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Managing money: The online accounting revolution

01 Feb 2011

Can you imagine actually enjoying doing your accounting? For too many small business owners, the thought of having to sit down and crunch numbers is a moment of dread. They’d much rather be focused on the actual job they perform or the things they produce. But the wages and bills have to be paid, and then there’s Inland Revenue to keep happy...Yet it could be so much simpler. Online accounting services have dramatically changed the way businesses handle income and expenditure.

"We’re in a real revolution now – we’re in the third generation of software for small business,” says Rod Drury, CEO of Xero, provider of online accounting software for SMEs.

Cloud computing is the third generation, he explains, the first two being DOS-based computers and Windows. With everything now being connected, and the software sitting in one place, SMEs are seeing their first real change in business processes in more than a decade.

"It means that we can now get fantastic new services to small businesses and connect small businesses to the services that they need, and they’ve never experienced this before.”

When Xero was founded in 2006 by Drury and SME accounting specialist Hamish Edwards, they’d spent some time talking to small businesses – not just about how they managed their accounts, but how they actually worked. Many small business owners, once their computer had booted up and they’d made their first coffee of the day, would check their accounts, to see who had paid them overnight. However, very few of them actually entered that data into their accounting system.

"What this means is, the accounting system was never up to date and they always had this work to go and do sometime later,” Drury says.

Xero’s response was to establish automated ‘bank feeds’, allowing its customers to automatically import bank statements into their online accounting systems. This means their cash flow is visible and updated without the need for manual data entry on their part. Every time they check the data, it’s automatically updated for them. "This is so great for survivability and just knowing where you’re at – and it eliminates that catch-up because you’re doing a small amount of work every day,” Drury says.

Accountants and other financial advisors can also be given access to that same data flow. If the accountant can now cost-effectively work with a small business owner, the owner is more likely to do more with their existing cash flow: more likely to hire a new employee, more likely to export, more likely to get a loan for some new plant and equipment.

"The cloud is doing a lot more work for the small business owner,” says Drury. "It’s making them smarter, and it’s getting rid of a whole lot of administration stuff that just wasn’t important before. And this means people are actually enjoying the numbers because we’ve taken a real design-led approach to make it easy but powerful, and the software is doing a lot of work.”

Removing data entry from the accounting process could potentially halve the costs that businesses spend on book-keeping, according to Stephen Nicholas, CEO of public practice accountancy firm Openside.

"We’ve seen a large number of clients moving away from having an in-house book-keeper/accountant,” he says. "

I think it’s an entirely appropriate direction for the industry to be moving.” An accountant takes seven years to qualify, and rather than spending their career filling out forms, they could focus on advising businesses how to measure and improve their performance. The next stage of development in cloud-based accounting is to leverage the connectivity it offers, so that businesses can use it to exchange other forms of information.


Wouldn’t it be great, Rod Drury argues, if every business had a unique identifying number, which could be used to generate a range of services? The Single Business Number (SBN) is already in use in several countries overseas, most notably in Australia, where it’s called the Australian Business Number or ABN. It is used for businesses to deal with each other, and with government agencies.

The number, held by the Australian Business Register, enables businesses to claim GST and energy grants credits, facilitates a single business activity statement, stops businesses deducting pay as you go (PAYG) withholding tax from payments, and allows other businesses to confirm details for ordering and invoicing purposes. Similar systems operate in Canada and in the USA, where it’s called the Employer Identification Number (EIN).

In these countries, the number was created to enable government agencies to collect information more easily from small businesses. In New Zealand, the Ministry of Economic Development and Inland Revenue have done significant work on SBN.

Support is growing in the business community, with Drury being a leading advocate. The concept of a trans-Tasman single business identifier was mooted at a 2009 summit meeting between John Key and then-Australian PM Kevin Rudd. It was listed for possible implementation within five years.

Having an SBN would mean that cloud services could use it as a communication tool. Computers would just read the SBN and update any new information, such as addresses.

Anyone contemplating doing business with a particular firm could do an instant credit check. Electronic invoicing would be automated, saving time and paper. Businesses could also benchmark their performance regularly and anonymously against their competitors and peers, using their monthly management accounts.

"We think it’s a huge key to improve productivity,” Drury says, "because that means we [the cloud software industry] can do more electronic work on behalf of the small business owner, as we’ve proved we’ve done to date.”


The big question about SBN is whether it should be an entirely new number, or whether an existing one can do the job.

There’s a strong case for using the Tax File/GST number for this purpose, given that it would save a lot of time and cost that would incur from setting up a new one. This view is shared by the Institute of Chartered Accountants.

Responding to a query from Start-Up, an Inland Revenue spokesperson said the Minister of Revenue had asked for a report on making the GST number double as the SBN. A joint report from Inland Revenue and the Ministry of Economic Development is expected by the end of the year.

While Drury accepts the argument in favour of using the GST number, he believes it could create complications. "It’s a very New Zealand-centric thing and we’re operating on a global stage,” he says. There is, however, an alternative suggestion doing the rounds.

