What Constitutes Accounting SoftwareAccounting and financial was the first functional area to get automated and feel the effects of Information Technology in any organization. Accounting software has become more sophisticated over the last several decades, and now it forms the core of business information systems. Accounting software initially based on older mainframe technologies is often referred to as legacy systems. Now, it’s changed with the advent of PCs and client-server and browser-server environments. Today’s accounting software is GUI-based, user-friendly and accessible from remote places. RDBMS is at the core of these accounting systems, which provides flexible and scalable accounting systems that can serve hundreds or thousands of users. Most of these software suites now look similar and provide comprehensive functionalities; however, these suites have different strengths and weaknesses.

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In this post, I overview accounting software from the small, mid-size, to the large scale, what accounting software are available for your business, what [who] is the major vendors, what they accounting [business] functionalities they offer, how the accounting and enterprise business solution are structured, development and evolution of the accounting software.

Disclosures:
– “What Constitutes Accounting Software?” is not a comprehensive accounting software review. This is a light overview based on author’s personal sight.
– Author and this site have no relationship with any vendors, products or services mentioned in this post [and any other posts] in any forms whatsoever.
– Author and this site never recommend/suggest/advise to use any product or services mentioned in this post [and any other posts].
– This post aim to provide a light overview of accounting and enterprise business solution to enrich knowledge of its readers.

 

 
Accounting Software Categories, Segment and Their Characteristics

The traditional view of classifying accounting software is by the size of businesses served by the accounting software. Initial offerings of accounting software packages were and (often times) now are aimed at a certain-size business. The size of the business is mostly measured by revenue and considerations such as number of employees or volume of transactions. The market starts at the lowest level of home/small office and extends to billion-dollar multinational and multi-product companies. The functionalities, databases, operating systems and capabilities of accounting software vary at each level.

The broad segments within the market are as follows: home/small, small, medium, large and multinational corporations – an accounting software market space. The approximate revenue range is less than $1 million, $1 to $25 million, $25 to $250 million, $250 to $350 million and greater than $500 million for each segment, respectively. These distinctions are, of course, arbitrary; however, useful for our purposes. There have been hundreds of accounting software companies. Some major players in each segment are shown below:

Major Accounting Software Vendors
Note: Most of these companies have existed for more than a decade, have a substantial installed base and have provided proven solutions.

 

Accounting software aimed at each segment has different characteristics:

  • At the lowest level, accounting software offers standard accounting modules such as order entry, payroll, general ledger and financials; it generally runs on a standalone system or supports few users; and a database is embedded in the software. The cost is low and the software can be bought off the shelf.
  • Accounting software that serves the mid-size market can provide a full financial suite and advanced industry-specific modules, and offer e-commerce solutions. This software can support multiple users, operate on multiple operating systems and come with an embedded database or work with any existing relational database products. The software is expensive and is generally sold by Value Added Resellers (VARs). VARs specialize in a particular software package and serve as consultants during installation and operation of the system.
  • The ERP packages at the high end are extremely expensive — a software cost of millions of dollars being merely a drop in the bucket compared to extensive consulting, training, reengineering of workflows and restructuring of organizations costs — and require armies of consultants and multiple years to install and make operational.

 

 
Classification of the Accounting Software

Within broad categories of low-, mid- and high-end accounting; there can be other distinctions. Accounting software maybe classified as follows:

  • Vertical Accounting, where accounting solutions are geared toward a particular industry;
  • Add-On products, which perform certain specialized functions and can work with existing accounting packages or in a standalone mode; and
  • Horizontal Accounting, which provides accounting solutions for a wide range of industries.
    This accounting software discussion so far has been in the context of Horizontal Accounting solutions, which is a dominant pattern in the accounting software industry.

 

Many accounting software packages are aimed at certain industries or types of businesses. The following discussion of these software packages does not strictly follow the definition of Vertical Accounting, though it uses the general concept. For example, programs such as Exact Macola offer a historical focus on manufacturing; CAP Automation and Cougar Mountain software are geared to point-of-sale retail environments; and there are programs specifically written for service industries.

