The way desktop accounting software handles our financial data is very familiar. It sits in the company file which a business can physically share with their accountant or bookkeeper. When it comes to online software, data is a much more nebulous and powerful concept with enormous potential.
The journey of the ledger
At the close of every financial year a business owner sends their desktop accounting file to an accountant who copies that file into their own accounting program. They then review and correct the data, create reports and send the required information to the tax agency. In some cases the accountant then sends the updated, corrected file back to the business so they can update their own records.
Accountants expect the business’ information to exist in two places; the business owner has a copy and the accounting firm keeps its own copy. Most accountants only care about their own copy as it is “the source of truth” from which they calculate tax obligations. It is also the file which the tax agency will audit if a dispute arises.
Online accounting software dispenses with the need for two copies. The data file is not stored by the accountant or the business owner but by the software company. Anyone with permission can view and edit the file no matter where they are located. All they require is an internet connection, a computing device and a username and password.
Software companies call this a single, common or unified ledger.
Business owners, accountants and bookkeepers can find this concept confusing and confronting. Unfortunately some accountants assume single ledger refers to single-entry bookkeeping, when it is in fact an evolution of double-entry bookkeeping.
The single-ledger approach has been universally adopted by all accounting software companies and will eventually replace the two copies required by desktop users. Storing the database that sits within every company file online opens the door to radical efficiencies. It also raises some important questions about who owns the data in the company file.
Who owns your data?
This is the first question many businesses ask when they consider moving to online accounting software. The terms and conditions for all online software companies state that although they store the data it remains the property of the subscriber.However, it pays to check the fine print.
Accountants sometimes hold onto desktop accounting files and refuse to send it back until clients pay their accounting bill. This is a practice from medieval times called lien – a merchant can hold onto property sold to a buyer until they have received payment.
While accountants can’t withhold access to online accounting software, some software companies support their right to refuse to transfer control of an online data file to a different accountant until the business owner has paid their bill. (1)
This happens very rarely. Such incidents have prompted online accounting software companies to clarify that the business always retains control of their file, regardless of who pays the subscription. In any dispute between an accountant and client the software company will give the business owner full control of their data file.
Xero is the only major software company which still recognises the subscriber as the owner of the data file, even when the accountant is holding the subscription on behalf of the business. Xero says its terms state that the ownership of the file is the subscriber and that it won’t get involved in disputes between accountants and their clients.
The safest and best practice is to make sure the subscription is in the business’ name, not the accountant. That way the business always remains in legal and practical control of the data.
How do I get my data?
A business may want to change from one online accounting program to another or, if the business is closing, stop using accounting software altogether. All programs give users the ability to download information into spreadsheets. Unfortunately it is often a small subset of all the data contained in the accounting program.
This is one of the weakest links of online accounting software. Software companies have little incentive to make it easy to leave their programs.
Third-party data migration services can move you from one accounting program to another relatively easily, although not all forms of data may be brought across.
If you are closing down your business you will need to retain your data for a minimum number of years. You can either download the reports and balances to spreadsheets instead of continuing your subscription.
If you would rather keep paying a subscription, ask your accountant to downgrade your file to a ledger or cashbook which costs a fraction of the full business accounting editions. If the business starts up again the edition can always be upgraded.
Ways that data can help you
Accounting data is incredibly powerful and valuable. Businesses have rarely taken advantage of its full potential. Online accounting software hopes to change that by making it easier to read and cross-checking it with other sources to make it far more useful.
One of the great advantages of online accounting software is that now the database holding your financial information is on the internet you can pull data from or push data to other databases. Why would you want to do that?
Here are some examples of things you can do now or do soon with online accounting software, depending on country availability.
- Business addresses. Your online accounting program can verify the address of a new supplier or customer when you are entering them into your contacts. The program checks the address against a government database such as the national postal service or a third-party database such as a phone-directory business. Now you know that any invoice mailed to the customer should arrive.
- Business loans. Several startups have launched funds that provide crowd-funded finance to high-risk businesses. These should make it much easier for small businesses to raise money than going through a traditional bank. Micro lenders have partnered with accounting software companies in the US and Australia.
- Tax details. In some countries the national tax agency can automatically fill fields in your online tax forms. It uses payroll and other tax information gathered throughout the year and sends it to your online accounting program.
- Business registration. Companies often fail to check the business registration number for a customer or supplier. Online accounting software can check a government database to see if the registration is valid and whether it matches the trading name.
- Credit checks. Online accounting software can run a credit check on a customer or supplier through a third-party database and tell you whether they are in good financial standing. You can then set your terms for payment accordingly.
- Benchmarking. Online accounting programs used by thousands of businesses contain an enormous amount of information. Software companies will soon add benchmarking services where businesses can compare their financial performance against an anonymised average compiled from other businesses of the same size, in the same industry or in a similar area.
How to share your data with other programs
It is relatively easy to pass information from one online database to another. There are many, many options to send and receive data in both directions which can open the door to great efficiencies in your business.
Here are some of the advantages to connecting to other online business programs.
- Automatic syncing. When you connect an online accounting program to another online business program it can update it automatically. This can be daily, on-demand or in real time.
Automatic updating with online software usually replaces the export-import routine used to manually transfer information between older desktop programs. Manual processes often fall behind resulting in multiple or incomplete versions of data in different programs. This can result in lost sales, wrong postal addresses and unhappy customers.
Online software can sync data such as addresses so that you only need to update an email or street address once and the change is pushed to other programs. Not all online software syncs data two ways; check whether it pushes or pulls data or does both. - Specialised tasks. An explosion of software startups has created hundreds of niche applications that will solve a problem for a particular industry, from bike shops to architects to farms. There is online software for specific tasks too, such as point of sale, complex inventory, HR and productivity suites.
A huge amount of innovation is expanding the world of online software; in some cases your online accounting program can connect to it or it might be a separate application. - Free to connect. Often the cost of connecting two online programs is zero or close to it. Online accounting programs have ecosystems of hundreds of business applications which will share some type of data freely. Online integration services such as Zapier, IFTTT and OneSaas can extend the number of programs you connect to for tens of dollars a month.
So what type of online business programs can you connect to? Here’s a list of activities performed by software that connects to online accounting software.
- Automate your payroll
- Send a newsletter or email
- Automatically scan receipts or bills
- Track sales deals and inquiries
- Manage support requests by customers
- Automate notifications to debtors
- Send well-designed sales proposals
- Track employees in the field
- Record sales made by your online store
- Record sales made by your point of sale register
- Track time against projects
- Analyse your financial or other business metrics
One question every business must answer is which application should be treated as the source of truth. In other words, if there is a conflict in information between two programs, which should be trusted?
Predictably, online accounting software companies are keen to establish online accounting software as “the operating system” for business. However, a retailer may see their point of sale software as the primary record of the most important data to their business.
Online accounting software can have an enormous impact on how well a business tracks and manages its finances. Your accountant or bookkeeper should be able to talk about the benefits of the different programs available.
Thank you for reading this guide. We here at Digital First hope that it has helped you understand how this software works and the difference it can make.
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Not sure which program is for you? Ask cloud-savvy business owners, bookkeepers and accountants in our LinkedIn Group, Cloud-Powered Businesses.
References
1. Ransom or Fair Game? Pay Dispute Questions Holding of Client Files (Digital First)
