There are so many options for accounting software on the market today. So the question is, do I need it? And when?
So if you’ve been wondering about when it’s time to take the plunge and invest in that accounting software package, this post is for you.
I wanted to take a little time today to talk about accounting software.
I often get asked the question by small business owners:
Do I actually need accounting software?
Or is this something I can just track manually using a spreadsheet?
You know, catering to the accounting needs of small businesses has actually become a big business in and of itself. Solutions range anywhere from free software to rather pricey monthly subscriptions. And don’t forget you do get what you pay for, but I’m not here to promote or diss any particular product.
Everyone has their preference of what they like to work with. I know I have my preferred software, but what I like to use may not be what other professionals like to use and certainly may not be what other business owners like to use.
I do want to address when you actually need a proper accounting solution. It’s very easy at the beginning to think you need the software. And it’s so easy to succumb to what other people tell you or to kind of listen to what the providers say that they can do for your business.
But here’s the thing. If you have a solid understanding of what you actually need, then you can determine for yourself, if you actually need software to do that, or if that’s something you can actually provide on your own and possibly save yourself some money.
So one of the big benefits of using software is the financial reports.
So question number one is:
“What financial reports do you really need?”
Not, “What reports will a software provide?” Do you see the difference here? Because a lot of these providers will run a multitude of reports and graphs and give you all of this fancy information, but that is of no use to you if it’s not helping you, or if you don’t know how to use those reports.
So really the most important report that every business owner needs is the profit and loss. It’s also known as the income statement. This shows you “Is your business profitable?” “Are you making income or are you actually running a loss for that year?”
It also shows you where your money is being spent. Are there certain expense categories that are higher than others? So it really allows you to pinpoint the financial activity of what’s going on in your business.
It will also tell you where your income is coming from. Maybe your business is set up where you have multiple sources of revenue. Is one source of revenue more profitable than another? This might lead you to make a business decision to invest in that area of revenue rather than the other one.
This is also the report you’re going to need at tax time. Your accounting professional is going to need this because if your business is generating income, we need to know how much income is actually being taxed.
Or if your business generated a loss, it’s going to offset your other areas in tax liability. So think of it like this: the financial report that is the profit and loss really is your data center. It gives you so much information about your business. And if you don’t have this report, you really are flying by the seat of your pants and running your business, which is not always a great thing to do.
So can you get this outside of proper software? And the answer is, yes, a spreadsheet will track this for you and you can use any spreadsheet of your choice. If you like Excel, Excel will do it, or maybe Google sheets or maybe apple numbers. Any of those will be fine, but here’s the catch.
There’s a certain amount of manual work that needs to be done with this. You yourself have to put that transactional information into your spreadsheet. Now you can possibly export a bank statement from your bank and put it into the spreadsheet and manipulate it from there. And that’s fine, but just know that you are going to actually have to put in a little bit of work on this in order to actually make that report work for you. So you have to decide how much your time is worth. And if that’s time you could actually invest right now.
Question number two, what does my business structure require? I know I’m always talking about business structure, but it really is the foundation of your business.
So if you’re a sole proprietor or you’re an LLC, the only statement you need is an income statement. So you can easily produce this on a spreadsheet. There’s no need for a balance sheet. Now it might be helpful, but it’s not required.
What is the difference between a profit and loss statement and a balance sheet?
Well, profit and loss simply tells you, are you profitable? Are you making money? Or are you losing money?
A balance sheet tells you the value of your company. So a balance sheet really becomes more necessary if you’re a business that has a lot of assets, maybe you own a lot of equipment, or maybe you have a lot of liabilities, like bank loans.
Those are the types of items that are actually tracked on a balance sheet. So if you actually had to liquidate your business or you decided you wanted to actually sell your business, you would have to know the value of your business, what it’s actually worth. And that information you actually get from a balance sheet.
So when do you need a balance sheet?
If you are a corporation, whether it’s an S corporation C corporation or a not-for-profit, you are going to need a balance sheet.
Accounting software at this point really is recommended. It can be done manually, but it’s not that easy. So I don’t recommend you try to do a balance sheet in a spreadsheet.
Is there a time when I should switch to accounting software?
Yes. When your bookkeeping has become too time-consuming, maybe you have many accounts or a lot of transactions, and it’s really taking a lot of your time and it’s becoming too cumbersome to keep up. That’s a time to look into accounting software that will automate some of the things for you to make your job a lot easier.
The other time to consider changing is if your structure changes, if you decide to become a corporation, or if you’re an LLC and you decide to make the tax election to be treated as a corporation, then you’re going to need a balance sheet. So that’s a good time to think about switching.
And last, if you work with a professional, be it a tax professional or a bookkeeper, and they need access to your books, then software really is helpful. And in this case, I would recommend a cloud version is best because that way you and the professional are working off of the same company file rather than transferring a data file back and forth. That can be done, but it does leave room for error and it could possibly result in multiple sets of books and that’s never a good thing.
So the bottom line is if you are just getting started in your business, you can use a spreadsheet as long as it’s not taking up too much of your time, because there is some manual labor involved in that.
And then as your business grows and your needs change, then it might become time to look at an accounting software package.