Due to special information needs, industry segments such as insurance, construction, property management, and law and accounting practices require specialized accounting packages. Then there are numerous packages aimed at the non-profit sector, which obviously has different reporting and analysis requirements. Packages — Add-On products — generally focus on a special accounting function. For example, there are packages that specialize in fixed assets management, payroll, time and billing, and tax preparation. As accounting software gets increasingly integrated, a trend fueled by SAP, the majority of add-on product vendors either get acquired or develop alliances.

The accounting software market is also segmented by countries. Languages, financial reporting rules, auditing requirements, tax code, and business laws and regulations are different in each country. Many high-end accounting software vendors have built multi-language, multi-tax code and multi-currency support in their software so multinational companies can coordinate their operations in various countries and regions. There also are specialized companies that serve specific national markets. For example, several accounting software packages cater to the new European Union and deal with the Euro currency.

The traditional market-size view gives us a good understanding of the markets and market strategies of accounting software vendors. These markets are dynamic in nature, and as companies become successful in one segment, they try to branch upstream, downstream or both. The product functionalities and product offerings of accounting software are also continually changing. The installed base remains a good indicator of the long-term survival of accounting software vendors and, as such, software vendors continuously struggle to seize market share. Accounting software companies also offer products to different segments to ensure that as customers grow (or occasionally shrink) they can seamlessly move from one software product to another within the same family.

 

 
Functionalities of the Accounting-Business Software

As business demands on accounting software grow, new functionalities are continuously added in accounting software. The mantra of this new age is comprehensive functionality“.

No matter what functional area the software catered to, vendors cannot survive unless they offer a reasonably integrated package to their core constituency of customers. Hundreds of business software vendors now offer accounting and finance functionalities. The major players in every market and industry segment now offer integrated solutions, and the role of stand-alone product vendors is slowly but surely diminishing. The terminology and alphabet soup of new capabilities become more fantastic, and one wonders what do vendors mean by the term accounting software? The answer is that traditional accounting software no longer exists.

High-end ERP vendors such as SAP R/3 never claimed to be accounting software vendors, though SAP has one of the best accounting and finance modules. This trend has filtered down to mid-size vendors. The majority of mid-sized accounting vendors claimed that their systems were in fact ERP systems. In the late 1990s, markets zoomed beyond ERP and into e-commerce and the resulting inter- and intra-business integration. Accounting software vendors, keeping up with the times, added new e-functionalities. ERP claims were modified to describe this new face of accounting software.

Following are some descriptions of accounting software [Note: picked up from the Web sites of the traditional mid-sized accounting software vendors]:

  • Microsoft Great Plains: Microsoft Business Solutions–Great Plains offers integrated capabilities for financial management, distribution, manufacturing, project accounting, human resource management, field service management and business analytics.
  • Sage Software: MAS 500 boasts integrated solutions that automate all areas of business management, including CRM, accounting and financials, project accounting, distribution, manufacturing, human resources and more.
  • Macola: Macola ES is the only ERP solution designed for the mid market with native Business Process Management (BPM) capabilities, including powerful exception management tools.

 

 
Standard Structure of Accounting-Business Software

The accounting function, as a trend of our times, is getting submerged in the greater business information system. Today’s accounting software contains accounting modules and a plethora of business modules, even at the low end of the accounting software spectrum.

Accounting modules depict traditional journals and ledger; however, accounting data now resides in relational databases. The database or data warehouse may consist not only of financial information but also non-financial information.

