Modern accounting – streamlining finance with technology

Managing your business finances is an ongoing challenge, but accounting technology is making it easier than ever. 

From cloud-based software that simplifies bookkeeping to automation tools that save you time on repetitive tasks, there are stacks of innovative solutions out there to help you stay on top of your finances.

In this guide, we’ll explore technology in accounting and how the latest tools can benefit your business. 

We’ll also examine practical ways to use cloud computing and automation to streamline your processes, improve accuracy, and unlock insights into your financial performance.

So, if you’re curious about how technology can help you manage your finances more effectively, this is a great place to start. 

Let’s examine the possibilities and explore how you can put them into practice. 

Cloud-based accounting software – the foundation of modern accounting

Cloud-based accounting software enables users to access and update financial information from anywhere with an internet connection. 

It’s the staple of modern-day accounting and bookkeeping practices for larger and smaller businesses alike. 

Key players in the market

The cloud accounting market is dominated by a handful of major players, which, in the UK at least, are led by:

1. Xero: Known for its user-friendly interface and robust integrations, Xero has gained immense traction with millions of global users in recent years. Plans are tiered based on usage and features but are very reasonable. 
2. QuickBooks Online: QuickBooks Online is popular for its comprehensive feature set and solutions for freelancers and small to medium-sized enterprises (SMEs). Priced to suit any user from freelancers to enterprises. 
3. Sage Business Cloud Accounting: Sage, a longstanding name in accounting software, offers cloud solutions tailored for small to medium businesses. Their basic plan is cost-effective. 
4. FreeAgent: Designed for small businesses and freelancers, FreeAgent offers an all-in-one solution for accounting, invoicing, and tax. Similar pricing to competitors. 

Core features of cloud accounting software

While features can vary between providers, most cloud accounting platforms offer a core set of functionalities. In fact, all four of the above platforms offer the following:

1. Real-time financial reporting: Generate up-to-date profit and loss statements, balance sheets, and cash flow reports anytime. 
2. Bank feeds: Automatically import and categorise bank transactions, reducing manual data entry and the potential for human error. This can save hours of work each week and improve the accuracy of your records.
3. Invoicing: Create and send professional invoices, often with customisable templates. Many platforms offer features like recurring billing for subscription-based businesses and automatic reminders for overdue payments, helping to improve cash flow management.
4. Expense tracking: Easily capture and categorise expenses, often through mobile apps with text scanning (perfect for receipts and paper invoices). 
5. Multi-user access: Allow team members, accountants, and financial advisors to collaborate on the same accounts simultaneously. 
6. Integrations: Connect with other business tools like Customer Relationship Management (CRM) systems, inventory management software, and payment gateways. You can build a fully integrated system where all your apps communicate with each other seamlessly. 

Benefits of cloud accounting

If you’re still on the fence about whether to adopt cloud accounting platforms, here are the leading benefits:

1. Accessibility: Work from anywhere, at any time, on any device. Check your accounts on the go, from a sun lounger on holiday – wherever you go and work. 
2. Automatic updates: Get access to the latest features without manual installation. This ensures that businesses always work with the most current tools.
3. Scalability: Easily adjust your subscription as your business grows. Cloud solutions can accommodate businesses from sole traders to large enterprises. Integrations mean you can add different features depending on your needs. 
4. Data security: Benefit from enterprise-grade security measures and regular backups. 
5. Improved collaboration: With multi-user access and real-time updates, teams can collaborate more effectively, regardless of their physical location. You can also work with accountants and bookkeepers through the tools, meaning total transparency over your finances. 

It’s also worth mentioning that digital accounting is now mandatory for VAT-registered businesses to comply with Making Tax Digital (MTD). 

This will be rolling out to more tax forms in the forthcoming years (including Corporation Tax). 

All businesses will likely eventually need to use digital software for their accounts – getting started now is a shrewd decision.

Implementation considerations

If you’re transitioning to cloud accounting from spreadsheets or paper books, you’ll need to jump through a few hoops to implement your solution smoothly:

1. Data migration: Moving historical financial data to the new system can be complex. Many providers offer migration tools if you’re moving data from spreadsheets. 
2. Training: Staff will need training to use the new software effectively. Most platforms provide online tutorials, webinars, and support. If you’re outsourcing, make sure to choose tech-savvy accountants like us at Lumin, who are familiar with all the major cloud accounting platforms. 
3. Customisation: Assess whether the software can be tailored to your specific industry or business needs. Some platforms offer more flexibility than others in terms of customisation.
4. Compliance: Ensure the chosen software meets accounting standards and HMRC requirements for Making Tax Digital (MTD). This is particularly important for VAT-registered businesses. Most widely used accounting platforms offer MTD for VAT. 

