Why Your Business Needs Accounting Software

Starting a new business is exciting, and risky. You need to maximize all of your resources which includes your time and every penny you have allocated to your project. A quality business accounting system, such as Xero or Quickbooks Online, is one of the best and most inexpensive tools you can use to save yourself time and help your business succeed. These tools simplify critical business functions, such as tax payment and payroll, and provide you with the information you’ll need to budget for today and plan for tomorrow.

Business Accounting: Never too Early to Start

Even if you are in the earliest stages of your company’s development, you’ll benefit from setting up and using an accounting system. That’s because using a quality accounting system will make complicated chores easier and help you get your business started on the right path. Some of the top benefits to setting up accounting early on in the life of your business include:

  • Expense Tracking and Tax Preparation: Accounting programs allow you to track all of your expenses and capture this information for tax purposes, even before your business gets off the ground. These write-offs help stretch your investment dollars, giving you more funds to grow your business.
  • Establish a Baseline: Accounting programs also helps you establish a baseline of your current expenses so you can create realistic budgets as your business grows. You will capture specific information on raw materials and product costs, vendor expenses, overhead, and more, so you will know how much money you need to take your company to the next level. Tracking inventory and/or time spent on your business also allows you to see a true picture of your operations which helps you to set realistic goals and plan your next steps.
  • Make Decisions: Without accurate accounting data, many entrepreneurs make decisions based on how they think things are going rather than reality, which ultimately leads to failure. Using a quality accounting software package keeps things real, which allows you to make better choices. You can and should analyze your data on at least a quarterly basis so you can adjust processes and manage expenses. This information can inform your decisions to alter course or continue with your plan.
  • Capture Funding: Utilizing an accounting system from the start of your company also makes it easier to attract investors and apply for loans. You will have actual data that can be used to create information-driven projections rather than hopeful numbers on a piece of paper. By following basic accounting principles, you also establish yourself as a serious, professional entrepreneur who understands the importance of managing the financial details of your operations. This allows you to stand out from others seeking funding and may give you an advantage.
  • Reduce Personal Liability: proper business accounting helps to legitimize your business’ legal status as an independent entity. This means you are less to be held personally liable for any debts or legal claims made against your business.

Start using an accounting system as soon as possible to capture the best, most accurate data possible. This gives you a better chance of success and increases your ability to capture funding.

What are Some Common Tools for Managing Business Accounting?

There are three types of tools that small and medium sized businesses commonly use to manage their accounting: spreadsheet applications, desktop accounting programs, and online accounting platforms.

  • Spreadsheet Applications: Many new business owners start out trying to track their revenues and expenses using a basic spreadsheet application, such as Excel. Initially this may seem like a smart option since most people already have a spreadsheet program installed on their computer. However, to manage accounting with a spreadsheet application effectively, you need to know exactly what you want to set up, how to format the cells, and be able to evaluate whether the information is accurate. However, unless you have significant experience with Excel, you will likely spend hours setting up and using your spreadsheets. Moreover, spreadsheet applications are designed for data input, but do not track changes or conduct any level of analysis. Consequently, many entrepreneurs who start out using Excel quickly abandon the process as too cumbersome and start over with a new system.
  • Desktop Accounting Software: These comprehensive systems are usually available to purchase online for a large, one time fee and you can download them to your computer. Pros: The systems are fairly intuitive, making it easy to setup and use. All provide data analysis such as profit/loss, and can help manage payroll, sales and income tax data. Cons: Many of these systems are intended for use by mid-sized firms and will have many features you won’t need. These systems can be expensive and you are often paying for options you will not use. Most companies issue annual upgrades to keep your system current with the latest tax codes and the costs of the upgrades can be high. Access is limited to your computer and, unless you have a laptop and take it everywhere, it isn’t portable. Since the program is computer based, you will need to send sensitive financial information by email or traditional mail, and collaboration with other team members can be difficult. Finally, with a desktop accounting program, you risk losing all your data if your computer crashes or is lost.
  • Online Accounting Software: An online or cloud based accounting system operates through off-site processors where information is stored and analyzed. It offers superior data protection and immediate access to all accounting functions. They are inexpensive – between $10 and $40 a month – and you don’t pay for upgrades. Several companies offer a range of options so you can start with a basic package and upgrade it as you need more features. These programs are specifically designed for small to mid-sized companies and non-accountant users. They are very intuitive and take little setup time. The system is mobile and you can put it on any device you authorize so you can access it anywhere. Online accounting systems also make it easy to share. You can set permissions allowing your accountant, lawyer, investor, or a potential investor to securely and immediately access your data. Finally, many of the most popular cloud accounting systems now include mobile applications that allow you to manage your accounting on the go with your phone or tablet.

Most small and first time business owners will have the best experience using online accounting software. The two most popular and highest rated online accounting systems are:

  • Xero: A popular online accounting solution with excellent customer support and simple/intuitive features for a great value. This is our top rated accounting tool.
  • Quickbooks Online: A well established and fully featured online accounting platform. QuickBooks Online has more medium and small business users than any other accounting tool.

