What is the outstanding amount on each of your current leases?
While it may seem like a straightforward question, it can be very tough for organizations with multiple capital leases to manage them correctly. Invoices can be spread out over years, with the original lease contract filed safely away in a folder somewhere, further complicating the reconciliation process. Without realizing it, organizations could be overpaying for their capital lease contracts, especially if several contracts are involved.
3 Common Challenges of Capital Lease Reconciliation
In order to avoid overpayment and properly resolve and reconcile their capital leases, organizations must first address the reconciliation challenges that limit them. The inherent nature of manual reconciliation methods can cause visibility and compliance issues.
1. Time-Consuming Nature of Manual Reconciliation
With so many accounts to reconcile, traditional matching and reconciliation methods can quickly consume time in the close. Not only do spreadsheets and other legacy tools further extend the close, but they can also delay updates to appropriate finance leadership through virtual or in-person meetings.
Lengthy processes such as transaction matching also take a toll on employee morale, leaving accountants to feel like their high-level skills are being underutilized. They prefer to focus on more strategic activities, but when manual processes are involved, more time and effort are reallocated to complete the close.
2. Difficulty Tracking Capital Lease Contracts
One of the biggest challenges to address with capital lease contracts is matching the invoices to the original lease agreement. This is a common problem, particularly for retailers who lease their premises with a Common-Area Maintenance (CAM) lease. The cost of your CAM lease varies based on your company’s physical expansion over time, the definition of your base-year, square footage and variance cap, among other factors.
Accurately reconciling these differences against your original contract and your actual payments seems almost impossible, especially when the invoices and original contract are lost in the accumulation of documents in papers, binders, and share drives.
3. Issues with Compliance Standards
A huge consequence of using spreadsheets for the close is that it is near impossible to track changes and revise errors. Spreadsheets incur serious compliance risks for the organization; they are not only used to complete the close but are also used for auditing and controls. If miscalculations and errors go unnoticed, as they often do, this can not only result in a restatement, causing serious financial and reputational damage but can mislead executives to make critical decisions for the entire organization— all based on incorrect data.
The Solution to Capital Lease Accounting Challenges
An automated finance solution can help organizations not only deal with capital lease accounting problems but the overall matching and close processes. Having a solution in place automates the reconciliation process and allows accountants to focus on solving the exceptions and focus on strategic activities, rather than manually completing the process over the course of weeks.
Implementing an automated finance solution enables accounting teams to access a digital archive of all documents stored in the cloud. This means you can find the right documents in a secure, centralized environment, further eliminating the time spent searching through papers, binders, or share drives. Imagine what your team can gain when they can reallocate those hours into strategic initiatives.
Finance leaders can also gain confidence in their numbers by knowing exactly what is being completed in the close. This increase in visibility not only eases the audit but leads to less compliance-related issues overall. As the close progresses, an audit trail is automatically generated, detailing the specifics of each task with supporting documentation attached. Internal and external auditors can then easily pinpoint areas that should be improved for even greater efficiency in the close. Automating the financial close truly benefits everyone involved.
Transitioning away from manual-heavy processes in the financial close solves several challenges, from reducing hours spent on reconciliations to visibility to compliance. Learn how your organization can better streamline the account reconciliation process by downloading this eBook.
Written by: Ashton Mathai