What is Real-Time Accounting?

As accountants may be the most boring people (disclaimer: I am one myself), you may think nobody has gotten around to automating accounting, especially in the complex e-commerce industry.

However, in the past few years, real-time accounting has taken off, driven by the need to have real, hard numbers to make quick and accurate business decisions. No more waiting until the 15th of the following month and having to drive blind; real time accounting allows you to have financials based on real numbers at your fingertips.

But, what is real time accounting?

Let’s dive in.

Now, you may not be familiar with the term real time accounting, because you think it is an oxymoron. How can accounting be real time?

Unfortunately, too many of us have gotten used to receiving our accounting reports and books from non-ecommerce accountants - in the best-case scenario - a couple of weeks or one month after the end of the month. Often, even later.

Believe it or not, accounting can be real time. Especially in ecommerce. Nowadays, you actually can have your books at your fingertips, allowing you to do so much with this data.

Real-time accounting means having all of your key financial information - such as your P&L, balance sheet, and cash flow, continuously updated, in real-time. Real-time accounting brings all of your transactions to your books in real-time. This data will reflect your true , giving you benefits beyond your wildest dreams (OK, I’m an accountant, so these things excite me).

What are the benefits of real time accounting?

OK, so imagine that you have real time accounting, and numbers in the books that reflect your financial ground truth. What can that do for you and your business?

Insights Into Business Operations

First, insights. Instead of driving blind and waiting for a while to have your numbers, you can have real-time insights. For example, you can see your pricing per SKU, and see if you are profitable at all. At any level, any point of day. Throughout the month, across your business.

You can also find out if you are possibly cross-financing from one SKU to another. You can use your cash flow statements to see how your business’s cash flows and use it as a basis for cash forecasting going forward.

These are all important for any business, but especially for e-commerce brands. This is due to the fact that e-commerce bookkeeping is so inventory heavy, so having a good handle on your finances can give you invaluable insights into your inventory and cash planning. Add seasonality to the mix (and BFCM almost always plays a big factor), and you have compounded value to having real-time financial data.

Cash Flow Improvements

As noted, real-time accounting gives you accurate visibility into your cash, straight from the source(s) of truth (banks, Amazon, etc.). This can allow you to understand your cash flow statement and plan for the future. It is also a good opportunity to review your cash flow and see if you can make any improvements.

Growth Planning and Management

Real time accounting can also be used for growth planning and management. First, by giving you really good metrics and comparing yourself to the market. This can be done via P&L margins, such as gross margin, contribution margin, EBITDA, and net margin.

It can also be via other metrics like debt vs. equity, interest coverage rates, or inventory turnover. All of these are KPIs that help you understand how you compare to your competitors and where you need to improve. Some of these measures, especially cash flow and leverage ratios, can help you determine whether you are in a position to grow.

Another important aspect of real-time accounting and growth touches on 3rd parties. The kind of 3rd parties you will meet with when you want to grow your business with debt or equity.

Think banks, investors, angels, you name it. They will all want to see your financials. If you don’t have real-time accounting, and your books are a mess, this can hamper your ability to close a deal. I’ve seen countless deals that get stuck or even outright fall through because of bad bookkeeping practices.

If you have your bookkeeping always clean, accurate, and in real-time, this can make the difference. One last point here - even if you do manage to get your books in order for those 3rd parties, they will always be taken with a grain of salt, as you (many times) have prepared these books for the specific deal. People can smell cooked books a mile away.

Catch Fraudulent Activity Faster

Another advantage of real-time accounting is that you can detect fraudulent activity more quickly. If you let your books gather dust, things can fall between the cracks. Take Macy’s, for example, which had a $150M expense on its books for over three years that didn’t hit the P&L. Real-time accounting can detect those kinds of issues on time.

Versatile Reporting

Real-time accounting can be much more versatile than old-school accounting. Because the data is always at your fingertips, you can cut it and analyze it, giving you great insights. Finaloop, for example, even has a feature that allows you to pull the data from your Finaloop account (for all of your main financial statements) and sync it into a Google Sheet. Once synced, you can change the order of the chart of accounts or plug in all kinds of metrics or KPIs, all in real-time.

Peace of Mind

Peace of mind is definitely underrated. Personally, when I stress about things, it takes me a while to fall asleep. Not to mention how it impacts my mental health or even the way I do business.

And I’m not the only one. Real-time accounting takes at least one (major?) stress point out of your life by providing you with your real financial figures. You don’t need to worry about not having the right numbers, or not having enough visibility into your cash. Having that certainly is worth gold.

Automation and Technology

After discussing the virtues of real-time accounting, the real question mamy ask is - does it actually exist? The surprising answer is that it does.

Cutting-edge automation technology can pull data from bank accounts, payment processors and online shops, meshing the data, and spitting out real-time financials. This is exactly what Finaloop does.

Using this technology (along with backend support), Finaloop provides brand founders and operators with real-time accounting that they can actually trust. This technology can also provide much more accurate and granular inventory and COGS reporting (which helps on the compliance side, and on the inventory management side, along with pricing). It can also help track AR and AP more accurately, giving you a great basis for your cash flow forecasting.

Drawbacks of Real-Time Accounting

Is everything rosy and perfect? Well, nothing is, in this world at least. Real-time accounting can have drawbacks, including:

Errors in implementation

However automated real-time accounting is, it still requires humans in the backend and customer input. Sometimes, when processes are automated, people tend to take the backseat and assume that everything will work itself out on its own. That is not the case, and this can lead to errors.

Growth in business results in more costs

Pricing for real-time accounting can be cheaper than human bookkeeping (and quicker) - but costs can increase as your business grows. Even so, this is generally much cheaper than you’d pay elsewhere.