The crystal ball of accounting

Data analytics and forecasting have quickly come to the forefront during the COVID-19 pandemic, as businesses struggle to predict what the future will bring. There is no such thing as a crystal ball, but today’s analytics and forecasting tools come closer than ever, and have the potential to solidify the […]

Data analytics and forecasting have quickly come to the forefront during the COVID-19 pandemic, as businesses struggle to predict what the future will bring. There is no such thing as a crystal ball, but today’s analytics and forecasting tools come closer than ever, and have the potential to solidify the importance of the accountant as a partner to small businesses in a way nothing has before.

The novel coronavirus pandemic has made the need for data analytics and forecasting very, very obvious. No business, large or small, was ready for a global upset of this scale, and while larger companies have been historically more likely to engage with analytics and forecasting in conjunction with their accountant partners, many smaller businesses in America don’t work with an accountant in the first place.

But now, partnering with an accountant, especially one who can provide data analytics and forecasting services, could be the difference between a business making it through the pandemic, or failing.

It can also allow business owners to fail responsibly, without losing everything. Lyssa Kemper, a CPA and founder of Virago Accounting, had one client whose biggest concern as the pandemic tore away at its business was simply whether they could, and should, stay open, or close its doors and walk away.

“One client did have a big downturn, so the concern was: ‘Can we stay open? Do we need to lay people off? Close our doors at the end of the year?’” said Kemper, who uses the product Futrli to create forecasts for clients. “I did a quick forecast, and after we looked at the boards I created, we saw there was an opportunity for online sales for this client. We decided to try that first.”

Futrli is a cash flow prediction and planning software powered by artificial intelligence. It allows accountants to create “cards” and “boards” to present data to clients in a visually appealing way. Cards are effectively charts and graphs, and they can be collected into a board to create a customized picture of anything a client needs to see, whether it’s historical cash flow, current sales, or projected hiring needs. It’s a great example of a data analytics and forecasting solution made for and accessible to small firms and small businesses.

Using data analytics, Kemper has also been able to perform reality checks for her clients, which include real estate agents, restaurants and boutiques located all over the country. All three of those sectors have been hit hard by the pandemic, but in recent months, Kemper has noticed that many of her clients have been experiencing an uptick in business, with some of them performing better than in previous years.

“I looked at a lot of data from previous years,” Kemper said. “For some clients, they actually did really well this year because as lockdown measures eased in later months, many people came out to support local businesses. And businesses came out in front of their customers, whether in person or online, more than they normally would because of COVID.”

An opportunity Kemper is particularly excited about as she grows her use of analytics and forecasting is green reporting, which companies use to evaluate their impact on the environment, but also to evaluate their treatment of employees and all other associates, such as vendors, and whether they are operating in an overall ethical way. It’s about more than just the bottom line. As a concept, green reporting has been around for more than two decades, but is still relatively underused.

Kemper is a sole practitioner — though she is getting ready to hire her first employee — and her firm is 100 percent virtual.

Her holy trifecta of technology consists of Xero as her central accounting software, Gusto for payroll, and Futrli for analytics and forecasting.

“Data analytics and forecasting will be a big part of my strategy as I grow,” she said. “It’s made such a difference in my clients’ eyes that I can’t see how I wouldn’t make it part of my business. There’s a lot of opportunity for one-time engagements where you do a forecast for a client who just needs that. Many small businesses don’t have the time, capacity or even knowledge to perform forecasts themselves, but they know it’s a helpful tool to help their business grow.”

It’s not that complicated …

Accountants don’t have to have access to expensive technology to provide data analytics and forecasting to their clients. Before Kemper found Futrli, she used Microsoft Excel to try and create forecasts. It wasn’t easy, but it goes to show there is opportunity to provide these services even with non-specialized software.

Timothy Wingate, an Enrolled Agent and founder of West Palm Beach, Florida-based firm G+F Business and Financial Consulting, applies job costing methodologies to help his construction industry clients increase project productivity — and he uses Excel, pulling data from QuickBooks and client merchant accounts (from Square, PayPal and QuickBooks Payments) to do it. He was considering buying additional software before the pandemic, but that plan was put on hold until the firm catches up to the rapidly changing times.

