1

Digital or DieHow digital accounting has revived a classic

Beautiful accounting software

2

Foreword

These days, digital is everywhere. The way we communicate, navigate, consume entertainment, shop, play and organise our day-to-day lives has been transformed by technology, and the list is endless. Even doctor’s appointments can now take place over Skype… the world has changed.

Like all things, changing some institutionalised processes can be more difficult than others, but the extraordinary speed of change taking place in industries all over the world suggests that it’s a question of when, and not whether, companies should make the switch to a more digital way of doing business.

The man pictured on the front of this report is Luca Pacioli, known as the ‘Father of Accounting and Bookkeeping’, who first came up with the double-entry bookkeeping system in 1494. And according to our latest research, the traditional paper ledger – introduced in 1299 – is still being used by many accountants today, while almost two thirds of accountants we asked said they know someone working from old-fashioned methods. But in an increasingly digital world, moving with the times is key to survival. Along with the benefits that those who have switched say they experience – including better efficiency, reduced errors and even increased business revenue – making the switch will better prepare businesses for the future.

So to encourage accountants and small businesses to move with the times, we’ve brought Mr Pacioli into the 21st century, recreating his portrait with modern-day cloud technology to signal the next revolution in the industry. It’s time to leave the dark ages, as the future is bright – and well-and-truly digital.

Damon Anderson, Director of Partner at Xero

3

Digital revolution

Technology has already transformed business – and it’s only getting started.

We do a lot of our shopping online now. What’s less obvious, but equally significant, is how the internet’s also changed the underlying transactions. Credits and debits are recorded digitally and that information travels much faster between buyer, business and bank.

This level of connectivity is creating all sorts of new opportunities for small businesses. Alternative finance is a classic example. Businesses that use cloud accounting can now apply for finance online, using the likes of MarketInvoice, and get rapid approval. Scheduling a meeting with the bank manager seems archaic by comparison.

Digital services like these can speed up business and make life far simpler for the business owner. Layers of admin and effort have been stripped away. It’s no surprise, then, that 83% of accountants believe they need to understand technology just as well as they understand accounting. Yet the rate of change can be overwhelming. Almost half of advisors (48%) now worry about being left behind. That’s twice as high as last year.

There’s very little refuge from the digital revolution. Even Her Majesty’s Revenue & Customs (HMRC) is getting onboard in the form of “Making Tax Digital” (MTD). Under the initiative, businesses will be assigned an online tax account, where all their transactions will be automatically recorded. Those accounts will be submitted quarterly to HMRC to estimate taxes.

MTD will dramatically change compliance and it could be here as soon as 2019 for businesses with a turnover above the VAT threshold. However, for some accountants this overhaul is being lost in the noise of constant change. One-in-four aren’t even aware MTD is coming. That could lead to some awkward conversations when business owners – most of whom know about HMRC’s plans – start asking questions.

Technological change can be daunting. While some people are early adopters, most prefer to pace themselves. That hasn’t been easy with digital accounting and financial tools, which are springing up everywhere. Some advisors find it unnerving to have change pushed from so many sides. In general, however, they recognise the opportunity.

The march of digital accounting into the steady and traditionally low-tech world of tax and compliance, via MTD, could be the catalyst for widespread change. Advisors who have been considering the transition – and most have – will now be compelled to take the leap.

4

Almost half of advisors (45%) believe practices need to go digital to survive. They’re acutely aware of the competitive advantages technology drives.

Tax- and bookkeeping-focused practices see the potential to streamline their workflows and deliver services more profitably. Others will use digital reporting and forecasting tools to offer premium services to strategically-minded clients.

Benefits of automation and AI for accountants and bookkeepers:

LOWER COST OF DOING BUSINESSAutomated data entry allows them to deliver bread-and-butter services with fewer resources.

NEW REVENUE STREAMSThey can use software to deliver more value-added services like frequent reporting, KPI tracking, forecasting, and more.

KEEPING UP WITH MARKET EXPECTATIONSMore business owners are learning about the advantages of automation, and having instant access to financial data. The demand for these services is growing.

