Technology has transformed the financial industry. In the past, business owners had to hire accountants to record and process financial data manually. Doing so costs more time, money, and effort. It also leads to more human errors.
Automation and digital accounting allow business owners and lets their accountants complete functional tasks more quickly and accurately, as well as interpret and report data more efficiently. This way, business owners can focus on their strategic roles and handle complex issues, such as cash management.
But what exactly is digital accounting and why should you consider it? Keep reading to find out.
What is Digital Accounting?
Digital accounting refers to the creation, representation, and transfer of financial information into an electronic format. Instead of using papers, all accounting transactions are conducted in an electronic environment.
This concept stemmed from the need to establish a more efficient tax system. Digital accounting surfaced in 2003 as a project of the federal government to modernize the Tax and Customs Administration (PMATA). Then came the Electronic invoice (NF-e) and the Digital Bookkeeping System (Sped) in 2009. In 2015, the Digital Bookkeeping System Tax, Social Security, and Labor Obligations was introduced.
To clarify a misconception, digital accounting doesn’t eliminate the role of an accountant or dismiss the importance of accounting routines. It values and empowers accounting professionals by making their work more efficient.
Now that you know what it is, let’s discuss the benefits of it:
Benefits of Digital Accounting
We have continued to shift to a more remote work environment. One of the primary benefits of a digital accounting system is that it provides you with remote access to your company’s financial data.
This means that less professionals are at the office. They won’t need to carry their laptops to access critical information. Digital accountants offer cloud-based solutions and digital accounting software packages let you log into the system from anywhere and at any time.
This is particularly helpful for cash flow management. If your cash flow position is unstable, you might risk bankruptcy. That said, cash flow is the lifeblood of your company.
For efficient cash flow, decision-making is a crucial role. With a cloud-based accounting solution, you can analyze your cash flow remotely and make quick decisions regarding payments, investments, etc. By monitoring cash flow online, you should develop a better relationship with your business’s finances.
Read more on why cash flow is so important here
You should have more control over the inputs and outputs of your accounting system at the end of the month, week, or business day. Analyzing financial projections should be clear and secure, and you can rest assured the money will be available when payments are due.
Real-time access to cash flows puts you in a much better position to decide on the financial future of the company. You are more likely to make accurate predictions and make rational long-term decisions.
Convenience and Improved Pace of Productivity
Ease of use is another advantage of digital accounting systems. As opposed to manual accounting practices, accounting software applications are super easy to operate, offering comfort and convenience to users.
The purpose of accounting should be to maintain annual, quarterly, or monthly business records and analyze the data to make business decisions. With manual accounting, an accountant may spend hours or days gathering information from the past year to create a cash flow statement and other financial statements.
Digital accounting provides you the comfort of running different automated financial tests on easily accessible data and allows the accountant to set up the financial statements within minutes. Professionals save a lot of time compiling and presenting reports and numbers to accelerate online transactions.
This increases efficiency and productivity. By automating many of the accounting functions through digital accounting, you can dedicate staff to other essential functions such as business development or sales. This means you can potentially generate more revenue with the same amount of resources.
Security and Agility
While paper-based accounting records aren’t totally secure (can be stolen or destroyed by fire outbreaks or natural disasters), data security becomes a more pressing concern if you navigate to digital accounting.
The problem with storing and managing data in-house is that unless you have solid data recovery measures in place, you can lose your data in case of a system crash or failure. Imagine losing accounting data obtained through years of hard work in a flash.
Cloud-based accounting solutions are an effective solution. These solutions come with cloud storage backed by multiple data centers for data backup. Many rely on SSL technology for data encryption like those used to secure financial information in banks. With a digital accounting solution, you should be able to retrieve or backup your data even if things go wrong.
Easy Invoicing and Payment Tracking
Without keeping up with invoicing and payment tracking, there’s no way to minimize delayed payments from your customers. Too many distractions can keep you from following up with debtors. This can adversely impact your cash flow position. A digital accounting system is perhaps the best solution to the problem. It automates the process of sending invoices and payment requests.
