From the abacus to the Incan quipu knot system, to written ledgers, adding machines and calculators, people have been using accounting tools for centuries.
Today, most accounting professionals rely on some sort of software to manage invoices, orders, accounts receivable and accounts payable. That software can vary widely in sophistication depending on the complexity of the business and the needs of the customer. For example, many small businesses can manage their books on Excel spreadsheets. Many continue to use Excel for accounting even as their business grows, which ultimately results in disparate data spread across multiple spreadsheets that are out of date or even present conflicting numbers. This has businesses wasting time agreeing on who’s numbers are correct and justifying their data. Eventually, businesses need to invest in an accounting software package and ultimately, depending on their growth, full-fledged Enterprise Resource Planning.
When it comes to the way in which businesses manage their accounting, there are a number of options. Some simply outsource accounting to an agency, but this leaves critical business data and the ability to effectively leverage it for insights into the business in the hands of someone else. For those who deploy accounting software, they can deploy on-premise accounting software or cloud-based accounting software.
Accounting software automates some or all of the processes associated with measuring and communicating the financial information of a business. This includes accounts payable, accounts receivable, income, expenses and more. Accounting software enables the finance department to more easily assemble financial data and disseminate it to stakeholders, both internal and external such as auditors, investors and suppliers.
Historically, accounting software has been run on-premise, meaning the software and database is stored on a local server that people within the organization can access and manipulate. The emergence of cloud computing first began with simpler functions such as email, but has since grown to include nearly every software application.
While there’s been decades of myriad vendors doing their best to sow confusion and create hype around cloud computing, it is at its most basic a simple idea—using someone else’s computer over the internet. There are, however, a number of different approaches. There is providing infrastructure, where the cloud vendor provides the servers, network and data centre and the client just accesses the compute power via the internet, commonly referred to as Infrastructure as a Service or IaaS. Alternatively, the vendor can provide both the infrastructure as well as tools and a development environment on which the client writes and manages an application, commonly referred to as Platform as a Service or PaaS. Finally, the oldest and most familiar form of cloud is where the vendor provides the infrastructure, the platform and the software application, which the client accesses over the internet, through a browser or mobile device, called Software as a Service or SaaS.
When it comes to cloud accounting software, most fall under the banner of Software as a Service, though not all. Most industry observers only consider a software application as SaaS if it is run in a multi-tenant environment. That means there is a single source code for the application that all customers share, while their data is kept separate. Some software providers or their partners will host a single application in their own data centre, manage it and let the customer access it over the internet, but because each customer has their own version of the software, it does not afford the same economies of scale that SaaS does. This approach is commonly referred to as hosting or the Application Service Provider (ASP) model and called by some SaaS vendors Fake Cloud.
SaaS or cloud-based accounting software presents a number of advantages over on-premise software.
Primarily, cloud accounting software can better scale with a company’s growth. Because all that’s needed to add additional capacity is a user license and a browser, businesses can quickly and easily add finance staff. If a company adds a new, office, location or subsidiary, managing the accounting and financial function is easily done as well. It’s just a matter of logging into a computer and accessing the application.
That benefit extends to the workforce as well. Team members traveling, stuck somewhere because of weather or catastrophe or even those who just want to work from home, can easily do so without the need for a VPN.
Because cloud accounting software doesn’t require an initial investment in servers, databases, data centres and the staff to manage it, the upfront costs for the cloud are far lower than for on-premise accounting systems. Those cost savings extend throughout the lifecycle of the cloud accounting software ownership because businesses can avoid the costly and disruptive upgrade cycles required by on-premise software but also because the vendor continues to pass on those economies of scale.
When it comes to financial audits, cloud accounting software adds another layer of convenience. Some businesses have simply been able to give outside auditors access to their SaaS accounting system and, instead of taking over a conference room with a small team and room full of boxes, the auditors can do their work from offsite.
But probably the biggest advantage of cloud accounting software over on-premise software is that it is always up to date. Cloud accounting software companies typically make multiple updates to their software each year and, since every customer is on the same version of the software, every customer gets those upgrades when the vendor pushes it live. That’s unlike on-premise accounting software, which requires manual updates, patches and updates to any integrations with other software that may be required. It also means that any changes to accounting rules regulations or state or federal law can be accounted for, built into the system and pushed out to customers at the push of a button. For example, with recent changes to rules around revenue recognition, particularly ASC 606 revenue from contracts with customers issued by the FASB and IASB, SaaS accounting software could account for those changes, build it into the system and disseminate it to customers when the rules went into effect.
There really aren’t advantages to having your accounting software run on premise vs. in the cloud. Some on-premise vendors might suggest that there are security advantages to housing accounting data at the location, but the security precautions cloud accounting software vendors take, both physical and cyber, is almost always far more sophisticated and advanced than an individual business. Some places do have legal requirements to keep data within a particular geography but most cloud accounting software vendors are building or have already built data centres in those locations to account for such laws. Today, the default choice is the cloud.