The Future of Cloud Accounting and Financial Services

The accounting industry is changing in dynamic ways that few of us could have imagined just a couple of years ago. With the explosive growth of Xero and other cloud accounting software, accountants and bookkeepers need to adapt their business model — quickly — to keep up with the new expectations of customers.

The traditional model for financial services businesses has always been locally based. Small business owners would have a tax accountant that they could drive to in their local area, recommended to them by their family or network.

The client would hand over all their documentation for the year, and that tax accountant would handle all their financials, but they wouldn’t necessarily be an expert in their customer’s industry. These were often long term relationships with clients working with the same accountant for 10 or 15 years.

Usually, the local accountant would have been an expert in tax accounting — they’d look at the figures, work out the tax implications and help their clients to create the right structures for their business to minimize tax, but they would have had little insight into the other financial aspects of running a small business such as pricing, product profitability and budgeting.

In big business, the traditional model has been a bit different. In large companies you would have a CFO with a team of accountants and accounts staff around them, who process transactions and put together reports for decision making. While tax is a factor, the main priority is using accounting information to improve the performance of the business. This includes regular management reporting, tracking actual performance against KPI’s and budget and projecting future performance with cash-flow forecasts and financial models for different scenarios.

These days, smaller businesses and start-ups need to have those ‘big business’ elements built into their financial processes as well.

I believe that one of the biggest shifts we’re going to see in this industry is that small businesses will adjust their accounting teams so they become similar to big businesses. They’ll have more of a focus on using the accounting figures to make decisions about the growth and direction of their business, rather than just for doing their tax returns at the end of the year.

This shift to data-driven decision-making will bring powerful change into both small businesses and the accounting industry, and there are four things bringing this change about —

1. The Un-bundling of compliance and advisory work
2. The growth of niche-specific productised services
3. Sophisticated financial technology and
4. The rise of the virtual CFO.

The trend right now is that accountants and bookkeepers are implementing value based pricing or fixed-fee pricing, rather than charging for the number of hours they work. With all the outsourcing and offshoring going on, there is the potential to make huge margins — costs of service delivery have dropped, but accountants are still charging at the same or higher rates. I don’t think it will be long until the market catches up, puts pressure on accounting fees and will force a different business model to evolve.

It is common for accounting firms to bundle advisory work with compliance work in a fixed monthly fee. My prediction is that soon market pressure will force these services to be ‘unbundled’ and that it will be common for small businesses to have their tax compliance work and their advisory work provided by different service providers.

Customers will expect this flexibility, and so here is an example of what a small business’ new accounting team might look like:

Niche Specific Productised Services

 Compliance work will be delivered at scale by businesses who have ‘productised’ their service and can deliver a standard service at a low cost. To succeed with a productised service business model, firms need to develop a replicable process that works for every new client and can be reliably reproduced every time rather than the ‘provide everything to everyone’ approach.

The web development industry gives us a great example of productised services in action. When a business decides they need a new website, they have two options before getting started: they can choose a pre-packaged theme, which is a fixed template that can be customised a little bit, or they could choose a custom-built platform that is completely unique and created for the specific needs of their business.

For a small business owner, the end result might look pretty similar — they both work, and they both look good — but choosing the pre-packaged theme is a much more economical option than the custom build.

The developer or agency that provides the template and makes the small customisations is providing a productised service: they can sell the same product to thousands of different businesses and provide a specific service within fixed parameters so that the client gets the outcome they want without a huge amount of resources needing to be invested by either party.

It’s my belief that productised services will be the model that emerges as the best way to do business for accounting or bookkeeping firms.

It’s a transformative shift for financial service businesses. Accountants and bookkeepers usually take an agency approach: they work out what the customer needs, create a custom proposal for that business, and then do everything they can to deliver.

There’s no real consistency or scalability with that model, because everything is custom and different each time, and productised services solve this growth problem in one hit.

The difference with a productised service is that the scope of the service is tightly controlled to ensure it can be delivered at scale, in a cost effective way. This means saying NO to requests from customers which are outside the scope, or charging significantly higher prices for custom requests.

I see the potential for productised services to emerge in tax compliance, business structuring, tax planning, ASIC compliance, budgeting and also delivering industry-specific or add-on-specific services at scale (such as accounting for dentists or specialists in a particular the Xero add-on).

As the financial industry moves online, the capacity to reach specific markets outside of a geographic location increases. This trend will put pressure on accounting firms to ‘unbundle’ their advisory services from compliance work, and to productise in a specific niche in order to stay competitive. These changes might not come willingly from accounting firms, but the pressure of customer expectations may eventually force their hand.

The Technology Making It All Possible

Scalable services weren’t possible prior to cloud accounting. Accounting software used to only be available on desktop computers — there was no cloud capability until recently — so you couldn’t have an accountant in a different city unless you posted them a USB with your data. Xero has been a driving force in changing this.