Unlike for Kemper, Wingate’s clients turned away from forecasting slightly during recent months: “We haven’t really had time to forecast for clients because they needed more assistance with finding grants or applying for loans,” Wingate said.

Indeed many firms have turned their focus quickly to helping their existing clients apply for government assistance. Liz Mason, for instance, of High Rock Accounting, said she believed it to be her firm’s “duty” to help clients apply for Paycheck Protection Program loans for free. This type of effect shows that sometimes, for businesses, there are things more urgent than looking toward the future.

However, for Wingate’s clients, during normal times, forecasting is their bread and butter. Construction
clients need to know how to accurately cost a job, as it can make the difference between winning a bid for a project or not, or taking a project that will financially make sense.

“Construction clients need to know whether they are profiting on specific jobs,” Wingate explained. “This information helps them plan and price similar jobs in the future. Knowing the effects of hiring new employees or when a supplier increases material cost is significant in making adjustments to maintain adequate profit margins, especially for people in construction.”

… but it can be

That said, the power of data analytics and forecasting can be big — as big as you want it to be, if you have the resources to invest. Approximately eight years ago, it became apparent to Big Four firm KPMG that their audit clients were using technology so sophisticated that the firm would have to make it a point to match that level of sophistication in order to provide effective audits.

Until then, KPMG had been developing data analysis tools that plugged into specific enterprise resource planning platforms, like Oracle or SAP. Now, the firm has developed a generic processor that can extract data from any system.

“The tools we have are no longer bolt-on,” said Larry Bradley, global head of audit for the Big Four firm. “Rather, they’re embedded within our methodology and our audit delivery tool called KPMG Clara. It’s all about how we do the audit now, as opposed to being viewed as a bolt-on tool.”

Clara is a real tool of the future. KPMG positions it as an all-encompassing solution for audit, from finding aberrations to suggesting actions to orchestrating investigative exploration — like obtaining drone footage of company inventory, for instance, to identify fraud. The potential for application of data analytics in audit is vast, and is evolving so quickly that “the future” could be here before anyone predicted.

But as Bradley noted, “The future came upon us in a matter of months” this year, when the pandemic forced everyone to go remote, and fast. Everyone, including accountants, is tapping into their available technology more than ever before in order to stay connected and effective in a virtual environment, and if data analytics had the potential to change the way accountants viewed their job before the crisis, it certainly will have that effect now.

“Due to COVID-19, a significant amount of change management has occurred almost overnight,” Bradley said. “But as long as we have access to data, and access to underlying source documentation, we’ll be effective. That’s critical, working in a borderless world. And working with multinationals, that’s absolutely critical. But we’re going to have to be much more sensitive about global trends — COVID has put so much of this in focus. Our ability to analyze the data is only as good as our understanding of the global macroeconomic trends happening right now.”

To Bradley’s point, data analysis is not something that a machine just does and that’s the end of it. Accountants participate in this process with critical thinking, professional skepticism, and every other expectation that comes with advising and guiding clients in the right direction.

Bradley said that while there is an “insatiable” need for technology-minded accountants, it’s still vitally important to hire accountants that have very good fundamental auditing skills.

“The art of professional skepticism is built into the auditing standard,” he said. “We have an obligation to have a questioning mindset.”

Additionally, he noted that an understanding of the client business is just as important: “You can have the greatest analysis software in the world, but if your auditor doesn’t have a fundamental understanding of the client’s business — how they make money, who they do business with, how they do business — they’re not going to interpret the information properly, or they’re not going to have that requisite professional skepticism.”

When Bradley looks toward the future, he is most excited about the potential of data lakes. In a very simplified nutshell, these are vast swaths of data, stored in raw form, from which organizations can extract any kind of data and configure it in any way, with the help of artificial intelligence, among other tech tools. The opportunity that data lakes also present is the ability to compare financial data with non-financial data, in a comprehensible way.

“The beauty of a data lake is that it’s a repository, but has a way to leave a common thread through the data so it can be extracted and analyzed in a meaningful way,” Bradley explained. “That’s the challenge for auditors — there is great potential in us being able to evaluate that data, but you have to ensure the data is complete and accurate, that the data lake is well controlled, and then you have to understand the business to know exactly what to query to the data lake. The challenge isn’t getting the data, but asking the right question — just as it is now.”

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