We usually associate blockchain with cryptocurrencies: Its application in other industries remains untapped, as it’s still in the nascent stages of development.
But in a short time, blockchain has emerged as a key financial technology (fintech) that can enhance financial management for small-business leaders and finance managers.
- 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.
However, like other emerging technologies, such as AI and machine learning, small business owners and finance managers face some key challenges in understanding the impact of blockchain such as:
Small-business finance managers who embrace the latest accounting technologies such as blockchain in the next business year will augment the footprint of their digital transformation. The new tools will also help them reduce risks regarding financial compliance and inaccurate financial management.
Read this article to understand the impact of this new blockchain technology on small-business finance and accounting, its potential applications, features, and the current pace of adoption.
Blockchain: Hype or a new era of accounting?
Gartner defines blockchain as:
“[A]n expanding list of cryptographically signed, irrevocable transactional records shared by all participants in a network. Each record contains a timestamp and reference links to previous transactions. With this information, anyone with access rights can trace back a transactional event, at any point in its history, belonging to any participant. A blockchain is one architectural design of the broader concept of distributed ledgers.”
In a nutshell, blockchain comprises the following core features:
As a decentralized platform that is based on a distributed ledger and not controlled by a single individual, blockchain will transform accounting concepts such as bookkeeping and digital wallet transactions.
It can revolutionize small-business client and vendor payments by eliminating third-party entities, such as banks and financial institutions, which often charge additional fees.
However, most applications of blockchain are currently over-hyped for the near term—illustrated in the Google trends data below:
Google Trends shows that interest in blockchain reached its inflection point in 2017 (Source)
Since the beginning of 2018, the number of Google searches has gradually waned. This is possibly because of the lack of conceptually viable blockchain use cases; some analysts label blockchain as overhyped without any potential application.
So, is blockchain all hype? No.
Does it promise a new era of accounting? Yes, but not in the near term.
We expect blockchain applications for small-business finance to be mainstream in the next five to 10 years. We’ll discuss why and how in the upcoming section about adoption trends.
When examining potential applications of blockchain for your small-business accounting or finance, ensure that the application is based on a blockchain platform. Many vendors fraudulently claim to provide blockchain-based applications to market their products.
Blockchain in finance and accounting to address key challenges
Though it’s still an emerging technology, blockchain can help small-business finance managers boost their accounting and finance functions. Here are some potential blockchain applications in finance for small businesses:
These agreements between buyers and sellers are inscribed in computer-coded language. These are decentralized and distributed across a blockchain network.
Smart contracts help small-business finance managers create, monitor, and comply with their financial agreements with vendors and clients. These contracts can be created for invoices, bill payments, mortgage payments, rent, and any other financial transactions that boost cash flow.
With a single, unified ledger system, blockchain ensures transparency between the vendor and supplier. It also reduces the time accounts teams take to cross-check the transactions in a ledger.
Blockchain helps small-business accountants retrace any erroneous data entries as an incorrect entry in a block will affect all the interlinking blocks. These errors are difficult to spot in a manual double-entry accounting ledger, which means that the year-end financial reports could be inaccurate.
As an integral part of the accounting process, this requires matching the financial transactions in a company’s balance sheet with the bank statement. It helps businesses rectify any financial errors in either record.
A distributed ledger based on blockchain can help small-business finance managers locate differing transactions at the source in real time. Blockchain will ensure that the balance sheet and bank statement are in sync, which reduces the number of reconciliations.
Digital wallets without any commissions
Usually, digital wallets charge a commission or interest that is paid to a bank or financial institution. As a result, when small businesses have to pay vendors or clients, they often pay an additional fee for cross-border bulk transactions.
The decentralized ledger eliminates third-party payments, which helps small businesses save money. It also facilitates secure transactions with the use of cryptography.
Monitoring accuracy of financial data
Using cryptography and timestamps on financial transactions ensures accuracy and security of financial data. This way, it’s easier to analyze the data and assess the financial health of small businesses.
In addition to making it easy to track financial transactions, blockchain lets you view ledger balances at the source, as all the transactions are linked in a series of blocks. A shared ledger validates financial data at the source of the transaction, ensuring the accuracy and integrity of data. This prevents any corrupt transactions and fraud.
Adoption trends: Implement blockchain-based accounting in the long term
As a technology disruptor for accounting and finance, blockchain has raised more questions than answers for small-business owners and finance managers. Gartner research says that there are limited potential use cases of the technology, which is a top reason why this technology is over-hyped.
According to Gartner’s Hype Cycle for Blockchain Business report (available to only Gartner clients), blockchain won’t see any applications until 2020-2021. It holds promise for potential application in the mid- to long term.
However, blockchain requires heavy investments in potential applications for banking, investments, payments, and more. For this reason, small businesses will have to wait and watch when these applications can become mainstream (like enterprise resource planning or project management solutions).
Here’s how the adoption trends for blockchain stack up in the next few years:
- Short term (1-2 years): Currently, there’s no new viable use case of blockchain application in finance. If you are a startup, start educating yourself on blockchain application in finance to stay ahead of the competition.
- Mid-term (2-5 years): Emerging financial blockchain applications include “complementary currency” and “digital commodity exchanges”. These would be based on the proof of concepts (POCs) created by large enterprises. If your small business has surplus revenue, consider adopting software platforms with core accounting functions that are based on blockchain.
- Long term (5-10 years): Adoption trends for blockchain in finance will significantly peak in this period as most industries, including banking and retail, will heavily invest in POCs. Possible use cases may include “blockchain-based ACH payments,” “smart assets,” and “smart contracts.”
Before you prepare your business to jump on the blockchain bandwagon, here are some steps you should take:
- Identify potential accounting and finance challenges that your small business currently faces such as cash flow management. Check whether these could be addressed by using blockchain to resolve payment gaps with vendors.
- Look for potential use case applications that enterprises are currently deploying. Assess whether these applications fit your budget and technology requirements in the longer term.
- Put blockchain on the back burner of your overall technology adoption strategy for now. Don’t expect potential applications to materialize soon. If you find good uses of potential fintech, such as robotic process automation or robo-advisors, which can address your current challenges, adopt these tools.
Read on to discover
Research for this article was compiled from secondary research with different Google search strings to search for information regarding “blockchain applications in finance” for small business.
In addition, information was sourced from Gartner reports (available to clients only) that specifically discuss the current adoption trend and impact of blockchain in finance. Please note, Gartner information on blockchain has been leveraged in instances that may be applicable to only small businesses.