this is called a self-liquidating loan.


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self-liquidating loans

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self-liquidating loans

Source:

Higgins, Robert C. “Analysis for Financial Management”, McGraw-Hill Irwin, New York, NY, 2007.

 

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Management Definition

See Also:
Activity Based Management (ABM)
Warning Signs Of A Company In Trouble
Budgeting 101: Creating Successful Budgets
Planning Your Exit Strategy
Outsource Definition

Management Definition

What is Management? The management definition is a single or group of individuals who challenges and oversees a person or collective group of people in efforts to accomplish desired goals and objectives. Furthermore, the definition of management includes the ability to plan, organize, monitor and direct individuals. The management definition is also a person or collective group who possess the executive abilities to lead a group through hardships, aspiring to meet an organization’s purpose and visions.

Management Functions

With an understanding of what is management, there are several management functions and roles that are needed in the management function of planning for an organization’s success. Management function examples include the following:

Organizations must identify the viable management functions organizing for growth and future success. They should also develop a business management structure to separate different management functions and roles; however in smaller companies, individuals may often take on multiple management functions. In comparison, larger firms will segregate different job management functions leading for organized management functions and skills.

Business Management

Organizational best practices are the business management description guidelines frequently outlined in standard company policies and procedures. Furthermore, a business manager reinforces these aids to ensure specific job functions are carried out in a preferred business approach. Organizations may hire a business manager for one or multiple functional areas to provide specific industry or product knowledge and have overall responsibility for business operations. Business manager responsibilities may include supervising an entire company, division, or territory to generate the highest revenue return from business activities.

In addition, some of the business manager’s duties include the following:

  • Managing a team
  • Providing industry or product expertise
  • Meeting desired performance measures

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Management Definition

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Management Definition

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Histogram Definition

Histogram Definition

The histogram definition is a graphical representation of the density or frequencies over a certain data set. Many usually use histograms graphs in finance for market analysis.

Histograms Explanation

A histogram exposure is related to a data set usually in finance. The data set is usually the entire existence of the market and where prices are set. For example, the histogram might use a data set from the S&P 500 on expected returns. Thus for each frequency that the market hit that return it will show up as part of a bar graph. The higher the bar graph the more frequent the market hits that particular return.

The histogram can also show the density amount or find data that provides somewhat of a percentage range of where the stock or market index is likely to hit. Returns are not the only use for the histogram within the market. In fact, you can use histogram graphs for just about any aspect of a stock, bond, or market index. Some of these factors may include the standard deviation or covariance in measuring risk, or returns in different stocks or markets.

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histogram definition

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histogram definition

See Also:

Financial Instruments
Finance Beta Definition
Efficient Market Theory
Required Rate of Return
Covariance

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Capitalization

See Also:
Company Life Cycle
Market Positioning
Insider Trading
Dispersion
Adjusted Present Value (APV) Method of Valuation
Capitalization Rate

Capitalization in Finance

In finance, capitalization in finance is the sum of a company’s debt and equity. It represents the capital invested in the company, including bonds and stocks.

Capitalization can also mean market capitalization. Market capitalization is the value of a company’s outstanding shares of stock. It also represents the value of the firm according to investors’ perceptions. It is equal to the number of shares outstanding multiplied by the share price.

Market Capitalization = Shares Outstanding x Share Price


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Capitalization in Accounting

In accounting, capitalization refers to recording costs as assets on the balance sheet instead of as expenses on the income statement. A company may record the purchase price of an asset, as well as the asset’s acquisition costs, such as transportation and setup, as assets on the balance sheet.

Capitalization in accounting also refers to transferring an off-balance-sheet operating lease onto the balance sheet and recording it as a capital lease. To do this, calculate the present value of the future operating lease payments and record the amount on the balance sheet as an asset with a corresponding liability.

Capitalization of Cost

For example, a manufacturing company may record the cost of raw materials, direct labor, and overhead as assets – where labor and overhead would be capitalized costs. The assets (including the capitalized costs) are then transferred to the income statement as costs of goods sold as the underlying assets are sold to customers. Capitalizing costs increases the value of total assets and equity on the balance sheet, as well as net income on the income statement.

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Capitalization in Finance, Capitalization in Accounting

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Capitalization in Finance, Capitalization in Accounting

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