Open Accounting Data — Why it matters for SMEs
While built on well-established principles, accounting data is far from generic. Each company creates their management accounts in a unique way. Companies in the same market with identical business models and audiences will often use entirely different terminology and categories to describe performance. Therefore, accounting data provides an insight into the way a company views itself. It’s a live record, created over a long period of time, that should closely reflect the management’s intentions and effectiveness.
Exchanging data with banks
Banks and lenders that provide loans to small businesses have always relied on MI (management information) which is effectively a snapshot of the business’s accounting data at a specific moment in time usually accompanied by some explanatory notes. While possessing a snapshot of accounting information is quite useful, it’s like having a photo of a shop for security rather than a real-time CCTV feed.
1) You can’t see what’s really going on and 2) there’s inherent delay in the manual process of receiving the data, reviewing, approval and drawdown. At a smaller lender, this can be a couple of weeks, with larger lenders’ processes often stretching much further, up to 6 months in some cases. In this interim period, fortunes can change and a once-suitable borrower may deteriorate considerably.
Persistent access provides actionable insight
There is no substitute for seeing an SME’s accounts being created over time and accounting platform APIs enable exactly that. Individual companies can now give ongoing access to their accounting data to service providers. This means a company can access credit and investment faster and sooner than ever before. A company can also provide permission in the application process for a loan which can allow monitoring throughout its duration. This permission can also be removed if the loan is not granted or circumstances change so that it is no longer necessary. Borrowers appreciate this — just as how Linkedin now has detailed privacy controls, and as intended under GDPR, consumers want more control over their data. Giving users the ability to contribute and leverage their data is the simplest and most effective way to harness this control.
Ongoing data synchronisation has several advantages. First, the company has no ability to adjust accounts prior to sharing a snapshot showing the most positive picture — aka window dressing. Open accounting data shows every transaction and is an accurate record of ongoing performance over time. This helps service providers to identify systemic risks in a business model and ensure they can be addressed swiftly so that the loan is less likely to default. Second, while a snapshot shows potential, ongoing accounting data is the closest thing an external party can get to understanding how money is generated and used in a business without constantly supervising the management team.
Automating data input
In addition to pulling performance data accounting APIs have also enabled the pushing of data to the accounting package. This can be anything from payments or bank transactions to invoices. Most small businesses will be using several pieces of transactional software in addition to their accounting package. The accounting packages are increasingly the single source of truth for a small business owner, and capturing that truth is best done through direct integration.
Ultimately, open accounting data drives efficiency by making both the read and write of data to an accounting package more automated. This efficiency grants business owners and service providers more time to generate value for customers.
Codat provides data infrastructure to enable seamless and connected digital financial experiences to small businesses. You can explore how we help customers in banking, payments, fintech and accounting at codat.io.
