Digital Financial Reporting

Small business accounting software is very competitive.  The Best Small-Business Accounting Software of 2020 provides a comparison of the most popular accounting software. This provides a list of the 19 accounting software applications loved by small business.  Recently I have tried the following: 

• QuickBooks Accountant
• QuickBooks Self Employed
• Xero
• Wave
• Manager.io
• Zoho
• Freshbooks

Here is my impression of what I have seen.  First, not one of these accounting software applications really helps with cost accounting and other important functionality small businesses really should be using.  To be honest, it has been my experience during my 35 years as a CPA that very few businesses actually properly analyze the information generated from their accounting system.  For example, most business owners don't have a very good handle on their fixed costs as contrast to their variable costs.  They cannot really have a good conversation about contribution margin or break even point.

Second, not one of the accounting software applications allows you to generate what I would consider a proper set of financial statements.  They tend to not differentiate between "current" and "noncurrent" on the balance sheet or "operating" and "nonoperating" on the income statement.  None really provides a decent cash flow statement (Wave does the best job).

Perhaps my expectations are too high.  Perhaps I am used to working with larger organizations that are more sophisticated in terms of their accounting function.  If these small businesses are happy, which they seem to be because millions use these sorts of software applications, good for them.  I am just making an observation.

What is incredibly good about all of those software applications is that they appear to be entire ecosystems that incorporate an increasing amount of functionality for small businesses.  The down side is that you are locked into their ecosystem; you cannot really pick and choose.  Reminds me somewhat of Comcast, Roku, Apple TV, and Fire set top boxes.

Imagine a robust ecosystem like QuickBooks that incorporated augmented intelligence functionality that helped the software users perform more sophisticated financial analysis.  Key to that financial analysis is having the underlying information right.

Something really interesting is that Wave was purchased by H&R Block for $405 million. Wonder what that is all about.  Is H&R Block expanding into the bookkeeping business?

Seems like a middle market accounting software ecosystem would be a good thing. Twenty years ago my favorite accounting software was Great Plains Dynamics 3.0 which had a Microsoft SQL database.  I was very, very happy with that software.  Microsoft purchased Dynamics (and many other accounting software vendors).

My current favorite is Acumatica.  Acumatica also has a Microsoft SQL database (there are others), the UI is HTML 5, you can modify the application using Microsoft.Net, and the interface is very clean and well-thought-out.  Acumatica was built to be cloud computing based from the beginning.

What would be incredible is some sort of open source ecosystem that is not tied to any one specific software vendor that tried to control everything.  For example, imagine an iPhone application ecosystem that is not controlled by Apple.  I wonder how the Android ecosystem works.  Who is in charge of it?  You can get Android apps from the Google app store.  Samsung has an app store for Android apps. There seems to be other Android app stores.  Android seems to be controlled by Google but open source.  Not sure if an ecosystem that is not controlled by some software vendor would work. Maybe, maybe not.  Maybe a consortium of companies or a coop.  Be good to reduce the "friction" that exists.  Seems that would benefit everyone.

The aim here is continuous accounting, reporting, auditing, and analysis to the degree that this is practical.

What is your favorite accounting software?  Why?

The Harvard Business Review article by Thomas Redman, Bad Data Costs the U.S. $3 Trillion Per Year, makes mention of the author calls "the hidden data factory" where U.S. organizations waste $3 trillion correcting errors made by others in the same organization.

In another article, Martin Doyle differentiates prevention cost, correction cost, and failure cost, WHY DATA SHOULD BE A BUSINESS ASSET – THE 1-10-100 RULE. Essentially this describes what George Labovitz and Yu Sang Chang came up with in 1992 called the "1-10-100 Rule" and is widely used as a tool to describe efficiency.  In summary: 

• $1: Verifying and correcting information at the start is the least expensive way to make sure your information is clean and accurate. This is prevention cost.
• $10: Identifying and cleaning information after the fact is time consuming and resource intensive. This is correction cost.
• $100: Bad information may flow between sources, creating a waste of time and resources. This is failure cost.

Said another way, "An ounce of prevention is worth a pound of cure."

Lean Six Sigma techniques and philosophies which have been around for years seems to be completely unknown to accounting departments and auditors.  Auditors I get; they bill by the hour.

I have demonstated that you can connect accounting, reporting, audit, and analysis processes. If that is hard to follow, try walking through this narrative to understand what I am trying to get at. Or, read the documentation. Or even better, try processing these files yourself.

If you have 100% of the information you need within a process to get information to flow effectively from one end to the other and if you have process control mechanisms in place then automation of certain specific tasks is trivial.

Even without the use of artificial intelligence accounting, reporting, auditing, and analysis processes would benefit.  But with artificial intelligence this becomes a no brainer.