What type of managerial system does your company have? Is it top-down or spread out, and is the system satisfying long-term objectives? We break down how restructuring authority and decentralized accounting systems can revitalize small businesses.
In this article:
- What is decentralized accounting?
- Centralized vs decentralized accounting
- Decentralizing with outsourced accounting firms
- Exploring blockchain accounting and decentralized finance
What Is Decentralized Accounting?
Decentralized accounting is a method of managerial accounting. It runs on the idea that multiple people are given authority to make financial decisions. You see this type of accounting in larger organizations when financial procedures increase in frequency and complexity. However, more small businesses are installing decentralized methods to increase productivity.
What Is Decentralization?
To understand decentralized accounting, you have to understand the theory of decentralization. In a decentralized system, all decision-making is extended to authority experts in their respective departments. They are entrusted to make sound judgments and set goals in the department. With distributed power decisions are quick and strategic.
Pros And Cons Of Decentralized Managerial Systems
Pros
Quick output keeps processes moving
Motivates leaders
Fosters loyalty to the business
Employees have more access to authority figures
Large companies have control across divisions and departments
Thriving company culture with keen insights
More people to share the workload
Cons
Hard to manage for upper management due to less visibility
Abuse of authority
Less optimal results for companies with competing departments
Centralized vs Decentralized Systems
In centralized systems, all power is siphoned to senior authority. They have final approval on all business decisions and actions, large or small. This type of system has firm control and a micro viewpoint of its entire operations. It creates more visibility for the person in charge but can feel exclusive to managers and low-tier employees. Not to mention, it is a slow method of getting work done because employees are waiting for management approval.
Responsibility Center Definition
Neither a decentralized vs centralized system is functional in totality. Humans, by nature, are flawed. We each follow our own moral code and how that is applied in the workplace is not always up to par with theory. In an ideal decentralized accounting system, the managers would positively use power. As we know, power corrupts. Without accountability and left to our own devices, we devolve into Lords of the Flies.
So most companies leverage responsibility centers for planning and organizational management. Responsibility centers hold managers accountable, rather responsible, for the actions they take. This method supports decentralization, allowing managers to delegate in the center (aka department) of a business. The success of that center is subject to scrutiny via performance reports.
Responsibility centers are commonly broken down into these categories:
- Revenue Center: a department of a business responsible for the revenue it generates.
- Cost Center: An area of business responsible only for its costs since it does not produce revenue, but is essential to operations.
- Profit Center: An area of business responsible for its revenue and costs.
- Investment Centers: An area of business responsible for investment, revenue, and/or costs as a result of investments. A good example would be a subsidiary company, franchise, or branch.
Responsibility centers can be organized beyond the departmental level. In some industries, you see a certain machine labeled a center (with human oversight) because it makes a profitable product. In small businesses the accounting department will float between centers, helping with planning, budgeting, and performance reporting for the other centers.
Centralized And Decentralized Accounting Functions
A centralized accounting function is like a funnel. Everything goes to the top, no matter how small or mundane. You could see a department with a controller, various levels of accountants, bookkeepers, and AR/AP clerks. But, their function would serve as skill-based employees only with all monetary decision-making done by upper management.
For Example: An accounts receivable clerk needs to wait for a refund to be performed or approved by the CEO.
In a decentralized accounting department, you would see a hierarchical division of authority. It would be the same segregated roles described above, but each owning specific authority in their position. The controller could be acting manager of the department, held accountable for any errors.
Decentralized Accounting In Small Business
Most companies already make use of decentralized accounting techniques. Since the economic landscape is largely moving online, it is hard not to entrust autonomous factions i.e. technology to work for you. Here are different decentralized accounting solutions for small businesses:
Decentralization With An Outsourced Accounting Firm
Outsourced accounting is a remote accounting group. They are autonomous from the companies they serve but reside in relatively the same geographical location (within the country, state, or locality). They execute the same duties as in-house accounting departments, but own internal responsibility and have a clear chain of command. The structure affords high-class work, from a skilled group of individuals for businesses that could not otherwise afford to have an accounting department.
Entrepreneurs who sign up with remote accounting firms grow more rapidly than without. Outsourcing your financial tasks is applying the divide-and-conquer method of decentralized accounting. It is like creating a cost center that adheres to the company’s main mission but retains its own authoritative wing. Freeing you of banal administrative duties, to focus on the future of the business.
Certain technical applications hold authority in this type of decentralized accounting system. Signing on with a remote accounting firm will give you access to business processing automation apps for an efficient fintech stack. You can liken this tech stack to a form of responsibility accounting, with each app relating to a specific accounting role.
For Example:
- Accounts Receivable and Payable processing with image and data capture in Bill.com
- Calculating Cost of Goods Sold (COGS) through A2X
Authority is given to coded automation and the accountants who supervise the computing commands. Most fintech apps have a chain of approval, which can be organized according to the managerial structure of the outsourced firm and the company they contract with. Although human supervision keeps them centralized in theory, eventually these applications will be fully autonomous in data entry.
You would not get the same output if you were to rely on outdated methods of manual accounting. Technology allows for faster processing, data aggregation, forecasting, and a traceable source for responsibility audits. This technological structure of outsourced accounting serves as a bridge from traditional firms to an even more exciting future for decentralized accounting systems for small businesses—blockchain accounting.
What Is Blockchain Accounting?