ACCESS TO TALENTFirms that use modern tools report greater workplace flexibility, which is a great carrot for recruiting millennials.

WORK-LIFE BALANCEAdvisors who are able to automate typically labour-intensive tasks free time in their schedule.

The inevitable advance of digital accounting is creating pressure on accounting professionals. Seven-in-ten advisors believe they need to understand automation, but three-in-ten say there’s not enough educational support. Even so, they are making an effort:

• half are learning about new technologies at their workplace

• a quarter are enrolled in offsite courses

In a profession that’s built on high levels of education, practitioners are open to further learning. It may simply be that the nature of that learning will evolve to become more technology-focused.

A profession accountable for its own survival

45%Almost half of advisors believe

practices need to go digital to survive

5

Digital accounting technology is gaining momentum, but it’s not taking over yet. More than three-quarters of firm-based accountants still use spreadsheets sometimes, while 18% work on paper ledgers.

These manual methods slow accounting down, locking advisors into periodic reporting. Clients have to wait until the end of the year or the quarter to find out how the business is performing. They can’t respond quickly to emerging problems or opportunities. And they tend to lose sight of vital things like cash flow.

The market will likely lose patience with this manual approach. A massive 94% of business owners want their accountants to use the latest technology. Practices that fail to modernise could risk losing business. But there are better, more positive reasons to embrace accounting technology. Most notably, it automates labour-intensive tasks that traditionally monopolised staff time, which will lift the ceiling on practice productivity (and profitability).

Working in the dark ages

Percentage of accountants who say they spend most of their time:

Manually reconciling bank transactions

Managing and processing finances

Chasing missing information

Correcting data errors

Chasing bills

61%

51%

30%

25%

18%

18%still work on paper ledgers

Digital accounting use is gaining, but

6

These tasks are automated or streamlined by modern accounting tools. For example, data flows into the software directly from source – such as a bank, an invoicing system, a point-of-sale system, or an expense system. Instead of plugging numbers in, advisors are freed to perform quality control. The risk of human error is all but gone.

By speeding up basic bookkeeping and reducing do-overs, accounting technology frees up a lot of human resource. That time can be reinvested in more enterprising work, which allowed digitally proficient firms to generate up to 34% more revenue per employee last year.

And yet, despite all the upsides, the transition to digital technology is yet to hit warp speed. When asked how ready they were, only a quarter of advisors (23%) thought they were ahead of the curve. Almost two thirds (64%) say they know someone who’s ‘working in the dark ages’.

Most common errors in a manual practice:(and the percentage of accountants who make them)

Data entry errors

Losing receipts

Mathematical errors

67%

33%

31%

34%more revenue per employee

Top digital firms generated

7

Although only 23% of advisors are ‘ahead of the curve’ on accounting technology, 61% believe the tipping point is here. They say it will soon become so prevalent that it changes roles within their team. And even if that change seems daunting on some levels, advisors agree it will be for the better.

Overall, they expect online accounting to save them 117.5 hours – or 15 days – per year (based on a 52-week year). A quarter predict those time savings will top 200 hours, or 25 days. They’d use that time to:

• strike a better work-life balance (42%)• offer deeper insights and advice to clients (21%)• explore new business and revenue opportunities (17%)

These seem like lofty goals until you look at what’s happening with practices that already made the switch. A recent UK Partner Benchmarking survey found revenue growth at digital UK practices was four times greater than the industry average.

Advisors who are considering a switch to modern accounting tools hope to grow their revenue. And advisors who have made the switch have grown their revenue (either by adding more clients or offering advisory services). It’s a reassuring correlation between theory and practice.

Allied with the “enemy”

Percentage of accountants who expect:

Reduced operational costs

Better data security

Shorter workdays

Time savings

More reliability

35%

33%

32%

25%

24%

4x12% YoY revenue growth

(digital practices)

3% YoY revenue growth (industry average)

8

Two thirds of advisors (67%) believe their clients would follow their lead if they switched to digital accounting. They’re right. Our survey of more than 1,000 small business owners found that over half (54%) have either started using online accounting, or are waiting for their advisor to make the suggestion. Modern business owners are well aware of the advantages of the cloud.

