The 4 types of accounting practices (and the only type that can facilitate growth)

Accounting service providers existed long before computers and the invention of digital accounting tools. While the digital revolution changed the industry significantly, the establishment of digital accounting methods has also brought more diversity in the way accounting practices work. Some have figured out their way to thrive in the digital era, some are stubbornly sticking to their old ways, and many are struggling on their way in between.

The difference between the 4 types of accounting firms listed below is the extent to which they embrace automation. The different levels of technology sophistication also separate accounting practices in terms of the types of clients they take in and the monetary value of the services they provide.

1. Paper-scroll archivers

These types of accountants prefer age-old accounting practices like the use of paper, books and binders. According to research done by Xero, around 18% of the accountants in the UK still use paper ledgers. Paper ledgers are books that have been used to keep records of economic transactions since antiquity. Before computers came into existence, all accounting processes were performed manually using paper and pencil and required a great amount of time, manual labour, sustained focus and attention to detail.

Some small accounting practices in the UK and beyond still prefer manual accounting systems, mostly because that’s what they’re comfortable with and because paper is much cheaper than electronic counterparts. Of course, a big part of this is many people are still not comfortable with using computers. Paper ledgers and manual accounting systems have few prerequisites: they can operate without electricity and do not require any additional technical skills apart from mastery of the accounting profession itself. Companies that prefer these systems also benefit from the fact that they can hire employees for less money because they don’t need computer skills.

Of course, accounting practices that prefer paper transactions are at the lowest level of automation and therefore cannot process the accounts for many clients (or for big clients) in a time-efficient way. Such companies also tend to charge much lower fees for their services. With the advent of regulation like Making Tax Digital in the UK, paper-scroll archivers are quickly becoming extinct.

2. Spreadsheet aficionados

These are practices that prefer the use of electronic spreadsheets over paper accounting methods. Spreadsheets are versatile computer applications that are used by businesses in all industries to organise, analyse, and store data. They are the most direct computer alternatives to paper accounting worksheets and ledgers, so naturally many accountants feel comfortable at this level.

Indeed, more than three-quarters of all accounting practices rely significantly on different kinds of spreadsheets that they make to keep track of their client, staff, time-sheets, billing data, AML and GDPR requirements, etc. While some practices also rely on Excel for their core bookkeeping and accounting work for clients, others use off-the-shelf software like Xero, Quickbooks, and Sage to prepare accounts but still rely heavily on spreadsheets for administrative purposes.

Spreadsheets have several indisputable advantages. They are versatile, flexible and make it relatively easy to create instant calculations of considerable sophistication. They are also easy to change, foster good organization, and it’s fairly easy to find affordable third-party support for Excel or its cloud-based alternatives like Google Sheets.

The main drawback of such methods is that they almost inevitably lead to much data inconsistency, duplication and lack of synchronization. Because data is not uniform or properly indexed, it can be difficult or impossible to find relevant data quickly in a large collection of spreadsheets. With spreadsheets, it also takes considerable time and effort to master the formulas, enter data correctly into each cell, and there is usually very little validation that allows the software to recognize errors in the data format or calculation.

Spreadsheets aficionados typically invent their own unique internal systems for structuring and organising spreadsheets into computer files and folders. While this is clearly much better than paper-based ledgers, the amount of manual work is only marginally lower (insofar as the spreadsheet formulas can take care of the calculations and data is a bit easier to find). These types of practices are still quite low on the automation ladder and can only afford to take on a relatively small number of clients, typically not very big or sophisticated in their requirements, and can rarely provide deeper insights or higher level advisory functions. As a result, their revenues are again mostly limited by the bottleneck of manual labour.

3. Software junkies

Today, most accounting practices are entirely dependent on software for different operations. As the market floods in accounting software, more companies are starting to become dependent on various pieces of off-the-shelf software to manage different aspects of their businesses. Practices that rely heavily on such software typically become dependent on a whole array of software packages for a various tasks. It’s not unusual for an accounting practice to use one piece of software for corporate account preparation, another for self-employed and self-assessment tax, another for payroll, yet another for digital tax submission, something else entirely for managing and storing client data securely, and so on. Practices with more specialised clients (e.g. in the construction industry) usually need even more pieces of software to handle tax complications like the CIS scheme. The list goes on and on.

To add insult to injury, these disparate software packages rarely work well together or are even able to share data at all. As a result, there is again a large overhead associated with keeping data consistent and in sync, resulting in further inefficiencies and trivial or more costly mistakes.

The costs of the licenses for the various pieces of software can quickly add up. The risks of data or service loss are often high. With many cloud-based solutions users do not actually own, or even have direct access to their data. Technical issues are a common occurrence and customer service is almost never reliable.

While software-based practices are undoubtedly more efficient than others with a lower level of automation, too often the end-result is that the manual-labour bottlenecks have now simply morphed into technology bottlenecks. As a result, growth is again limited and there are few opportunities for differentiation to justify higher rates.

4. Data-driven cash machines

Finally, there is a small number of accounting businesses who are adopting a unique digitally-native approach to running an accounting business. This unique approach, at the highest level of automation, is the only strategy that does not impose limits on growth and can allow the business to provide high value services at scale without requiring more manual labour or additional hassle.

These companies have fully embraced highly tailored software that is fine-tuned specifically for the way their operations are designed. In such organizations, workflows are fully streamlined and highly automated. This allows staff to perform all important activities from a single place, without manual overhead and without data inconsistencies. It allows the business to take many more clients than their competitors who rely on less automated methodologies, without a proportional increase in payroll.

Additionally, because data is stored in a single place, they can perform better analysis, see patterns, gain insights, and generally provide better and higher value consulting services to their clients. There are also lower levels of risks involved in such practice and they can consistently charge more for their valuable services.

Taking a shortcut to success

The accounting services mentioned in this post are ranked based on their automation level and how streamlined their processes and workflow are. The ones with the lowest automation levels are constantly suffering stress, spending much of their time putting out fires, solving issues, making mistakes, and missing clients’ deadlines. They also experience a lack of business mostly because they are not able to cater individually to their clients due to lacking systems. As a result, the less automated practices cannot charge much more than market rates for their services.

While the 4 types above are ordered in increasing level of automation, this is not exactly a ladder to be climbed. The bulk of the benefits are only reaped by the highly automated data-driven businesses who own their systems.