For small businesses and start-ups, gaining customers and market share are the two major focus areas and a lot of talent and effort goes into that.
At the same time, it is useful to remember that howsoever great the service or product that the company sells are, one of the first things a business needs to get right is a control over cashflow. A US study found that 82 percent of businesses fail not because they had a bad product or service, but due to cashflow mismanagement.
While profit is earnings minus expenses, cashflow is the money the business has in its bank account at any given point of time and this is determined by inflows (of cash) and outflow. Obviously, positive cashflow means more money in the bank and this can help when planning for future spending on things like business expansion. Good financial accounting needs to capture not only the profit (or loss) at any point of time but also the cashflow trend, so that proper budgeting can be done.
It is for this reason a good accounting package is a prerequisite for success and so choosing one that fits requirements is important; also, be prepared to upgrade as needs change.
Starting Out On Your Financial Accounting Journey
Many small businesses start their financial accounting journey with spreadsheets, either Microsoft Excel or its alternatives like OpenOffice spreadsheets. Initially, it makes sense to use such software. Excel, for example, has several ready-to-use templates available online and it is relatively easy to find the right accounting formulas to use. However, while Excel is a great tool and cost saver in the initial days, as a business grows in complexity, the various limitations within the software become apparent.
One of the biggest disadvantages of Excel is that all data entry must be done manually. While the cost of buying a licence is relatively small, the number of man hours that need to be put in for data entry into Excel could add up significantly to the financial accounting cost. For companies that report under GAAP (generally accepted accounting practices), each manual entry must be done twice.
When every single piece of data or formula requires manual entry, the risk of error remains high. For example, when J.P. Morgan lost more than US$2 billion in the capital markets in May 2012, a post-mortem examination seemed to indicate that one of the reasons for that was an Excel sheet inputting error due to a “copy and paste” methodology being used for data entry. That single error cascaded over a complex series of formulas to result in a hugely erroneous result.
Another drawback of spreadsheets is that the program cannot accurately predict cashflow. This is a serious lacuna since, as mentioned earlier, 82 percent of businesses fail due to cashflow mismanagement. As a business grows, it becomes increasingly hard to forecast money inflows and budget accordingly as the company’s financial transactions grow more complicated.
Growing Your Accounting Practices Beyond The Spreadsheet
At some point in time, all small businesses need to grow out of spreadsheets and move to a proper accounting software. There are several different accounting packages available that can suit every requirement and budget.
According to Software Advice, a Gartner company, accounting software costs can start as low as US$9 per user to as high as US$500 per user per month. One-time licence fees can start at around US$499. For more advanced accounting systems and more users, prices can start from US$375 per user per month, or more than US$1,000 for a licence. Most small businesses should be able to find a solution within the US$5 to US$20 per user, per month range.
For small businesses looking to graduate from spreadsheets to proper accounting software, two popular solutions are Xero Accounting and QuickBooks Online. Both are cloud-based, do not require any hardware investment and are relatively easy on the budget.
Each offers an impressive set of features for their price, are easy to use and flexible with plenty of customisation options. They are available on a monthly subscription basis and offer several tiers of plans, with the costlier ones having more features and options. Both also offer mobile apps to do accounting on the go and allow for third-party tools to be integrated into them.
As the two most popular web-based accounting software platforms for small and medium-sized enterprises (SMEs), it is difficult to say which one is better. They offer very similar features, but there are some important differences.
Calculating Features: Xero Accounting And Quickbooks
QuickBooks, which was set up in 2004, can be used through any web browser and can manage daily transactions, make bill payments, file taxes, create invoices and analyse and monitor sales.
Apart from these tasks, it has a few other interesting features. It allows the user to schedule transactions and send files, documents and signatures along with these transactions. It allows the creation of multiple budgets in a financial year and integrates third-party applications. There is also a feature to track changes via the audit logs and review financial operations.
Xero emerged two years after QuickBooks in 2006. It is a good tool for those who are not proficient in accounting. The software allows users who are not trained in accounting to make better financial decisions based on the data.
The Xero accounting software can prepare reports like profit and loss statements, balance sheets and periodic budgets. It also has inventory management features, invoicing and purchase order functionalities that can be done online. It has a cash coding feature to handle multiple transactions without the risk of errors. Xero also offers more than 500 add-on features that improve its functionality.
The Xero basic Starter plan costs US$20 a month and that includes 20 bank transactions, five bills, and five invoices and quotes. Although it allows an unlimited number of users, its basic plan puts a cap on the features. The next tier of Xero, the Standard plan, starts at US$30 and does not include new features but removes all the restrictions of the basic plan. The Premium plan, Xero’s topmost tier, comes in at US$40 and allows the user to track expenses and includes multiple currencies.
QuickBooks’ basic plan, Simple Start, stars at US$20 a month and supports one user plus two accountants. It allows for unlimited invoices and estimates, contract management expenses tracking, and live bank feed and reporting, amongst other features. It’s next tier, the Essentials plan, costs US$35 per month, comes with three users plus two accountants, and offers more features like accounts payable and time tracking.
QuickBooks’ Plus plan, which costs US$60 per month, offers up to five users access plus two accountants. The top tier plan, called Advanced, which costs US$150 per month, offers 10 plus users access and features like a dedicated account manager, priority care, custom use permission and advanced reporting from Fathom.
QuickBooks also offers payroll processing, which cost either US$19 or US$49 per month, depending on features, and then US$2 for every employee. Xero doesn’t have this feature, but it integrates with other applications that offer this functionality.
In summary, QuickBooks stands out in terms of its various pricing plan options, time tracking, and tax tools. Xero, on the other hand, stands out in terms of its user allowances, integration options, and customer support. Its interface is also relatively more intuitive to use.
Overall, there is little to choose from between the two and it ultimately depends on what the user is comfortable with. Both Xero and QuickBooks offer 30-day free trials, and this helps users to experience the software first-hand to determine which one suits their needs the most.
When Your Needs Outgrow Simple Accounting Software
While either of these two products can be a good starting point for small companies, what can they do when their requirements outgrow the capabilities of these software? One route is to go for an enterprise resource planning (ERP) solution that has an integrated accounting package built into the suite of services. This suite could include customer relationship management (CRM) and supply chain management solutions. Such a package also fits into a company’s other requirements as business complexities grow.
One of the popular solutions in the market is SAP Business One, which the German software giant specifically designed as an ERP solution for SMEs. The ERP solution consolidates all business processes, accounting, sales, CRM, inventory management, distribution, purchasing and operations into one pane of glass to provide clear visibility over the entire business. This gives access to real-time data. Another major advantage of SAP Business One is that it has the largest ecosystem of third-party solution providers that have built on an open and extensible architecture to cover nearly all types of industries. In Singapore, SAP Business One pricing starts at SG$80 a month per user.
As companies grow, their business becomes more complex and so does their accounting needs. It is important to choose wisely when upgrading accounting software to get a handle over increased complexities like multi-currency reporting and transactions via branch offices. Hanging on to a piece of software because of its familiarity may not be a good idea if the organisation’s requirements outgrow the software’s capabilities.