When I look back over my accounting career there have been two major revolutions (so far) in how books are “kept” for small businesses, and right now we’re in the early stages of a third.

The first one occurred when it went from paper to computer in the 1980’s. The second when most small companies moved from a jumbled mix of software offerings towards QuickBooks (which became a defacto standard).

The third revolution in my career is happening now – and it’s not just one change, it’s actually two big changes happening almost simultaneously.

Move to the Cloud – Accounting software is quickly transitioning to the web (including QuickBooks Online).

– Accounting software is quickly transitioning to the web (including QuickBooks Online). No More Data Entry – Most of the new cloud based accounting software also connects to your bank, downloads and automatically categorizes transactions, eliminating the most tedious part of keeping a set of books.

Today if you’re choosing accounting software you have to understand these very important changes. There’s little reason to go with the old standard when a new Quickbooks alternative has the potential to be so much better.

Why the Cloud?

Quickbooks Pro is of course the accepted standard, at least in the United States. It is software you install with CD’s – which I refer to as QuickBooks Desktop to distinguish it from its online brother. However for all its market share and revolutionary (for 1990) features it has some surprising limitations.

It only runs on a PC (the Mac version is an on again, off again prospect), data has to be shared with a USB drive, and everyone it’s shared with must have the same annual version of QuickBooks. If the hard drive crashes, all the work is lost unless it’s also backed up regularly – a painfully common occurrence.

Cloud based accounting, whatever the company offering it, solves all of these problems.

It’s always backed up regularly – and in many cases even multiple times in different geographic regions.

Most of the services allow more than one person to use the same set of books at the same time – although some do charge higher fees for those extra users.

Most importantly: everyone is using the same version of the data! This is important since “Accountant’s Copies” are notoriously difficult to work with. These partial versions of a set of books have to be carefully checked out and then back in to a master set. Sharing a set of books in the cloud removes this hassle.

The only somewhat frustrating limitation to cloud based services is they are a little slower. However this doesn’t effect the typical business owner, but power users may gripe just a bit while appreciating all the other benefits.

Plus the speed difference is going to diminish over time: the amount of data in an entire company’s file is on average only a few megabytes, about the same as a high resolution digital photo these days.

Automatic Books? Yes!

The second simultaneous revolution is even better: automatically downloading data.

Keeping a set of books for hundreds of years meant entering transactions; whether that was papyrus, paper or keyboard. Now, we’re finally free! Your bank and credit card companies have all your transactions already. Why key them in again?

The new approach avoids that hassle by logging into your online financial accounts and downloading the transactions. This data feed includes the date, amount, and often the payee – the only thing missing is the category for the transaction.

That’s where the new accounting software does the rest of the work, learning from you and automatically categorizing your transactions.

This leads to something new: real time books! A company’s financial results can be looked at daily as the new transactions hit – no more waiting for the bookkeeper to get around to entering the transactions.

However there is one major challenge for this very promising technology.

The Auto-Coding Mess

What happens when you hire a bad bookkeeper and didn’t realize it? They work for weeks, months or years, keying in transactions but many of them turn out to be wrong. What do you have to do to fix their work?

Well, besides retrain (or fire?) the bookkeeper, someone who knows what they’re doing has to revisit every single transaction this bookkeeper worked on and assess whether it was right or not.

Auto-Coding books have the exact same problem, expect it’s a machine instead of a human. No matter how hard the programmers try the new generation of accounting software makes errors categorizing transactions – too many – and like a bad bookkeeper every single transaction has to be reviewed.

So, what’s the point? Why have automated books at all if you have to check all that work? Well, because it turns out you can still save time by using software to streamline the review process.

Only Three Products Do It

At the moment, however, only three products have systems designed to for you to efficiently review their work: QuickBooks Online, Xero, and our software Cheqbook.

The first two work by “quarantining” transactions, whereas our product Cheqbook works an entirely new way.

Xero and QuickBooks Online both hold the transactions off to one side, and have developed very good interfaces that make the process of reviewing those transactions as efficient as possible. Both provide tentative categories, and if you agree just one click approves a transaction. After you’ve approved them they join the others in the company’s books. This is far faster than having to key in the entire transaction. Plus because the transactions are well presented and grouped, so a user does save time compared to manually entering data the old way.

The third option, Cheqbook, is a relative newcomer that uses a new patent pending approach. Rather than hold all the transactions off to one side (sometimes requiring a user review hundreds of transactions) Cheqbook tags every transaction with a color code revealing which ones need attention. Combined with the ability to filter by this status lets you work even more efficiently than quarantining.

Sadly the other 3rd generation accounting software products seem oblivious to this problem, leaving me unable to recommend them. You’ll run across the others as you research accounting software, especially these three:

WaveAccounting, Outright, and Freshbooks.

In practice these have proven to be just as time consuming to work with as manual data entry, so you should stay away from these until they provide some sort of efficient review mechanism (strangely, WaveAccounting used to offer a review feature, but has since abandoned it ).

Where Accounting will be in Five or Ten Years

There’s no doubt that QuickBooks Desktop’s days are numbered. The combination of the cloud and auto-coding is a revolution in accounting which will slowly but surely catch on.

Most businesses still use QuickBooks desktop, as do most accountants, so if you ask around there will be considerable pressure to join that club. However if you listen carefully most of the advice may be just a little reluctant, as in “Well, the only one you really can use is QuickBooks.”

If you’re choosing accounting software today though, you can:

Avoid having to transition later, and…

Get the benefits of the cloud and auto entry now.

So, which cloud software is right for you?

I have to admit to my own biases, especially since I did build Cheqbook, but here’s my heartfelt assessment:

If your company has annual sales of greater than one million annually you should consider QuickBooks Online or Xero. Both are robust, complete packages that art excellent for complex businesses with multiple employees and sophisticated accounting needs.

That robustness does come at a price, however: they are challenging to learn – especially for non-accountants – which also makes them intimidating systems to setup and keep running.

Cheqbook on the other hand is specifically designed for business owners who don’t know much about accounting. So, if the business has less than a $1 million a year in sales and accounting is challenging for you or your client, take a close look at Cheqbook.

It’s a complete cloud based accounting system with the best tool for managing auto coding. Cheqbook could be just what you’re looking for!