A standard structure for accounting software is shown below:

Structure of Accounting-Business Software

 

Accounting modules are at the core of the business information system, since accounting is still the language of business. The accounting modules are supplemented and/or complemented by various functional modules, such as production planning and control, inventory order processing, project management and warehouse management. The inter-organizational transactions are managed using specialized modules such as supply chain management, supplier relationship management and customer relationship management. The primary database of an organization now consists of financial and non-financial information, often times a data warehouse with which all functional modules interact. The e-commerce modules can be physically separated or integrated with the software; however, they enable various inter- and intra-organizational Web-based processes.

A general structure of accounting/business software is outlined below:

Accounting modules: The core accounting modules perform standard accounting jobs; for example, order entry and billing, accounts receivable, accounts payable, inventory, payroll, fixed assets, job costing and general ledger. In addition to these core modules can exist other accounting-related modules, such as bank reconciliation, foreign currency managers, time and billing, and travel expense management, among other things. These modules are sometimes standard and sometimes sold separately. Software almost always includes a separate module called system manager (or a similar term) that provides common services to all accounting modules — for example, searching data across all applications. Accounting modules are often supplemented with treasury modules that manage cash, working capital, derivatives, investments in bond and stock markets, and foreign exchange and interest rate risk exposure.

Business function modules: These modules run the entire gamut, from functional areas to supply-and-demand chain management. The functional modules can be manufacturing related, such as material requirements planning, capacity requirements planning, production scheduling or warehouse management. Demand chain management may include modules like sales forecasting, customer relationship management or sales force automation; and supply chain management modules can consist of supplier relationship management and inventory forecasting and management modules. The business function modules may also contain industry specific modules — for example, modules for non-profit companies.

E-commerce modules: E-commerce modules vary, from support for traditional EDI to Web-based executive dashboards/enterprise portals, which provide vital business information to executives/employees in a user-friendly format. Almost every accounting cycle has seen emergence of different types of e-functionalities.

Third-party add-on products: Add-on products can vary from vendor to vendor. Some accounting software products offer a comprehensive set of accounting modules and do not need add-on products. Few accounting vendors offer core modules and have an open architecture for the software, and generally third-party developers can easily develop add-on products purchased separately. Additionally, standard modules on specific software can be add-on product for other accounting software, due to each product’s market focus. The common add-on products are fixed assets modules; reporting modules such as F9, Crystal Reports or FRx; and e-commerce-related modules.

Customization tools: Customization tools add or improve functionality of the software; import and export data; and customize forms, screen views and reports.

 

Development and Evolution of the Accounting Software

In earlier days, many software companies shared the program code with customers. The trend now is to provide 4th Generation Programming Languages (4GL) tools, such as Visual Basic or Visual Basic for Applications-based tools, which allow extension of accounting software sometimes without tampering with the program code.

 

The Evolution of Accounting Software Marches On

Accounting software is now part of integrated business software, business information system and business solutions, and no doubt there are even more exotic terms on the horizon. Accounting software analyzes financial and non-financial information, interacts with powerful reporting tools, is enhanced by Web-based processes, and of course fulfills the basic requirements of financial reporting in accordance with Generally Accepted Accounting Principles (GAAP). The requirements of the Sarbanes-Oxley Act 2002 make it even more imperative for accountants and auditors to have a deeper understanding of the continuously evolving and changing accounting systems.

 

Directions for the evolution of accounting software and the accounting software industry remain unpredictable, which of course is true for all predictions. In any case, here they are! The high-end accounting/business software market is becoming, and the trend will continue, supportive of what can be called multi-enterprise collaboration, which was described as collaborative commerce (c-commerce) in the late 1990s.

The ERP infrastructure is now a foundation for the applications that connect suppliers, customers, employees and other stakeholders in a giant web of information. Gartner Group has already coined a term ERP II and AMR Research Group has offered Enterprise Commerce Applications (ECM) as an alternative for these types of applications. The terminology continues to be confusing, and each software vendor and consultant defines identical or similar things with different labels.