Blockchain accounting is a decentralized method of maintaining a ledger. Instead of having one consolidated area for transactional information between two known parties, blockchain distributes and encrypts information. To explain further, a transaction takes place between anonymous parties, and the verification process of that transaction is done through multiple blocks from different anonymous coders. These blocks are chained together to complete the transaction and are then recorded to the infinite blockchain.
What Is An Irreversible Ledger?
Every transaction that has ever happened is recorded on the blockchain. This makes the ledger extremely secure because a hacker would have to decrypt each piece of information, from all anonymous exchanges, to unlink the chain and manipulate a transaction.
For Example: multiple people are recording a transaction in your ledger but each person contributed a small portion of the information; one person wrote down the date, another the account code, another the description, so on and so on. That transaction is then locked to everything already recorded in your books. No one party could go into your books and fudge the numbers.
The Blockchain Accounting Function
Our current monetary system places verification in the hands of a financial institution like a bank. In blockchain accounting, verification is guaranteed by an encrypted code. Since there is no single governing body controlling the exchange of assets, there is a limited need to monitor items like reconciling accounts, exchange rates, error charges, duplicate charges, and other tedious bookkeeping tasks.
Additionally, accounting function changes with a decentralized blockchain ledger. Instead of a data entry role, it would be something similar to outsourced accountants; monitoring user roles and transferring logistics of assets, application integrations, and performing financial analysis.
Pros And Cons Of Decentralized Blockchain Accounting
Pros
More secure can only be accessed with a key
Saves time with automation
Very hard to cook the books
Limited regulation for global companies with many branches and divisions
Ledger/exchange is ruled by chains of code not people
The ledger is consolidated to one exchange
Single currency for payroll for a global workforce
Cons
Technology infrastructure is still young
Not a widespread economy only used by certain people
Confined by the exchange you use and the type of assets that can be traded
Not fast and not environmentally sustainable
Scams targeting individuals for account login info for illegal crypto wire transfers
Decentralized Finance Explained
Decentralized finance is a relatively new space where authority is spread out. It takes outsourced accounting to a whole new technological level, where the accounting function does need to abide by one known entity. Instead, the code is law or the blockchain is the law. For a business, that means eliminating the middleman and connecting people that would otherwise rely on financial institutions and governments for transactions.
Decentralized Financial Functions
Right now our world is built on financial hubs that dictate business. On a macro and micro level business is subject to policies, procedures, laws, currency, interest rates, etc, set by institutions in these hubs. Decentralized finance blasts a hole in this structure by having a space for trade ruled by no single governing body, only the blockchain. This space allows anonymous persons to transact for the benefit of their businesses. The technology is limited to these types of business transactions:
Crypto Trades
Stablecoins promote a less volatile note for people to use for payment, and minimize capital gains tax associated with crypto. They are usually backed by an actual currency like USD or commodity-based. These coins facilitate billing, payments, payroll, and more on an irreversible ledger for companies. More and more businesses are engaging in asset trading via stable coins to eliminate fees associated with bank and credit card companies and increase security for accounting systems.
This currency facet of decentralized finance is also known as the settlement layer, or Layer 0. This method of trade scratches the surface of decentralized finance as the start of a borderless economy. It is the level at which daily operations between businesses and their customers can take place. Currently, trade occurs between tangible and intangible assets represented by coins (real estate tokens, NFT tokens, and digital art). Trading activity takes place in the application layer, aka exchanges, which are vaguely parallel to an online marketplace like Craigslist or eBay.
Futures Trading
Also known as a protocol layer, this is a decentralized stock exchange (SE). Based upon our SE landscape this is a place for futures trading of intangible assets. Since crypto is not held by any one country or institution, trading activity is dictated by the community. It is a laissez-faire arena that injects community trust and is foundational to the crypto monetary system. Unlike the influence publicly traded companies have on the market, traders are only acting on the tide of the community encouraging a thriving global network and crypto economy.
Smart Contracts
Smart contracts are vital to the crypto economy and a decentralized financial system. They are contracts made between parties without the need for a third party’s consent. Instead, coding takes the place of the third party, to set and verify the terms of the contract. Coding can be customized to the agreement between the parties, and encrypted for complete security. If certain parameters are met, a coded command can induce an action like a distribution, a fee, or assets sold, etc.
Smart contracts also take place in the application layer of decentralized finance. While still in its infancy, applications are emerging that build a platform of trade on top of the settlement layer, with blockchain recording the contract. While these applications are created by companies, the companies hold no authority over the individuals that use and engage in contracts.
Decentralized Finance For A Small Business Example
When the foundation of your company is built on a community loan, NOT held by any major institution, you are somewhat sheltered from the fluctuations of the market. Plus there is a spread of authority where all economic actions are held accountable by the code. Here is an idealized example of a business engaging in a decentralized finance system:
You hold a smart contract for a stablecoin loan with an anonymous lender. You receive disbursements of funding at certain times of the year and pay the loan back according to the agreement outlined in your contract.
Your business accepts payments of stablecoins for assets from anonymous customer wallets. All customer payments and vendor billing are settled with a secure encrypted wallet.
You use various decentralized apps to run your departments: inventory, accounting, and storefront. People you work with retain anonymity and all your information is encrypted.
Are You Ready For Decentralized Accounting?
Truly decentralized accounting has not reached its full potential yet. As a business owner, you are at the precipice of a cutting-edge system. How you choose to organize management roles and finances now, could make or break your business in the matrix. Joking! You don’t have to go to extremes to make your business successful, but reconfiguring the distribution of authority can increase productivity and drive key performance metrics.
