As technology for retail and wholesale businesses becomes more advanced, there are often debates around what kind of technology is better. In particular, the debate of integrated accounting vs siloed systems happens frequently.
In this blog, we’ll discuss the differences between integrated accounting and siloed systems, so that you can assess yourself which is better for your business.
Integrated Accounting Systems
One of the major benefits of integrated accounting systems is that your accounts are kept up-to-date purely by virtue of processing your orders. Accurate accounts are, therefore, a byproduct of efficient operations.
So, as a purchasing manager or business owner, you order inventory on purchase orders and sell inventory on sales orders. With integrated accounting in place, by processing sales and purchase orders, your accounting is done for you.
This gives you a real-time position of the business’ income statement and balance sheet, helping you to quickly identify trends, and forecast and predict future performance.
There are also a number of other advantages of integrated accounting systems, which we will touch on now…
Powerful Segmented Data
As integrated systems collect data from all sources of sales, you can often segment your P&L and other accounting data in a number of ways:
- Channel P&L - You can review how profitable a marketplace is versus an ecommerce platform as all your operational costs can be attributed to a channel rather than just sit in a normal P&L as ‘overheads’.
- P&L by Product - You can instantly see how profitable a particular product line is by reviewing your total sales, total cost of goods sold (COGS), quantity sold and quantity returned. If your accounting system can also attribute landed costs to products as well, then you’ll also know the exact margin per product.
- P&L by Customer - You can also view sales versus cost per customer as well as quantity sold versus returned. This allows you to consider the extra discounting applied to your top customers, and whether they are still profitable with this level of discount.
Real-Time View of Tax Liability
The fact that integrated systems collect data from all sources of sales, also means that your tax and VAT recording is taken care of, providing you with a real-time view of tax liability.
The systems you use should then be able to use this data to produce reports for all your tax submissions, while providing you with a detailed audit trail of each transaction that makes up the total tax liability (including your sales minus purchases).
“Compared to the accounting system we had before, Brightpearl has absolutely been a huge step forward. You can audit everything, and anything that happens across the business, all in one place.” - David Keith, CTO, Growers House
Integrated accounting systems are (by their very nature) cloud-based, which means you can give your accountant instant access to your data, at anytime, from anywhere.
What this means is that your actuals can be compared with budgets and forecasts during the month, rather than at the end, and your accountant can finally become your trusted business advisor, as opposed to just your accounts administrator.
Instant Business Decisions
There is often much less work required to build an accurate view of your business with integrated accounting systems, because data is created as a side effect of running your operations through the software.
With a live income statement and balance sheet available, you have stress-free and instant access to the information required to grow your business, whether it be for securing investment, business loans or understanding where your costs are high and margins are low.
“Brightpearl is a really strong platform, particularly for inventory and accounting management. It gives me the ability to oversee the whole business, it’s easy to use and everyone working in the business knows how to use Brightpearl to streamline their workflows.” - Justin Essler, General Manager, Giantnerd
Siloed Accounting Systems
However, in our experience, these systems often leave large gaps in processes and make it very difficult to obtain accurate business data (without masses of manual work).
Consider these points…
Sales created on your website, in-store, or over the phone, as well as aggregate sales and payments are created in siloed accounting systems periodically via manual journals.
These can be posted daily, weekly, monthly, (monthly is the most common frequency), but sometimes even less frequently.
What this means is that your accountant will not only rack up many labor hours in order to catch-up with the bookkeeping, but they will also only be able to report on their findings a long time after the event. With these kinds of workflows in place, you’ll be taking far too long to implement changes in your business to act on those findings.
Many siloed accounting systems don’t allow you to create purchase orders. In this case, how can you know what overall commitments and liabilities you have in your business?
Without a view on this, your cash flow analysis will involve collecting data from various sources in order to calculate, rather than something you can see instantly.
With siloed systems in place, your cost of goods sold (COGS) is likely being recorded when performing cycle counts (or stocktakes), or when you count your inventory at month or year end.
Sadly, this means you won’t have an accurate income statement for a whole month, or even an entire year!
And what’s more, you’ll then have to spend hours, days, weeks even, going through a painful exercise of calculating inventory movements to calculate COGS for that period.
How Do Integrated Accounting Systems Work?
So if some of the most well-known accounting systems are based on the idea of having your accounting completely separate from the rest of your business, you may be wondering how integrated accounting systems, like Brightpearl, do it.
Here’s a typical workflow, demonstrating at what point the accounting is updated automatically within Brightpearl:
- As inventory is bought on purchase orders, Brightpearl records the cost of the product as it is received in the stock ledger.
- If purchase orders have stock received but not invoiced, Brightpearl records the liability in the balance sheet, giving you a realistic picture of the business’ net assets.
- When supplier invoices arrive, purchase orders are used to create the purchase invoice, removing the need for re-entering the data as an invoice (this also removes the liability above).
- As sales orders are processed, Brightpearl records the revenue in the income statement (or P&L) as the orders are invoiced.
- As inventory is shipped on sales orders, Brightpearl posts the COGS value into the income statement on the date the order is shipped (usually month end for other software).
- Brightpearl ensures the revenue and COGS related to a sales order are always posted in the same month. This ensures your income statement is correct month to month, also allowing you to view an accurate P&L for the current month at any time!
- Brightpearl uses the exact cost of each product sold to post the COGS journal (using the FIFO accounting method).
This ensures that you know the exact gross margin, per sales order, per customer, per product, helping you to identify whether you’re actually making a profit on each product after you have paid your supplier, plus duty to bring it into the country, shipping costs, insurance for transit, agency fees, and other logistical costs.
If you’ve been reading this and nodding along in agreement to everything we’ve been saying, then it may now be time for you to consider modernizing your business with an integrated accounting system, like Brightpearl accounting. Just give us a call to find out more!