Basically, ERP II and ECM functionalities include e-commerce and Internet applications. These applications also cover what is called xRM categories; for example, Customer Relationship Management (CRM), Supplier Relationship Management (SRM), Supply Chain Management (SCM), Partner Relationship Management (PRM) and Employee Relationship Management (ERM). There is an endless debate about what these terms mean, and different definitions and interpretations are offered by vendors, consultants and academicians. The explanations provided here use commonly accepted definitions and provide general understanding of the terms.

CRM integrates customer-centric efforts such as marketing campaigns, call centers, help desks, sales force automation and customer analytics (such as most profitable customers). SRM and SCM handle managing sourcing of raw materials, production, inventory and logistics; additionally, these also improve collaboration with suppliers, manage risk and analyze supplier profitability. PRM deals with efficient management of relationships between sellers and indirect channels, such as dealers, agents, VARs, wholesalers and distributors. ERM focuses on employee education, performance analysis, incentive effects, workforce analytics and additional tasks, such as recruitment, time and expense reporting, and employee self-service. A new field called Demand Chain Management (DCM) that encompasses customer demand and consequent activities, and intersects with CRM, SRM and SCM, is also sometimes offered as a separate module.

Analytical abilities of accounting/business software are also being enhanced. Earlier business intelligence applications generally collected and analyzed data from customer and supplier databases, manufacturing and marketing activities, personnel data and financial data to generate reports in the desired format for the end user. Some of these tools were not user-friendly nor fully exploited. Now, enterprise portals and executive dashboards that are Web- and GUI-based, provide various user-friendly tools and can be accessed remotely are being developed and deployed. These portals and dashboards can be utilized to view information in a numerical or visual format, drill down to obtain further information, and analyze information and data using embedded analytical tools.

A number of independent software vendors have products in these areas that are decade(s) old. The novelty is that these products are getting integrated and, on the base provided by ERPs, can now offer powerful capabilities. The extent of integration of these tools and consequent effectiveness is a matter of debate, and different software vendors have strengths in different areas. Different businesses have deployed these technologies with varied results. What seems certain is that seamless integration of these functionalities remains the Holy Grail for software vendors.

These high-end developments will continue to filter down the hierarchy, faster and quicker than ever before. Accounting software vendors are merging and consolidating to acquire new markets and new capabilities. The accounting software industry still remains in a fragmented state— many accounting software vendors are competing for the same mid-sized market. As such, powerful industry players such as SAP, Oracle and Microsoft are moving upstream and downstream in the accounting software market. The million-dollar question, of course, is what is the comparative effectiveness and efficiency of these tools offered by various companies? The answer is illusive and remains open for further research and experimentation.

At the lower end of the accounting software, movement toward relational databases and client-server architecture is expected. The use of relational database capabilities by accounting software varies widely; however, more accounting programs have begun to exploit power of relational databases. The use of Web-based accounting software is a continuing experiment. Web-based offerings are developing a clientele; the extent of penetration in the market is not clear. Web-based systems, though, are going to be part of the accounting software landscape, and in due course, most of the accounting software vendors will offer some type of Web-based access, entry and reporting capabilities.

These speculations for the future are based on experts’ thinking and trends observed in the past. Accounting software is not required to follow any of these directions. Though unlikely, niche software players or garage developers could change the face of the industry. Coming developments, whatever they may be, will certainly test our ability to learn, understand and employ new technologies.

 

Accounting software no longer exists at mid-size and higher-ends. Instead, we have accounting/business software, integrated business information systems, or ERP systems with accounting and finance modules. Accounting modules interact with other functional modules and also with entities outside the organization. In the future, the functionality of high-end software will include increasingly powerful capabilities for intra- and inter-organizational collaboration. The trend is toward integration of different functions in one software package. The present high-end functionality should filter down to mid-sized accounting software, a process that has already begun. Lower-end accounting software will use the full power of RDBMS and be written or re-written to take advantage of the client-server environment. E-commerce developments have added new capabilities to existing software. Accounting workflows and processes in every accounting cycle have changed due to these features.