In Pursuit of Profit
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While this statistic may be true, it fails to provide any information about why corporations are choosing cloud computing, and why those that aren’t making the switch are continuing with their traditional accounting software.
It has been reliably estimated that by the year 2020, more than 78% of all businesses large and small, will rely on cloud computing for their data processing. There are a number of reasons for the burgeoning popularity of cloud computing, and those reasons are certainly valid for the specific business function of accounting. Before getting into a comparison of the traditional and cloud accounting methodologies, we should define them to establish a baseline for each.
Key Factors to Consider and Relevant Data
If it seems that this comparison of benefits is heavily slanted toward cloud accounting, that's simply a matter of the facts supporting a fairly obvious conclusion. In truth, the benefits of cloud accounting make it a pretty hard package to beat, but all managers and company officers must make decisions based on their own business circumstances, goals and objectives, and available resources.
When considering whether to maintain a company’s use of traditional accounting software or shift to cloud accounting, there are several important factors for executives and business owners to consider.
Local vs. Remote
Traditional accounting is generally carried out in-house, with all data and software stored on a local server, and all transactions recorded right on the premises. Very small businesses and startups are typical users of traditional accounting methods, often due to budgetary constraints, the uncertainty of longer-term viability, or simply because they haven't yet been exposed to the potential benefits of cloud accounting.
Cloud accounting, on the other hand, has all data and processing situated on remote servers which are hosted by a company providing this service, generally on a monthly subscription basis. The obvious and immediate benefit of this arrangement is that the need for local hardware and software is either reduced or eliminated, as well as the expertise required to maintain it.
Initially, only larger corporations made use of cloud accounting, but its appeal has become much broader than that today, and businesses of any size can benefit from it. In fact, it may have even greater appeal to small businesses because cloud accounting can provide exactly the same resources to a four-person startup as to a giant corporation - which has the startling effect of leveling the playing field between the two.
Cost of transfer and ultimate cost-effectiveness
Of course, no comparison would be complete without some reference to the associated costs. This is another area where it might seem that cloud accounting is at a disadvantage, but again, the opposite is true for the most part. To get your traditional accounting program established, you'll need to purchase in-house hardware and software, pay for training your personnel, and cover all maintenance and repairs which become necessary. When you do accounting over the cloud, all those costs are irrelevant, and the only cost you have is a predictable, easily-budgeted host fee, which is paid periodically.
A company’s primary goal is to increase its profit margins, which means eliminating and mitigating costs whenever possible. As such, businesses currently using traditional accounting software must consider the cost-benefit analysis of transferring to a cloud accounting system. While costs surely vary based on a business’ size and scope of accounting projects, one study conducted at the Bucharest University of Economics concluded that:
The study is hardly the first of its kind, nor the only one that concludes that cloud accounting offers cost-savings benefits. Consider CompTIA Senior Director of Technology Analysis Seth Robinson’s opinion of cloud computing, where he described it as “the ultimate way to do more with less.” Robinson explained that these costs savings are multi-faceted, writing, “Cloud offerings can deliver cost efficiency, but they can also simply workflow, speed up operations, introduce new features, or lead to new business products/services.”
For what cloud accounting offers in cost efficiency, it may lack in security. In fact, while security is often cited as a benefit of cloud accounting, with information about encrypted data and backup capabilities being touted (which are both valuable and credible considerations), concerns about security are one of the primary reasons that some businesses are holding back on making the switch. According to a report published by Eurostat, 57 percent of large enterprises and 38 percent of SMEs (small- and medium-sized enterprises) state that the risk of a security breach is a factor limiting the use of cloud computing.
One analysis found that approximately 21 percent of data that is uploaded to the cloud by companies contains sensitive data, including intellectual property. Not only does this create the risk of sensitive information being accessed, but the risk of profit loss, too. Consider the fact that when Target’s data was breached, the company experienced a 46 percent drop in quarterly profit, and a loss of approximately $148 million.
Scaling is a concept that all businesses need to be aware of, and to plan for, since it involves all those measures necessary to accommodate business growth, which is the theoretical aim of all enterprises. When your small e-Commerce business is discovered as the only source for 'genuine leather toe bracelets', you could be faced with a sudden surge in growth that causes a huge problem with scaling up to meet growing demand. With cloud accounting, which would not be the case, since scaling is automatic when managed by your provider, making it a process virtually transparent to your business.
Space and hardware.
Even companies that are managing millions of dollars in revenue each year may have concerns about the space and hardware that is required for the maintenance of an approach utilizing traditional accounting software. In addition to the physical space that is necessary, considerations regarding hardware and traditional accounting software include:
Consider also that as your business grows, so will your storage needs. Servers to meet these storage needs consume large amount of space and are expensive to maintain. Further, should a server be destroyed due to a hack, equipment or electrical malfunction, or natural disaster, there may not be a backup, and data may be permanently lost.
Since cloud accounting has its base on the Internet, it can easily be accessed by any authorized company user, from any location and using any type of computing device. This is ideal for companies whose employees work from home or are frequently traveling for business purposes - there's no loss of productivity and no loss of access. Take your laptop on the road with you, access your business data at any time of day, and from any place you happen to be.
Traditional accounting dictates that an employee is either working right on the premises or has some type of remote connection to company servers. It also usually requires that access is by a single kind of computing device, which has been pre-defined in access protocols during implementation.
Finally, as the world becomes more connected and the number of people who work remotely grows—a survey published by The New York Times found that in 2016, at least 43 percent of Americans reported spending some time working remotely, and the percentage of people working remotely four to five days has grown--having access to your company’s accounting data no matter where you are may be a priority. Cloud accounting provides for remote access; traditional accounting software does not.
The Utilization of Traditional Accounting Software
Cloud accounting has benefits and drawbacks, as highlighted by the information above. However, advantages aside, some businesses may opt to maintain traditional accounting software when:
Comparing Traditional Accounting Software vs. Cloud Accounting – The Future
As mentioned at the outset, there are some compelling reasons why cloud computing will be embraced by more than three-quarters of all businesses by the year 2020. This leaves approximately 25% of businesses in the country using the traditional accounting methodology, although those numbers will likely continue to diminish.
The business landscape of today can be characterized by rapid change and the need for flexibility and agility in response to shifting consumer trends. To achieve that kind of flexibility, most businesses of today and the future will need to adopt practices and strategies which allow them to compete with market rivals, and cloud accounting is one shining example of those strategies.
Our team here at ASP is not limited to a specific type of software. They have decades of experience working with many. If you are interested in making an accounting change at your organization, please reach out to Eric Moore here.