Ahead of the curve

Data not lost

if

computer fails

Less

time to

manage accounts

Cost effectiv

enness

Easier in

teraction

with advis

or

More immediate in

formatio

n

on fiancial posit

ion

Fewer d

ata-entry

errors

Good data securit

y

Help pay supplie

rs on tim

e

Easier in

ternal

collaboratio

n on accounts

Better in

voice m

anagement,

enabling fa

ster p

ayment

Ability t

o record tra

nsactio

ns

immediately

from different d

evices

28%

26%

21%

16% 16%15% 15%

14% 14%13%

8%

Benefits of online accounting:(and the percentage of business owners who want them)

9

Businesses will be attracted to advisors who help them access these benefits. And, once those core advantages have been delivered, there’s scope to do more. Advisors can use add-on apps to create more easily-understood reports, or even live dashboards that track business performance on a daily basis. Plus they can introduce clients to other add-on apps that streamline business functions like payroll, inventory management, point of sale, or client relationship management.

That’s not to say all business owners are ready to hit the ground running. Most of them are still feeling their way.

Practices that want to provide leadership on accounting technology should first address the anxieties clients will feel.

These include concerns around how the cloud works, how information is protected, how data is accessed, and – like all good clients – what costs are involved. Advisors also predict that 20% of small businesses will resist change, and 19% will be worried about a complex switchover. These are all legitimate anxieties and should be respected. However, they’re often driven by perception rather than reality. For example, practices regularly transition their clients to online accounting with a one- or two-hour orientation.

“You need to take them through accounting concepts so they know what they’re looking at. Pace their introduction...

“A client’s first priority is to have clean, reliable data in the software. If you give them comfort that that’s happening, they’ll be happy. You can get into the more complex concepts later.

“Onboarding should be really basic. I start with a two-hour training session focused on: purchase invoices, sales invoices, bank rec and getting the tax right.”

Alex Falcon Huerta - Founder, Soaring Falcon Accountancy

10

So what’s all this change leading to? Will automation and AI start to take work away from professional accountants and bookkeepers? Business owners don’t think so.

Only 16% said they would trust their accounts to be managed by machines. The rest would prefer for professionals to stay well-and-truly involved. Advisors also believe that software can’t replicate certain human qualities that are critical to accountancy.

Conclusion – the future

Trustw

orthiness

Honesty

Relationsh

ip building

Important human qualities AI can’t emulate:(and the percentage of advisors who agree)

63%

49%47%

Deliverin

g business

advice

41%

Jargon-fr

ee communication

30%

Relationsh

ip management

47%

Common sense

Creativity

Critical th

inking

Reading and understanding

the emotions o

f others

Making m

oral choices

42%39% 38%

36%34%

11

Those human touches are central to the client-accountant relationship, where trust and communication drive success. This is backed up by academic research that found emotional intelligence was a better indicator of a partner’s profitability than general IQ (Emotional Intelligence: The Role of Accounting Education and Work Experience, Cook, et al).

Quite the opposite of competing, accounting professionals and accounting technology enable each other – expanding the body of available work. Our UK benchmarking study of more than 400 Xero accounting partners found that digital

practices were more likely to be hiring. As their proportion of digital accounts rose, so did the tendency to be recruiting.

So while Making Tax Digital may force some practices into digital accounting before they were ready, that could be a good thing. It will give them the tools to work more efficiently and either take on more clients, offer more services, or work fewer hours. Business owners are ready to make the move and are waiting on their advisors to lead. This could provide the impetus to do so.

1. Source: 673 accountants and 1,001 SME owners were surveyed by Censuswide between 22.08.2017 – 29.08.2017

2. Xero. Retrieved from UK Partner Benchmarking Report

3. Xero. Retrieved from State of Accounts Research Report

Reference material

www.xero.com

Beautiful accounting software