Better Integration and Syncing
One of the biggest challenges associated with manual accounting systems is poor compatibility with the other tools used in your business. The best digital accounting solutions integrate simply with other business tools such as the point of sale system, payroll, website order fulfillment, and more.
The cost of these integrations is often zero or negligible. These applications comprise ecosystems of hundreds of business applications that enable data sharing freely.
When you integrate a digital accounting program with another online business application, both can update each other in real-time, daily, or on-demand by automatically syncing data. This is a useful replacement to the hectic export-import routine used to manually transmit data from one platform to another.
This accounts for why manual accounting processes fall behind and lead to incomplete versions of data in different programs. The simplest of errors, such as incorrect postal addresses can result in unhappy customers and lost sales.
Automatic data syncing with digital accounting solutions means you can update an address or email in one place and it will automatically update on other programs.
As your business grows, these integrations will become more and more important. Not all accounting software offers flexible integrations and two-way data syncing. Some will only pull or push data, while others will do both. Examine these features when choosing an accounting application.
Facilitates Tax Preparation
Manual accounting practices make it difficult to gather tax-related documents and prepare to file upcoming returns. It also leads to poor financial tracking and makes it difficult to set aside funds for tax payments. Not preparing for tax filing as the deadline draws near poses serious risks.
While you can’t avoid taxes, digital accounting systems simplify the preparation and filing process for you. Digital accounting not only helps you arrange and separate funds for tax payments proactively, it also simplifies the calculations for taxes. This should exempt you from agonizing stress associated with taxation.
The poor financial tracking inherent to manual accounting can cause you to miss tax write-offs or deductions for your company. To avoid overlooking payments you can use for tax deductions, consider switching to a digital bookkeeping and accounting system.
Bank Reconciliation Made Easy
Your manual records might be effective for day-to-day transactions, but figures must also remain consistent with those in the bank statement. Digital accounting solutions come with useful reconciliation tools that simplify tracking errors in transactions and processing as well as to detect theft and frauds.
The tech industry seems dedicated to creating an app for every business function. Hundreds of niche applications have been developed to cater to different industries, from farming to retail to architecture. Depending on the complexities involved in your business, you might be able to find a digital accounting solution that works better for your business than others.
Online retails, for example, involve hectic inventory management. You may want to choose an accounting platform with an efficient inventory management system. In other cases, your accounting program can connect to other specialized apps.
More and more accounting experts are available for tax services and providing real-time advice to entrepreneurs.
With a digital accounting system, your data remains up to date. This puts you in a position to seek financial advice. Using real-time data, a financial expert can analyze the numbers and offer real-time advice on the easiest and fastest way to improve them.
A Streamlined System
As discussed before, one of the disadvantages of managing taxation is that it is hard to store the information in one place. In a manual accounting system, you will have to store information in various places. Recording information and managing your books may not be the challenge. Gathering information and using it in the correct way to create a thorough report is.
Although the manual accounting system is organized well, organizing data and ensuring everything falls into place correctly is difficult. Balancing the information in the trial balance may seem like a relatively easy task on paper. However, in reality, there is a lot of hard work involved.
Digital accounting systems also store information in a specific area, giving the owners real-time access to essential details and information. Critical data is accessible with a few clicks in digital accounting systems. From cash flow to balance sheets everything will be accessible.
Accessibility to Important Financial Information
In a business, interdependence is the key. Departments are interlinked together, with each department helping the other out. This is one of the key reasons why some small companies outperform others. A business where all the factions and departments are interlinked in a sound framework is bound to outshine other competing businesses.
This interdependence means that all departments must have access to the critical information of the business. When the need for financial updates comes from a specific department or a faction of the company, it is imperative that the data is readily available. In manual accounting, presenting the required information according to the needs of the department can be challenging.
The supply chain department needs to provide information related to the turnaround of goods and data so they can process purchase orders and free up operating capital sooner. This is especially important with accounting for eCommerce businesses.
Calculating these formulas and the numbers that a business generates from these formulas help entrepreneurs shape business policy. With numbers readily accessible, the team and the department can make rapid decisions. For a small business, the timing of the decisions and their turnaround is crucial. The more time a company takes to achieve a decision indicates a business’s inability to adapt and react to changes in the financial environment.
