As tax deadlines approach, the anxiety and frustration from going through the numbers can make or break a small business owner’s day. I find that many entrepreneurs don’t have a system outside of a shoebox of receipts and stack of papers, or just went with an accounting software that they hear the most about, which is usually QuickBooks. However, not understanding and finding the right tool for your small business needs can lead to avoidance, gaps, and tax implications. As a small business finance coach, I get asked what accounting software solutions are the best so here are my thoughts on the decision-making process.
I have looked and used several accounting tools and always encourage small business owners to take advantage of the free trials and try out software before they commit. If you get a tool that is too robust or complicated for what you need and want, which seems to be the case for many who get QuickBooks, then you will likely:
- Not use it
- Use it incorrectly and need to spend money having a bookkeeper or accountant fix it and set-it up correctly.
- Hire someone else to do it for you, spending hundreds to thousands of dollars each month and year.
For aspiring entrepreneurs, using a spreadsheet is perfectly acceptable when starting out. Don’t overcomplicate things and assume that you must get QuickBooks. I checked with two CPAs and both confirmed that an Excel spreadsheet with all the correct numbers to create a Profit and Loss Statement was perfectly fine for most small business owners, especially when they are starting out and there aren’t a lot of transactions per month. Also, QuickBooks is great for those who have inventory, but if you are a service-based business, this is probably more robust and complicated than you need.
When you’ve graduated to securing your first paying customer, you will want to have an invoicing system in place, which is included in most of the accounting software tools. The two tools that I’ve evaluated and liked are Freshbooks and Xero. Here are features that stood out between the two software tools for consideration:
- Business Expenses – When you import expenses from your bank accounts and credit cards, it will attempt to categorize the expenses to make it easy for tax reporting, but will mark expenses “uncategorized” for items that it doesn’t recognize. If it’s a recurring expense, you can update the category and select to have Freshbooks “Remember this category for similar expenses” in the future. Ideally, the software will recognize the expense in the future and automatically categorize it correctly to minimize your time reconciling expenses in the future.
- Customer Service – I have called customer service at least five times and have been pleasantly surprised that someone has always answered within two rings! How many companies have you ever called and customer support immediately answers without making you go through several telephone prompts? The exceptional customer service, especially if you’ve experienced long wait times with other accounting software companies, may be enough to make you switch.
- Profit and Loss Statement – This is the one of the most important statement that you need to send to your CPA to complete your small business taxes. If you are creating and sending invoices to clients through Freshbooks, collecting payments online and correctly marking paid if you received cash/check, and managing expenses with correctly assigned categories, then you have all the data needed to populate a Profit and Loss Statement (P&L) within seconds, and make tax season a non-event.
- Generate P&L: Go to Reports, Select Profit and Loss (P&L), and a P&L Statement is instantly generated on the screen.
- Send P&L to CPA: You can choose to export the P&L data or print a report to send to your CPA to finalize taxes.
- Inventory – I like how Xero has a tracked inventory feature to monitor unit price, sales price, starting inventory, and quantity on hand (aka remaining after sales). However, it does not do negative inventory, so you won’t be able to use this feature if you sell goods before you’ve purchased them.
- Real-life example: I recently had to go through and figure out the sales tax owed on books that I sold at in-person events for my first quarterly tax payment on merchandise. It was the first time that I’ve ever had to track and manage inventory (as opposed to service through financial coaching), and it was a giant mess on Excel. It took me several days to figure out how I wanted to best track and calculate sales tax collected versus owed, cost of goods sold, sales price, and number of books remaining. I would definitely recommend self-published authors to consider using Xero!
- Budget Manager – You can create multiple budgets by choosing to view actuals and forecasting your sales and expenses over a selected period of 3 months, 6 months, 12 months, or 24 months. This is a great feature that allows business owners to project their Profit & Loss based on real data and prior performance, and determine if they need to make any adjustments to become profitable and manage a positive cash flow.
- Cash Summary – Given that many small businesses fail due to a lack of cash, I like this reporting feature. You can select to include or exclude sales tax, viewing your opening balance, net cash, and closing balance for the month.
- Separate tax account – I highly recommend all small businesses to have a dedicated bank account for managing taxes versus the main checking account for paying operating expenses to ensure money collected for taxes is not overspent!
In summary, I don’t think one tool has it all to win best accounting software for all small businesses. However, I do think that FreshBooks and Xero are worth a strong consideration. I personally use FreshBooks, but really like Xero’s features as highlighted. Consider what type of business you have, what products or services you offer, and what areas are going to be critical to have insight to determine your short-term and long-term financial success, including profit, cash flow, expenses, and inventory. Pick FreshBooks or Xero for a free trial and enter several transactions to see how you like the features and if you find the tool intuitive. Quarterly and annual taxes don’t have to be time-consuming and stressful when you have the right tool for your business.
I’d love to hear your pros and cons for the accounting software that you use for your small business. Or, if you don’t have one, let me know if these highlighted features helped you decide.