MTD - Next steps into the Digital World

Following the introduction of the Making Tax Digital (MTD) legislation earlier this year, hopefully by now most clients who can be cajoled, helped onto accounting software are recording their accounting records digitally and transmitting the information with a direct digital link to HMRC.

As part of the process, which was hopefully not as painful as it could have been, the temptation no doubt existed to limit the software integration to as they could stomach; “You want to work with the software and let it help you without changing too much how you are doing things” was perhaps a common refrain.

Within a group of clients there will be those that are ostensibly fully onboard on the process, and indeed compliant with everything they have been asked to do by HMRC. But although they are working ‘digitally’, do they still keep a backup of their paper records, still in the old assigned space in the home office, and still go there at the end of a week or month or quarter and ‘do the accounts’? The underlying transactions might be digital, but their way of working is still resolutely analogue.

The question is, is this making full use of the software they are paying their monthly subscriptions for? And are we doing our clients a disservice by not pushing them to take full advantage of all of the time and energy saving mechanisms that software allows?

Just to give an example of a few ways in which wholeheartedly utilising the software and adopting an ongoing approach to bookkeeping could benefit these clients:

• Credit control

Raising invoices on software saves time, common line items can be recalled instantly. Most software will allow for the invoice numbering to always be sequential if required. The record of the invoice will be retained, both for inclusion on VAT returns and year end accounts. However, if you are not taking advantage of a constantly refreshing bank feed and reconciling off transactions as they occur, credit control is going to require a separate process to manage, with separate records, which will have the added effect of taking focus away from the core aspects of the business.

On top of this there are potential benefits in using online invoicing, streamlining the process for customers to pay as quickly and easily as possible.

• Cashflow management

Keeping the records of the company current allows for much more meaningful cashflow management. It cannot be stated enough how important this is to the small business owner. Not managing cashflow is responsible for the failure of four out of every five small businesses.

Something as simple as running an aged creditors report from up to date information will enable the owner to prioritise payments and understand the future cashflow position beyond just how much money there is in the bank. Future expenditure and capital purchases can be informed from this, making for a much healthier business.

Some software will also make an estimation of corporation tax payable, another big cash outgoing that can catch business owners by surprise.

• Budget and management information

There are many more ways up-to-date management information can guide an owner into making the correct business decisions, for which keeping up-to-date information and utilising the built-in report functionality is critical. Whether this is looking at margins of products, affecting sales mixes or pricing decisions, or looking at debtor payment periods, previously this sort of information was only available to a much larger company, and can have massive impact on the success of the business. When some software offerings will allow for the customisation of reports, there should be no excuse for even the smallest business owner to not have the management information they need at their fingertips if they are willing to adopt the correct approach in using the software and are well advised in getting these things set up.

Those are just some mechanical ways using the software in the way it was intended can help the business owner, but there are perhaps more subtle effects that could have an even bigger impact.

Use of technology is changing almost every aspect of our lives. We accept without comment the constant access to computers in our pockets, to look at pictures of cats and check the weather forecast, that far outstrip those that have sent spacecraft to other worlds.

As an example in another field, with the introduction of diagnostic technology, the important skill of a doctor will increasingly move from having an all-encompassing and encyclopaedic knowledge of every symptom and co-morbidity, to focussing more on the process of delivering care to the patient.

In the same way it is not unreasonable to see the greatest benefit from a whole-hearted adoption of accounting software as achieving the same freeing of mental energy for the small business owner. Not merely in terms of time saved each month from manually entering invoices and reconciling banks, but in delegating whole aspects of the thought process of running a business and freeing almost all of the business owner’s attention to genuine value-adding activities and creative solutions. This can only happen by having the confidence and certainty that the information that is held is accurate and up to date.

Jonathan Carr writing in The Shallows: What the internet is doing to our brains, describes how the presence of connectivity and freely-available data in our everyday lives is fundamentally changing how we think, and how we process and retain information. There is no reason why this should not be the same for the small business owner and adopting work practices to fit this, will enable them to be competitive and successful in an ever-changing marketplace.