With a paper-based accounting system, the turnaround time of processing information and making a decision increases considerably. During market instability, this can cost a business quite a fortune. Additionally, a person will have to spend extra time accumulating the required data and handling paperwork; this can be annoying and time-consuming for an accountant.
Ease of Use and Improved Speed and Productivity
This factor stems from the previous one which claims the accessibility an individual gets in case of data being readily available. Ease of use is one of the core aims of technology. Accounting software applications are easy to use in comparison to the manual methods.
The primary purpose of recording all accounting data is to:
- i) keep a record of all the transactions on a monthly or yearly basis and
- ii) analyze the data and the numbers accumulated for business decisions.
It might take an individual more than an hour to create a cash flow and gather information. Digital accounting gives you the comfort of running all kinds of financial tests on the readily available data. A manager may be able to create the cash flow of the business within minutes.
In addition to the ease of use, a business also takes advantage of increased efficiency and productivity with digital accounting. A business that makes use of digital accounting will have more staff available to focus on other aspects of the company.
A financial manager or their assistant can now compile the same reports and present the same numbers in considerably less time. Digital accounting saves time in processing online transactions since it allows the accounting department to prepare reports and compile facts and figures in minutes.
In addition to improving efficiency and productivity, digital accounting can also help reduce the cost of the business since it automates previously manual tasks.
One of the primary reasons why businesses and companies look for automation and digital operations is because it saves money by minimizing the cost of services.
Using digital data is more cost-effective than other forms of recording data. It works faster and saves businesses time so they can concentrate on different parts of the company.
Hiring a professional to record data in-house, regardless of how well trained they are, will cost your company more than a digital accounting solution.
A digital accounting service may only charge the cost of installation. If you don’t know how to operate the software, you can hire someone with the required expertise.
Reliability and Scalability
The most sought-after feature of software and machines is that they don’t commit errors. Accurate results make automated software and services much more reliable than traditional accounting practices.
When we compile data, human error is virtually inevitable. Even if humans can produce accurate data, it takes much longer to compile that data than a machine. Accurate, swift data accumulation and analysis is important because your company needs to rely on accurate data to make critical decisions.
Apart from accuracy, digital accounting systems are popular among entrepreneurs due to their scalability. For a startup, managing accounts manually is okay in the beginning. As the business grows, your accounting system will require numerous upgrades to support the increase in the scale of operations.
Hiring too many professionals to handle the increased accounting needs can prove costly. A digital accounting system is an inexpensive way to scale your accounting practices during the growth stage. When you have reliable accounting software, all you need is a simple software upgrade to address the growing needs of your business.
Accounting experts should be aware of the challenge recording data presents. Given the variety of standards present, it is easy to understand why it is difficult for manual accountants to record data.
However, with digital accounting, the software applications are standardized to an accounting system. This makes it easy to use since the user knows the accounting technique the software follows.
Moreover, most accountants will tell you they despise the monotonous procedures manual accounting requires. Manual accountants must carry out the same routine over and over again which can zap any initiative.
The tediousness of the job and their lack of interest often causes mistakes. We have already highlighted how a simple accounting mistake can lead to severe consequences for the business.
While some accountants can charge by the minute, some require a fixed fee for quarterly or monthly consultations and phone calls to counsel you in growing your business.
Digital accounting is fast becoming the norm in the industry. With the introduction of advanced accounting software, more and more businesses today are looking to implement it into their company infrastructure.
However, many small businesses follow the more traditional route of hiring specialist accountants for their day-to-day entries. You cannot blame them for supporting the manual accounting procedures; a system that has been in place for more than 900 years will garner more confidence than the one that has just emerged.
To sum it all up, if you’re looking for business growth, you must replace your manual accounting procedures with digital accounting. Now that you know the answer to the question, “What is digital accounting?” it’s time to find an accounting solution that works best for your business. Keep the above aspects in mind when choosing a digital accounting solution.
Whether you’re an e-commerce retailer or any other entrepreneur, Fully Accountable can help you find the right accounting solution. For more information on digital accounting, schedule your strategy call today, or answer a few quick questions and get a customized proposal to fit your unique eCommerce business needs now.