Although it is still in its early years, if blockchain reaches its full potential, it could reshape the way we work in accounting and finance. Companies do not understand blockchain very much and it is surrounded by a lot of hype. Recent research by business discovery specialists GetApp helps define what it is and its real-world 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 to the transaction can access. Since both parties have access to a single ledger, there is no need for a third-party company, and so there is no risk of additional fees charged by these companies. Blockchain technology also makes the process faster, more reliable and efficient.
Key facts about blockchain in finance:
- Blockchain has the ability to secure financial transactions using advanced encryption.
- Blockchain technology promotes 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) that can be applied in financing to small businesses have emerged.
Despite the positive effects it can have on the finance industry, research reveals that companies may still have trouble implementing it. Forbes and Cox research shows that 31% of small business owners say they are currently unsure which technology is right for them. According to a Babson report, eighteen percent of small businesses find it difficult to integrate new technology with their existing technology setup. In the future, with the development of Blockchain, business owners may still find it difficult to successfully introduce new technology.
What benefits can Blockchain bring to finance and accounting?
The biggest impact of Blockchain will be to eliminate some of the common challenges for industries. Here are some of the benefits we can see from blockchain applications and bring them into finance and accounting:
Agreements between buyers and sellers will now be recorded in computer-coded language, before they are decentralized and distributed over the blockchain network.
Smart contracts help small business finance managers create, monitor, and comply with financial agreements with vendors and customers. These can be created for any cash flow enhancing financial transactions.
Because all data is stored on a single, accessible system, the blockchain ensures transparency between the vendor and the supplier.
This helps eliminate any errors or disputes with each transaction because it allows small business accountants to track erroneous data entries as an incorrect entry to the block. When entered into a double-entry system, these errors can be difficult to spot and may mean that year-end financial reports are inaccurate.
This application helps companies correct any financial errors with their balance sheet or bank statement by matching the two together.
Small business finance managers will be able to identify various transactions at source and in real time. Synchronization of bank statements and balance sheets reduces the number of reconciliations.
There is no commission on digital wallets
Eliminating third-party payments could mean that small businesses no longer have to pay extra commission or interest fees when making transactions with vendors or customers.
In addition to saving companies money, it also ensures the security of transactions through the use of encryption.
Improve the accuracy of financial statements
Blockchain will help ensure that financial reports are more accurate and secure because it will use encryption and timestamps in its transactions. For this reason, business owners will find it easier to generate reports and monitor the company’s financial condition.
Data validation is done at the source of each transaction; Eliminate the risk of corruption and fraud.
How long until we see Blockchain in use?
For all the discussion surrounding blockchain in recent years, the conversations have declined since 2018. This highlights the initial buzz when the concept of blockchain first became popular, but it shows that without practical applications, interest has declined.
According to Gartner research, there are limited potential use cases for blockchain, which is why it has developed a reputation for being overhyped. Despite this, experts still predict that we will see blockchain usher in a new era of accounting at some point in the future.
GetApp predicts that blockchain applications will become mainstream for small business finance within the next 5 to 10 years, laying out a timeline of the progress of blockchain and how companies should prepare themselves for the new technology.
Short term (1-2 years): There is currently no viable use for blockchain applications, companies should start educating themselves on how it will impact finance in the future.
Medium Term (2-5 years): Emerging blockchain applications include “Modern Currency” and “Digital Commodity Exchanges”. If the price is reasonable, small businesses should consider adopting software platforms with basic accounting functions based on the blockchain.
Long Term (5-10 years) – Adoption trends will peak significantly in this period. Industries such as banking and retail will invest heavily in proof of concepts.
Despite the slow pace of blockchain emergence, there is no doubt that it promises to have a clear impact on the finance and accounting industries in the future. Since it is not yet in regular use, small businesses should prepare themselves by learning about the technology and the role it may play in the future of their business. It should make it easier to prepare for blockchain implementation as it becomes more of a mainstream business technology.