Technology has transformed the financial industry. In the past, business owners had to hire accountants that would record and process financial data manually, costing them more time, money, and effort, as well as human errors. Today, automation in digital accounting has allowed business owners and their accountants to 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 ensuring better 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 in an electronic format. Instead of using papers, all accounting transactions are conducted in an electronic environment.
The concept actually originated from the need to establish a more efficient taxation 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 rather 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
Accurate and Scalable
The most sought-after feature of software and machines is that they aren’t prone to committing mistakes. Providing accurate results and staying free from errors, automated software and services are much more reliable than traditional accounting practices.
In contrast, human error is inevitable when we compile data. Accuracy is extremely important because businesses rely on data to make critical decisions. Imagine taking a poor business decision based on inaccurate accounting data that causes the business to fail. Digital accounting solutions help avoid that.
Apart from accuracy, a digital accounting system has also proved popular among entrepreneurs due to its scalability. For a startup, managing accounts manually should be okay in the beginning but as the business grows, the accounting system will require massive 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.
Another major benefit of a digital accounting system is that it provides you with remote access to your company’s financial data. This means that professionals need not be at the office or carry their laptops everywhere to access critical information. As cloud-based solutions, digital accounting software packages allow you and other employees to log in to the system from anywhere and at any time to track results and data.
This is particularly helpful for cash flow management. If your cash flow position is unstable, you might be going towards bankruptcy. That being said, cash flow is the lifeblood of your company. Read more on why cash flow is so important.
For efficient cash flow, decision-making plays 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.
In other words, you should have better control over the inputs and outputs of your accounting system at the end of the month, the end of the week, or even the end of a particular business day. Analyzing financial projections should then be clear and secure, and you can rest assured that the money will be available when payments are due.
Real-time access to cash flows also puts you in a much better position to decide on the financial future of the company. You are likely to make accurate predictions and make rational long-term decisions.
Convenience and Improved Pace of Productivity
Ease of use is another incredible advantage of switching to a digital accounting system. As opposed to manual accounting practices, accounting software applications are super easy to operate, offering comfort and convenience to users.
The underlying purpose of accounting is to maintain a record of business transactions on an annual, quarterly, or monthly basis and analyze those numbers and data to make business decisions. In a manual accounting process, an accountant may have to spend hours or even days gathering information for the past year and creating a cash flow statement and other financial statements from it.
A digital format, on the other hand, provides you with the comfort of running different automated financial tests on easily accessible data, allowing the accountant to set up the financial statements within minutes. Professionals can save a lot of time compiling and presenting the same reports and numbers, thereby accelerating the processing of online transactions.
This, coupled with better decision-making, translates into high efficiency and increased productivity. By automating many of the accounting functions through digital accounting, you can dedicate more staff to other essential functions such as business development or sales. This means you should be able to 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 bigger concern when it comes 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 all 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 a tremendous 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. There might be too many distractions keeping you from following up with debtors. This can adversely impact your cash flow position. A digital accounting system happens to be the best solution to the problem as 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 other tools used in your business. The best digital accounting solutions offer amazing flexibility in terms of integrations 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 automatic syncing of data. This is an incredible replacement to the hectic export-import routine used to manually transmit data from one platform to another. That’s the reason why manual accounting processes fall behind, leading to incomplete versions of data in different programs. The simplest of errors like incorrect postal addresses can result in unhappy customers and lost sales.
The automatic data syncing with digital accounting solutions means that you only need to update an address or email in one place and the change will be automatically implemented to other programs.
As your business grows, these integrations will become more and more important. The simplicity of future business processes will depend on them. However, not all accounting software offers high flexibility in terms of integrations and offer two-way data syncing. Some will only pull data or push data, while others will do both. So, be sure to examine these features when choosing an accounting application.
Facilitates Tax Preparation
Manual accounting practices make it extremely difficult to gather tax-related documents and prepare for the filing of the upcoming returns. It also leads to poor financial tracking, making it difficult to set aside funds for tax payments. Not preparing for the tax filing as the deadline draws nearer can put you in serious trouble.
While you can’t avoid the tax burden, a digital accounting system can simplify the preparation and filing process for you. With a solid financial tracking system, digital accounting not only helps you arrange and separate funds for tax payments proactively but also simplifies the calculations for tax. This should exempt you from agonizing stress associated with taxation.
Poor financial tracking specific to manual accounting procedures also means you can miss out on possible tax write-offs and available deductions available for your company. To avoid overlooking payments that be used for tax deductions, consider switching to a digital bookkeeping and accounting system.
Bank Reconciliation Made Easy
You might be doing remarkably well in manually recording the day to day transactions, but figures must also remain consistent with those in the bank statement. Digital accounting solutions come with good reconciliation tools that make it easy to track errors in transactions and processing as well as to detect theft and frauds.
The ever-advancing 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, involves hectic inventory management. You may want to choose an accounting platform that comes with an efficient inventory management system. In other cases, your accounting program can connect to other specialized apps.
Allows You to Obtain Real-Time Advice
More and more accounting experts are breaking open from tax services and seizing the opportunities to provide real-time advice to entrepreneurs.
With a digital accounting system, your data remains up to date. This puts you in a great position to seek financial advice. Using readily available data, a financial expert can analyze the numbers and offer real-time advice on the easiest and fastest way to improve them.
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.
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.