Choosing an Accounting System for your Small Business

Unfortunately, there is no business without bean counting. But I bet you didn’t start your business to do accounting. This article will help you choose a system to make it easy, cost-effective and as painless as possible.

Your accounting system should work for you. At a minimum, it collates your income and expenses for your tax returns. Ideally, it also provides valuable, at-your-fingertips information to help you understand and improve your business results.

Do it or Delegate it

First, decide if you are a DIY accountant or not. Do you enjoy working with numbers, are good at managing finances, and want to spend time on them? If you answer no to any of these, you should probably get help.

There is no bigger productivity or joy killer than tearing your hair out trying to balance your books. There are plenty of people who love that stuff and will do it efficiently and cost-effectively while you spend your time making money.

Whether you choose to do it or delegate it, you need to choose a system for your business.

The No Accounting Software Business

The simplest businesses can operate without accounting software. Bank statements, a manual cashbook or excel spreadsheets can provide the data for GST and income tax returns. Invoices can be prepared on word documents or excel.

If your transactions are few and uncomplicated, this may work for you. However, as your business grows, complications grow and mistakes creep in. Consider starting with a system that will grow with your business.

Cashbook Software

Your first step may be a cashbook system.

You use a cashbook system to track and code your receipts and payments. Your invoices for credit sales and purchases must be managed separately. If you’re a contractor with minimal expenses, sending out just a handful of monthly invoices, a cashbook may suffice.

If you’re GST registered on a payments basis – the most common method for small businesses – your cashbook software will handle your GST returns. Your cashbook data, combined with your manual sales and purchases invoice lists, provide the raw data for your financial statements and income tax returns.

Full Accounting Package

For a more comprehensive solution, choose a small business accounting package. These typically handle cash transactions, sales invoices and purchases invoices. They often also handle inventory, project management, payroll and other tasks.

If you process more than a few invoices and a couple of pages of monthly bank statements, you probably should have a full accounting package.

Advanced Accounting Requirements

If your business has specific or complex needs, you may need more specialised software. This will usually mean either an industry specific package, say that tracks stocks of components for repairing machinery, or software for specific functions such as project management, customer relationship management (CRM) or inventory tracking.

Management Information and Reporting

Processing transactions to satisfy IRD is just the start. You need relevant information to make effective business decisions. With your data already collated in your system, you can see your financial performance results with a few mouse clicks. Unfortunately, people often spend significant time and effort processing transactions, then file their GST return and forget it. With minimal extra effort, they can empower themselves to build a better business.

Nearly every accounting system has built in reporting including the two primary financial reports – the Profit and Loss (P&L) and Balance Sheet.

Your P&L shows your business’ financial performance — how much money you’re generating, how much you’re spending to generate it, and the profit left over for you. Presuming you want to make money, it would be crazy to not review your Profit and Loss at least monthly.

Your Balance Sheet shows your business’ financial position – how much it owns in assets, how much it owes to outside parties, and the surplus left over for you, the owner. With small business being so vulnerable and risky, it would also be crazy to not monitor the financial health of your business.

Even a cashbook system will produce these reports but, unless you have no credit transactions on credit, you must adjust for outstanding sales and purchases accounts for a true financial picture. Depending on your business, you may also need adjustments such as for inventory values and depreciation of fixed assets.

Including outstanding debtors (money owed by customers) provides a true figure recognising revenue generated regardless of whether the invoices are paid. Likewise, including outstanding creditors (money owed to suppliers) provides expenses actually incurred. A cash-only result can mislead and bury the true story.

As well as the P&L and Balance Sheet, your system may provide many other useful reports including a breakdown of your debtors and creditors, and cash flow analyses.

To effectively manage a business, you need a basic understanding of your financial reports. See our Understanding Financial Statements articles for an introduction.

Accounting Software Options

Small business accounting software options in New Zealand include MYOB, Xero, Reckon, Moneyworks, Accomplish Cash Manager, QuickBooks and others. You can buy a desktop-based system for a one-off cost, and maybe ongoing support and upgrade fees, but the trend is towards subscription based online systems with no start-up cost.

I am not an expert on all these systems, or objective, but my favourite is Xero. We are a Xero practice, so I will use it as an example.

Xero is a New Zealand technology business success story, attracting investment and spending heavily on ongoing development. Xero is a modern system built specifically as a cloud accounting system. This means no software updates, different versions, duplicate data files or back up issues for the user. Everything is sorted behind the scenes.

You can invite whomever you like into your ledger such as your accountant, bookkeeper and staff, and control their access rights.

There are cheaper options than Xero and some people dislike ongoing subscriptions. However, considering how intuitive and easy to learn and use Xero is, when you value your time, the overall economics compares well with other options. Having previously been a consultant and trainer of another popular program, teaching clients to use Xero is a breeze in comparison.

From an accountant’s point of view, I prepare clients’ annual accounts in the same Xero datafile that the client uses. The old model meant extracting the client’s data, re-inputting it into my system, processing financial statements, then adjusting the client’s system to match mine. That process can add about 25% more time to the annual accounts job.

Also, I can help a client far more effectively when we are both looking at the same, live data.

Xero Options

While Xero is one software program, you can unlock more features depending on your subscription choice.

Cashbook Edition

A Xero cashbook option is available via Xero partners including accountants and bookkeepers, for around $25 per month. This includes bank feeds, meaning your bank transactions are automatically fed into the system daily, ready to be coded.

Standard Edition

Currently $60/m, the Xero standard edition includes bank feeds and handles your debtors and creditors. It also includes basic inventory, tracking for different projects etc and many other features. If you want a full accounting package for a service business, this may be your best option.

Premium Edition

At $75/m, the Xero premium edition is the standard version plus handles multiple currencies. If you invoice in US$ for example, or hold foreign currency bank accounts, this is the package for you.

Additional Features

For additional cost, you can unlock additional features within Xero. This includes payroll for staff on PAYE, and a projects module to track your time and expenses against specific projects. Payroll costs $10/m for one employee and $1/m for each additional employee. Projects is $10/m for one user and $7/m for each additional user.

Personally, I use and prefer another payroll system called Smart Payroll, but Xero payroll has developed since I last used it.

Add-Ons

For specific needs that Xero does not handle, you can buy add-on software. Xero has a marketplace of apps from independent developers. Most are cloud based and integrate with Xero, seamlessly transferring data between the two systems avoiding duplicating input.

For example, an architect who wants a more comprehensive analysis of project time, expenses and profitability than Xero Projects provides, could choose WorkflowMax, a project management solution.

Your Solution

You will likely need an accounting package plus some sort of Practice Management system to run your business. Your software choice will depend on the complexity of your operation and the output you want from your software. All systems have their strengths and limitations.

Contact us for help deciding.