Business Accounting at all Stages of Company Growth

As you take your business from a concept to an ongoing concern, your accounting needs will change. A high quality accounting system can expand with your growing company to address every aspect of the process.

The Startup. The startup phase of the project lays the foundation upon which you will build your business. Now is the time when you select your business model, develop your products or services, and evaluate capitalization options. There is no revenue stream at this stage which is why too many entrepreneurs do not invest in accounting software, but the advantages outweigh the minimal cash outlay.

During the startup process, a basic cloud accounting system will help you save time and money by:

  • Creating a system to collect all expense information to maximize your tax write offs. Little things like gas receipts or business lunches can fall through the cracks but utilizing an accounting system will capture these items.
  • Supporting tax filings by organizing your business expenditures into allowed and disallowed expenses. Regardless of your legal structure, at this stage you will probably be able to write off your startup expenses on your personal taxes. The accounting system saves you the time and hassle of digging up receipts or trying to estimate how much you spent. Instead, you will have a detailed record of your expenses and can create reports specific to tax preparation and filing.
  • Managing your startup budget. You have probably allocated specific funds to support your startup process. Your accounting system can track how you are using those dollars and help determine how remaining monies should be spent. You can also identify unneeded or overpriced expenses and adjust to get the most value from the remaining funds.
  • Establishing your operating budget. As you work, you will come across information you want to include in your operating budget. You won’t need to take notes or hope you’ll remember since you can begin to create the budget now and be ahead of the process later.

Using a cloud-based accounting system will save you time and hassle as you go through the startup process. You will have all expense information at your fingertips which will make tax time a breeze and increase the amount of your write off. Knowing exactly how you are spending your startup funds will help you evaluate your choices and save you money.

Establishment/Growth: Your company has transformed from a dream to a reality and there is more hard work ahead. Your primary goal is to attract and retain loyal customers, and then find even more. You will be managing customer service, inventory, scheduling, ordering, and maybe hire a few employees. With your success, you may seek investors or loans to grow your company. With so many tasks to manage, your accounting software becomes an invaluable tool to keep you, and your business, on track. You will want to use this system to:

  • Manage accounts receivable. Depending on your business, clients will owe you money. Use your accounting system to track these accounts and notify you if they become past due. Effective management of your accounts receivable will keep your cash flow positive and reduce your stress.
  • Manage accounts payable. Avoid paying penalties and interests by remaining current with vendor bills and other monies owed.
  • Oversee costs. Create flags to notify you when specific expenses go beyond set limits. This is a quick and easy way to identify when vendors have increased their prices or if there are quality problems. Use your system to quickly identify these issues so you can proactively address them and reduce their negative impact on your business.
  • Track inventory. Most systems include an inventory section so you can see what you have and where it is located. You can set alerts to remind you when you need to reorder which allows you to avoid out-of-stock situations. Inventory tracking can also alert you when you have too much of an underselling item.
  • Manage payroll. You will save time and reduce stress by managing your payroll through your accounting system. Most programs manage both state and federal tax requirements and will automatically update as they change. Your system will notify you when and how much to pay and track that the payments were sent.
  • Prepare tax reports. All systems will track the information you need to file your business taxes and many will complete the forms with the necessary data.
  • Analyze your data. Use your system to run profit/loss statements, inventory analysis, payroll cost reviews, and more. These reports allow you to assess what is working and what needs to be adjusted so you can best manage your company.
  • Create funding reports. Your accounting system can create funding support documents with a push of a button. These can be used to secure bank loans or attract investors. With your cloud system, you can provide immediate access to this information to your select audience. Investors prefer this level of responsiveness and ease of communication.

These are the primary ways your accounting software will benefit your business in its critical early stages. The time you save by utilizing this system can be spent on growing your company and planning for its future.

Additional Benefits of Cloud-Based Accounting

Your accounting program can impact your business in ways you may not have considered. While it is a financial-driven system, the data collected can be used to improve broader aspects of your company.

Marketing Support. During the establishment phase of your business, you need to attract and retain customers. With your accounting software you will be able to:

  • Identify your profitable clients. Use this information to create targeted campaigns for these individuals or companies, and offer perks that make others want to join this elite group.
  • Identify your less-profitable clients which gives you the opportunity to learn what you can do to better engage this undervalued group. They already know your business so the goal is to get them to love your products/services.
  • Develop customer profiles to be used in developing marketing campaigns.

Staffing Support. Utilize your payroll data to help determine if you are over or understaffed. You can also evaluate which level of employees (full, part time, combination, etc.) makes the most sense for each stage of your business. Use the system to determine if a specific service should be provided in-house or outsourced to make the company as efficient and cost-effective as possible.

Expansion Decisions. Through your customer tracking, you will be able to identify where your customers live which can be used a key element of your expansion decision. This information, along with competitor analysis and costs, can help you decide when and where to open the next store or focus additional marketing campaigns.

Bottom Line

Give your business the best possible chance of success by investing in a cloud-based accounting program as you begin the startup process. This tool will save you time, money and hassle while providing you with the information you need to take your company to the next level.