Most entrepreneurs are great are creating their products or delivering their services, but struggle with managing the finances for their small businesses. There is a lot of anxiety about dealing with numbers and confusion in using accounting systems, so many small business owners just don’t look at their finances. I find that many entrepreneurs are paying for an accounting software that their accountant or CPA recommended (which is usually QuickBooks), but they don’t know how to use the tool and are 100% dependent on their CPA to tell them what to do. Finding the right tool that’s easy to understand and use will allow you to better manage your money and make better business decisions based on your financial data. As a small business owner, there are four main accounting software solutions to consider for your type of business and budget.
Why You Need a Simple, Easy-to-Understand Accounting Tool
Having looked at several accounting tools, I encourage you to take advantage of the free trials and try out a software before you 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 more money having a bookkeeper or accountant to fix it and set-it up correctly.
- Hire a bookkeeper or accountant for your business, adding to your financial obligations and spending hundreds to thousands of dollars each month and year to continuously manage your finances.
Which Accounting Tool Is Right for Your Small Business?
There are four main tools that I’ve seen small business owners use, including:
- Excel spreadsheet
#1: Can I Really Use an Excel Spreadsheet?
For aspiring entrepreneurs, using a spreadsheet is perfectly acceptable when starting out. Don’t overcomplicate things and assume that you have to use 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 you are starting out and there aren’t a lot of transactions per month.
Here’s an example of what a Profit & Loss statement in Excel would look like:
#2: Who Should Use QuickBooks?
QuickBooks is great for small business owners who have inventory, but if you have a service-based business, QuickBooks is probably more robust and complicated than you need.
QuickBooks is also good for small business owners who have grown the size of their business and volume, and can afford to outsource the daily/weekly/monthly management of their finances to someone else. However, it’s still important that you know how to read the reports to spot potential errors. Your bookkeeper and accountant won’t necessarily have the background knowledge to help point out where numbers seem off, so you want to make sure you understand how to use the tool.
You also want to make sure you have the budget to pay your bookkeeper or account to fix any errors that you make in the tool, especially due to the results of a survey conducted by FreshBooks. In a recent survey of 300 North American-based accountants and bookkeepers, 71% said their small business clients use QuickBooks desktop or QuickBooks online, but 83% said it’s typical for small business owners to make a mistake when using it.
If 68% of small business owners reported that they are intimidated by accounting software, it makes sense to find one that is easy to learn. You’re busy running and growing your business, so I would avoid tools that make you feel like you need an accounting degree to use it!
#3: Why do Service-Based Business Owners Like FreshBooks?
FreshBooks is the invoicing and accounting tool that I use for my small business, and the one that I recommend to most service-based business owner. It’s easy to get started and you don’t need to pay anyone to set it up for you. I’ve had clients who have switched over from QuickBooks to FreshBooks once they see how simple it’s to use and they aren’t intimidated to use the tool.
The three features that I really like about FreshBooks include:
- Categorized 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.
- Exceptional 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.
- Reports Can Be Sent to CPA (i.e. Profit and Loss Statement) – All the reports that your CPA needs to complete your taxes, including the Profit and Loss Statement, are available for you to print or send directly to your CPA. 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.
#4: How is Xero Different than FreshBooks?
Xero is another accounting solution that I’ve seen a few small business owners use. The key differences that I found when comparing it to FreshBooks include:
- 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.
- Tip: – 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!
Summary of Best Accounting Software:
There isn’t one tool that has all the features to be the absolute best accounting software for all small businesses. However, I do think that FreshBooks and Xero are worth a strong consideration over QuickBooks. I personally use FreshBooks for my service-based business, but I do like Xero’s features for inventory.
Consider what type of business you have, what products or services you offer, your budget, 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. Get a free trial of FreshBooks or Xero, then enter several transactions to see how you like the features and if you find the tool intuitive. Once you pick the right tool for you and your business, taxes and understanding how your business is doing financially doesn’t have to be a time-consuming or stressful experience.
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.