It answers Drury’s assertion that a globally identifiable number is preferable, and it’s already contained in something we see every day: the barcode that appears on all retail products.Barcodes are an international standard administered by GS1, an international non-profit organisation with member organisations in more than 100 countries. If you examine a barcode, you’ll notice it contains a series of numbers, and it’s these that really matter.

That standard that is embedded in the barcode number is called a Global Trade Item Number (GTIN), and it uniquely identifies a particular product in a particular configuration from a particular brand owner. A companion number to that, which most people are unaware of, is the Global Location Number (GLN). This number identifies the source of the product and is crucial in electronic transactions, such as data synchronisation between product catalogues, or even shipping and dispatch notifications.

"It’s really ubiquitous, it’s used a hell of a lot and it’s embedded in systems where a lot of people that use it don’t even know, in the same way that most people don’t think about a barcode,” says Peter Stevens, CEO of GS1 New Zealand.

"Why would you create a new NZ number with a new format and get it put into everybody’s software when in fact there’s already a number that is well understood, very widely used, supported in a lot of software, and is global?”

GLNs are also very widely used to support traceability requirements, and to protect the integrity of the supply chain for consumers and producers. Stevens says using the GLN as a single business number makes sense because larger businesses are already using it.As to whether the government would be amenable to the idea of a private database being used by its agencies, Stevens says IRD and the Companies Office have had discussions with GS1.

Its board, which comprises some of the country’s biggest industry associations and companies, has also discussed the idea in principle and appears to have an open mind. In theory, the GLN numbers held by GS1 would be held by the Companies Office and the GLN would become a government number – as is already the case in some other countries.


Another area of money management where software can help is running the payroll. While electronic forms are now commonly used, they are still vulnerable to errors. What businesses need is software that checks information as it’s being entered, pointing out when the employee makes a mistake.

TimeFiler is a cloud-based, software-as-a-service (SaaS) application that manages employee rosters, leave requests and timesheets online. A pre-configured version containing features suitable for SMEs was developed jointly with IMS. "We worked to give it more generic functionality, so it’s cost-effective for smaller employers to use as well,” says TimeFiler CEO Ian Johnson.

Features can be tailored for special requirements, such as overtime and shift allowances. TimeFiler can also generate reports for managers on such things as leave entitlements and work paid for versus work rostered, and business rules can be configured for a company’s requirements. Such flexibility is important when calculating such things as holiday pay – especially with the upcoming changes to the Holidays Act (see "The system is very proactive at helping the managers to keep their payroll costs down,” Johnson says.


Let’s wrap this story up with a major issue for any business: getting customers to pay. Accounts receivable can be nerve-wracking for a business that is dealing with the public – especially if someone has to start chasing overdue accounts. The recession has had a major impact on businesses that rely on membership fees, such as golf clubs and fitness centres.

"As things got tighter, people realised they needed to give their customers maximum flexibility,” says Steven Holmes, IT Manager for billing services provider Debitsuccess. "When there’s less discretionary dollars floating around, then that becomes a barrier to people maintaining their subscriptions.”

Debitsuccess has helped this by letting its clients offer their customers a part-payment option, so instead of hitting customers with an annual bill of perhaps $1000 or more, they can split this up into smaller, more manageable chunks. Debitsuccess formed a partnership with NZ Golf to create Flexisub, a payment management system that not only helps golf clubs retain members, but helps them reduce overheads through not having to manage a renewal process. Organisations whose income varies with the seasons can also benefit.

Debitsuccess is Australasia’s largest payment processing company, offering billing, customer service and credit control facilities not only to the fitness and golf industries, but also to child care centres, the telecommunications industry, and insurance and software companies. Through its online services and call centres, it manages direct debit payments and customer inquiries. It also handles membership applications, using technologies such as Direct Entry, a smart client application that allows people to sign up customers with a signature pad, so they have an electronic version of their agreement rather than a paper contract.

Then there’s Clubware; software that lets health & fitness clubs administer member management, training and fitness programmes, bookings and correspondence, as well as cash drawers and barcode scanners. It synchronises daily with the client’s billing system, so they get regular updates automatically, and there’s no need for manual data entry. It keeps track of customer account payments and can also initiate email correspondence.

The other major technology change has been the ability to initiate direct debits online. Debitsuccess’s Online Management Gateway service allows a SME with no technical or software capability to generate online templates, for their customers to be able to sign a direct debit agreement and a membership or service agreement online. The gateway also allows clients to add hyperlinks to emails that they can then use for marketing campaigns.

"We’re managing the entire financial relationship with the customer on behalf of the business, including inbound and contact,” says Holmes. "We’re managing the movement of funds into your accounts, we’re providing you with a full suite of financial reporting surrounding that, as well as statistics for customers, and we manage annual price increases and variations. We operate on a commission basis, so essentially we only get paid if the business gets paid.

"Your entire accounts receivable function can be replaced,” says Holmes, laughing. With economic recovery still stuttering, businesses that can streamline their money management will perform better, reduce expenses, and with any luck find more capital for development. And don’t forget the fun of watching those figures move without pain and perspiration on your part..