There have been two main shifts in the evolution of cloud accounting. First, there has been a massive increase in flexibility and opportunity: the business owner could be in Berlin, while their tax accountant is in New York and their bookkeeper is in Brisbane, or anywhere else. This flexibility creates far more opportunities for both parties to grow their customer base, because they can operate in multiple markets and timezones without needing to be physically present in them.

The other main shift is that the underlying data is now more timely. With desktop accounting, it was a big hassle for clients to get data to their accountant, so that would usually only happen once a quarter. With cloud accounting software being connected to bank feeds and your other financial tools, all the data is synced at least once every 24 hours.

This means that accountants can be giving advice weekly, monthly or quarterly, rather than annually.

Shortening this feedback loop so significantly allows business to adapt more quickly and make better decisions over the course of the year, because they’re getting incremental updates rather than a data dump that happens once a year. They can see in real-time which products to double down on, where they need to cut costs, or where there is an opportunity to capitalise on.

As accounting and bookkeeping apps become more sophisticated, specialisation and scale is going to happen faster and more effectively, and technology will start overtaking a lot of the repetitive tasks that are currently outsourced overseas. The cloud accounting software add-on marketplace combined with the ever increasing reach of Artificial Intelligence (AI) will automate a large part of the bookkeeping data entry process, especially in areas like entering bills and allocating transactions to account codes. These factors will all contribute to drastic shifts in the financial services industry over the next few years.

The Rise of the Virtual CFO

Many accounting firms are trying to move towards a recurring revenue model. Since tax returns needs to be done annually, that particular service is not really suited to a subscription model,so firms are trying to come up with a service that can be done monthly. The most logical step there is to provide a virtual CFO service.

The role of the virtual CFO is to ensure the accounting data is accurate and relevant reports are being delivered, but also to think strategically. They tell the story behind the numbers and help the business to use the numbers to make decisions. It’s their role to understand the business and the industry, understand the people in the business and their information needs, and then put it all together.

The virtual CFO is there to help people within the business make decisions based on accurate data and to look critically at the business and question what’s working.

While accounting firms are racing to enter this space, the evolution of the Virtual CFO online marketplace is evolving. There are now specialist virtual CFO firms such as Cloud CFO and Tinka Consulting. These are also websites where small business owners can search through hundreds of experts to find the perfect part-time virtual CFO for their business. One such example is expert360.com.

Earlier I touched on forecasting, setting budgets, and defining KPIs for the team. The virtual CFO becomes responsible for each of these areas in the business, and acts as the project manager to ensure that everything is executed as is needed.

My prediction is that the the virtual CFO will understand the tax requirements for the business, but will have the work completed by a business providing a tax compliance productised service. They have some knowledge of tax planning and structuring, but they’ll get advice from external expert accountants in this field. They’ll understand forecasting and they might do that kind of work themselves, but that might also be handed off to a productised service specialising in forecasting.

The virtual CFO manages each of the productised services and specialists, has them deliver high-quality work, on time, and then helps the business owners to interpret the numbers and set strategies in place that make use of them.

This begs the question, if compliance work has been productised and is being delivered at scale, system setups are completed by specialist Cloud Integrators and the virtual CFO work is being delivered by expert individuals rather than accounting firms, what does the future hold for accounting firms? I still see a place for accounting firms providing specialist tax advice, but this will be a much smaller market once the tax compliance and virtual CFO work is unbundled.

How to Take Advantage of These Opportunities

 Accountants will have to make a decision. Should they go down the productised service path and build a business that delivers at scale? Alternatively, should they compete for a piece of the hotly contested tax advisory work or become independent experts who work as part-time virtual CFOs for a range of businesses.

We designed Bean Ninjas with these predictions in mind. We are focusing on building a scalable productised service, delivering bookkeeping to online businesses.

Accountants traditionally haven’t been great at marketing, and haven’t needed to, because the majority of their work came from word of mouth referrals. Now, if they’re trying to go beyond a local market and target a niche, then they’re going to have to develop marketing strategies that differentiate them from their competitors and focus heavily on building trust with their potential clients.

If it’s a productised service or advisory firm, they need to improve at marketing their business, and if it’s the virtual CFO path, then they need to improve at marketing themselves.

This is hard for accountants. We do a lot of ethics training that focuses on not trying to sell anything, and always trying to do what is right for a customer. Accountants often undersell themselves: they don’t want to be perceived as salespeople, because they don’t want to erode trust in their customer base.

But if you have a productised service or are trying to get consulting clients, you must market your offering. Try to see it as an opportunity to share your insight and expertise with the people who need it most in the niche you are serving. Choosing a specific niche makes marketing much easier, because you don’t have to be all things to all people. Select a specific type of business that you want to help, then double down on positioning your services to benefit them.

If you are an accountant wanting to focus on marketing, you might find some of our other articles on attracting leads through online communities, guest podcasting and growth hacks useful.

Where do you think the financial industry is heading in the next few years? Share your thoughts in the comments!

This article was first published on the Bean Ninjas website.