Automation in modern accounting

Building a cloud-based accounting system is just the start. Once data flows into your software and you’ve nailed the basics, you can dig into the full scope of what these tools offer. 

Here are some key automation features that will help you get the most out of your accounts:

1. Bank reconciliation

The first key automated feature you’ll likely be using is bank reconciliation. 

Cloud accounting systems connect to bank accounts, import transactions, and attempt to match them with existing accounting records. You can set up rules for recurring transactions to automate categorisation.

Sage, Quickbooks, Xero, and most other accounting systems also offer the ability to match and categorise transactions automatically as they enter and leave your accounts. 

AI learns from past categorisations and suggests matches based on historical patterns. It becomes more accurate as it learns about your payment behaviour. 

Of course, while this automation can dramatically reduce the time you spend managing your accounts, human oversight is still needed to review matches and handle discrepancies or unusual transactions.

2. Data entry and management

Drowning in receipts and invoices? You can use accounting software to quickly scan and log data into your accounting system. 

These tools, such as Xero’s HubDoc, use optical character recognition (OCR) to extract key information from uploaded financial documents, including date, vendor name, invoice number, and total amount.

Using that data, the system creates a digital, searchable database of financial documents that is valuable for audits or financial reviews.

Beware: accuracy can vary depending on document quality and format. Non-standard or handwritten documents may still require manual intervention. You’ll need to check the scanned data against the real thing to ensure it’s correct. 

This also helps you comply with the Companies Act, which requires you to keep detailed financial records for six years.

3. Accounts payable and receivable

Accounting tools to automate aspects of accounts payable (AP) and accounts receivable (AR) processes.

In AP, Sage, for example, automates the entire invoice processing workflow. This includes capturing invoice data, routing invoices for approval based on predefined rules, and scheduling payments. 

The system can match invoices with purchase orders and receive documents, reducing errors and speeding up approval processes.

For AR, Sage automates invoice generation based on predefined schedules or triggers, which is particularly useful for businesses with recurring billing cycles. 

The system can send automated reminders for overdue payments, helping to improve cash flow without requiring constant manual follow-ups.

4. Financial reporting

Automated financial reporting has transformed how businesses generate, analyse, and share financial information. 

Modern accounting software offers real-time financial reporting capabilities, providing up-to-the-minute insights into your business’s financials.

These systems can generate a broad range of reports, from standard financial statements to specialised reports tailored to specific business needs. Many offer customisable dashboards that provide at-a-glance views of key financial metrics.

For larger businesses, multidimensional reporting allows them to analyse financial data across various dimensions, such as department, project, customer, or product line.

AI in accounting: Beyond number crunching

AI is transforming accounting from a field focused on historical record-keeping to one that provides real-time insights.

Most major accounting platforms have already integrated AI features in workflows, enabling users to query their data using chatbots, generate predictions for future cash flows and profits, and much more. 

Let’s take a look at some of these tools and use cases. 

AI applications in financial analysis and forecasting

AI is rapidly enhancing financial analysis and forecasting. Machine learning algorithms (the inner mechanics of AI models) can analyse vast amounts of financial data, identifying patterns and trends that human analysts might miss.

For example, Microsoft’s Power BI uses AI to forecast time series, allowing businesses to accurately predict future revenue, expenses, and cash flow. This might have taken an experienced financial professional hours or days.

Xero also employs AI in its “Short-term Cash Flow” feature, which provides a 30-day view of a business’s financial position, helping with cash flow management.

In 2024, Xero also announced a generative AI assistant, “Just Ask Xero” (JAX), which works similarly to ChatGPT. It allows users to interact with the software using natural language to perform tasks such as generating invoices and managing expenses more efficiently.

Sage Copilot and Intuit Assist are similar tools that make it much easier for users to interact with and learn from their accounting data. 

Embracing the future: Implementing modern accounting technologies

As the accounting profession evolves, implementing these technologies isn’t always easy. It requires a shift in how businesses (and indeed accountants) approach their data. 

