How Will Blockchain Change the Future of Finance and Accounting?
Although still in its junior years, if blockchain reaches its full potential it could completely reshape the way we operate in accounting and finance. Blockchain is little understood by businesses and surrounded by a lot of buzz. Recent research carried out by business app discovery specialists GetApp helps define what it really is and the realistic applications for finance and accounting.
What is Blockchain?
Blockchain is a system that records details of transactions made using cryptocurrencies such as bitcoin. It stores this digital information in a shared database where both parties in a transaction have access. As both parties have access to a single ledger, there is no need for a third-party company, and therefore no risk of additional charges imposed by these companies. Blockchain technology also makes the process faster, more reliable, and more efficient.
Key facts about blockchain in finance:
- Blockchain has the potential to secure financial transactions with the use of advanced cryptography.
- Blockchain enhances financial compliance and transparency by creating a decentralized ledger for small businesses.
- Blockchain is gaining traction among business leaders as more proof of concepts (POCs) have emerged that can be applied in finance for small businesses.
Despite the positive effects it could have in the finance industry, research reveals that businesses may still have trouble implementing it. Forbes and Cox’s research showed that thirty-one percent of small business owners say they are currently unsure which technology is the best fit for them. According to a Babson report, eighteen percent of small businesses find it difficult to integrate new technology with their current technology setup. In the future, as Blockchain develops, business owners could still face difficulty successfully introducing the new technology.
What Benefits Could Blockchain Bring for Finance and Accounting?
Blockchain’s biggest impact would be to eliminate some of the industries’ common challenges. Here are some of the benefits we could see from blockchain applications and their introduction into finance and accounting:
Agreements between buyers and sellers would now be inscribed in computer-coded language, before being decentralized and distributed across a blockchain network.
Smart contracts help small-business finance managers create, monitor and comply with financial agreements made with vendors and clients. These can be created for any financial transactions that boost cash flow.
As all data is stored on one accessible system, blockchain ensures transparency between the vendor and supplier.
This helps eliminate any errors or disputes with each transaction because it allows small-business accountants to retrace erroneous data entries as an incorrect entry to a block. When inputted on a double entry system these errors can be difficult to identify and may mean end-of-year financial reports are inaccurate.
This application helps businesses rectify any financial errors with their balance sheet or bank statement by matching the two together.
Small-business finance managers would be able to locate differing transactions at the source and in real-time. Syncing bank statements and balance sheets would reduce the number of reconciliations.
No Commission on Digital Wallets
Eliminating third-party payments would mean small businesses no longer have to pay additional commission or interest fees when making transactions with vendors or clients.
As well as saving businesses money, it would also guarantee the security of transactions through the use of cryptography.
Improving Financial Data Accuracy
Blockchain will help ensure that financial reports are more accurate and secure as it will use cryptography and time stamps on its transactions. Because of this, business owners will find it easier to create reports and monitor the financial health of the company.
Data is validated at the source of every transaction; eliminating the threat of corruption and fraud.
How long until we see Blockchain in use?
Despite all the discussion surrounding blockchain over recent years conversation has dropped since 2018. This highlights the initial hype when the concept of blockchain first became popular, but demonstrates that without the introduction of practical applications, interest has fallen.
According to Gartner research, there are limited potential use cases for blockchain, which is why it’s developing a reputation for being overhyped. Despite this, experts still predict we will see blockchain lead us into a new era of accounting at some point in the future.
GetApp expects blockchain applications to be mainstream for small-business finance within the next 5 to 10 years, putting together a timeline for the advancement of blockchain and how businesses should prepare themselves for the new technology.
Short term (1-2 years): There is currently no viable use of blockchain applications, businesses should begin to educate themselves on how it could impact finance in the future.
Mid-term (2-5 years): Emerging blockchain applications include “contemporary currency” and “digital commodity exchanges.” If it’s affordable, small businesses should consider adopting software platforms with core accounting functions based on blockchain.
Long term (5-10 years) – Adoption trends will significantly peak in this period. Industries such as banking and retail will be heavily investing in proof of concepts.
Although the pace of blockchain’s emergence has slowed, there is no doubt it promises to have a telling influence on the finance and accounting industries in the future. As it’s not yet in regular use, small businesses should prepare themselves by becoming educated on the technology and the role it might play in the future of their business. Being prepared should make blockchain easier to implement when it becomes more of a mainstream business technology.