A practical accounting using modern software

Let’s put it together with a worked example of how you might use modern accounting tools and automation to smoothen your workflows. Of course, this would vary widely between businesses, but this is a solid starting point. 

Daily and weekly operations: Capturing transactions

Accurate data entry is the foundation of excellent accounting, and modern accounting software has made this process much more efficient.

Start your day by checking your bank feeds. For example, you can use bank reconciliation to automatically import your latest bank transactions. 

The software categorises them based on rules you’ve set up (there will be a walk-through/tutorial for this when you set up the software). 

For any new or uncategorised transactions, take a moment to assign them to the correct account. This habit ensures your books are always up-to-date.

For expense management, consider using a mobile app that allows your team to snap photos of receipts on the go. 

For instance, QuickBooks Online’s mobile app uses OCR technology to extract relevant information, reducing manual data entry and the risk of lost receipts. 

Make it a policy for any of your team members to upload receipts immediately after incurring an expense.

You can also set up recurring invoices if you regularly invoice customers or clients. 

Monthly processes: Financial review and reporting

It’s time to review your financial position at the end of each month. Your accounting software should offer comprehensive monthly financial reports. It’s simple to pull up a report pack featuring:

• Profit and loss statement
• Balance sheet
• Cash flow statement

Further, many accounting platforms offer dashboard features to represent key performance indicators (KPIs) visually. Consider tracking metrics such as:

1. Gross profit margin
2. Debt-to-equity ratio
3. Inventory turnover

Monitoring these KPIs monthly lets you spot trends and make informed business decisions on the fly. 

Quarterly tasks: Tax preparation and forecasting

As each quarter ends, it’s time to prepare for tax obligations and look ahead. Most accounting software automatically sorts your transactions for easy tax reporting. 

For example, QuickBooks Online uses tax categories for this purpose. Review these and make any necessary adjustments.

You can also make budgets for the next quarter. For instance, Xero’s budget manager allows you to set up budgets and track your performance against them. 

Use your year-to-date figures and knowledge of upcoming events (like seasonal fluctuations or planned expansions) to create an accurate forecast.

Year-end processes

As the financial year concludes, it’s time to review your finances and prepare accounts. Accounting software can simplify much of the year-end accounting processing, but you should still seek professional advice for complex tax matters.

Remember, while accounting software can handle much of the heavy lifting, understanding your business and professional judgment remain invaluable in ensuring accurate financial reporting and tax compliance.

Final reconciliation

Ensure all transactions for the year are recorded and reconciled. This includes bank statements, credit card statements, and any other financial accounts.

Generate year-end financial statements

Use your accounting software to generate comprehensive financial statements, including:

• Profit and Loss Statement
• Balance Sheet
• Cash Flow Statement
• Statement of Changes in Equity

Corporation Tax preparation

Your accounting software should be able to generate a tax computation based on your financial data. However, it’s important to review this carefully:

• Adjust for non-deductible expenses: Some expenses, like client entertainment, are not tax-deductible. Ensure these are correctly identified.
• Capital allowances: Review your fixed asset purchases for the year and calculate the appropriate capital allowances. Most modern accounting software can assist with this calculation.

Prepare for filing

Once you’re confident in your figures, use your accounting software to generate the necessary reports for filing your Corporation Tax Return (CT600) with HMRC. 

Many accounting platforms can now file directly with HMRC. For example, Xero Tax integrates with both Companies House and HMRC.

Plan for the next year

Use the insights gained from your year-end review to set financial goals and budgets for the coming year. Many accounting platforms offer forecasting tools that can help with this process.

Backup and archive

Ensure all your financial data is securely backed up. Most cloud-based accounting software does this automatically, but it’s worth double-checking.

The bottom line

And there we have it – a practical guide to technology’s role in the future of accounting. 

Businesses that embrace modern technologies are poised to reap the rewards. 

From streamlining daily operations to gaining deeper financial insights, the tools and strategies outlined here can help you master your numbers and uncover deeper analyses. 

But adopting new technologies and workflows can be tricky, especially if you’re used to more traditional accounting methods. That’s where the team at Lumin comes in. 

At Lumin, our mission is to empower businesses like yours to thrive in this new era of accounting. 

We combine cutting-edge technology with personalised support and guidance, helping you harness the full potential of modern accounting solutions.

Contact Lumin today, and let’s get started.