Should you use accounting software or a spreadsheet to track your small business finances?

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Over the years  my clients have come to me with their financial data in various formats.  I have received shoeboxes of receipts which need to be deciphered and compiled.  Some clients have given me their spreadsheets in excel, google or occasionally summaries in a word document. Others decided it made sense to use accounting software right at the outset of their businesses.

In many cases, using a spreadsheet is perfectly fine and sufficient for small business or self employed individuals where you simply need a way to determine your income and expenses.  There are situations, especially when you are planning to do your own small business accounting, where it can be significantly beneficial to upgrade your record keeping from a spreadsheet to accounting software.  I have enumerated some of the factors to consider when determining if your spreadsheet is enough for your accounting needs or whether it is time to upgrade.  

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What is the size of your business and how many transactions do you have ?

Generally speaking the larger the size of your business the more beneficial it is to use an accounting software.  Very small businesses, freelancers, independent contractors etc. can usually get by with a spreadsheet if they only have a few transactions per month.  However, if you have more than a handful of transactions, then you are likely wasting valuable time by using a spreadsheet.  Most accounting software lets you create invoices which then gets recorded automatically as a sale. The invoice itself can then be duplicated for future transactions. With a spreadsheet, you usually have to manually create an invoice and then separately record the invoice and the payment for accounting and tax purposes.  Similarly, if you have a number of expenses or bills, you would have to enter the details manually while with an accounting software there are various levels of automation that can help reduce the time it takes to do these tasks.

Do you want to keep track of your customer and/or supplier data ?

If you have more than a couple of customers, who pay you after you have sent them an invoice (rather than immediately, upon receipt), you should have a system to track the customers that owe you money as well as the individual invoices that haven’t been paid. This helps you identify late payments that you can follow up (the more proactive you are about this, the better).  This is most easily accomplished with an accounting software as you can generate customer receivable reports that show you how much you are owed and how long the invoice has been outstanding.  Similarly, if you have suppliers from whom you purchase goods or services such as inventory or subcontractors for which payment can be made in the future, it is important to track these details especially for cash flow purposes .  Conversely, if you only have a couple of customers and your expenses are mostly paid as they are incurred, then a spreadsheet should be adequate. 

Do you want to be able to analyze your data ?

One of the great advantages of accounting software, in addition to the time savings and automation, is the ability to analyze your data to keep track of how your business is doing.  You can see your total sales, sales by customer, sales by product line, profitability, cash flow, sales tax and numerous other reports.  Data that you can query helps you to improve business decisions and ultimately improve your profitability and success.  Analyzing accounting data that is in a spreadsheet needs somewhat advanced spreadsheet skills and there is always the possibility of errors.   

Do you have inventory?

Product based businesses usually need to keep track of the amount of stock they have on hand, which in accounting parlance is referred to as inventory.  Accounting software, when structured correctly, can help you track how much inventory you have at any given time, reduce your inventory automatically for every sale and increase it for every purchase.  It can also give you valuable information on re-order points and provide data on what products are selling better than others.  All of this is much more difficult with a spreadsheet.

Are you incorporated?

Businesses that are unincorporated such as sole proprietorships and partnerships generally only require information from a profit and loss statement that then needs to be transcribed onto schedule T2125 of your personal tax return.  This is straightforward to do with a spreadsheet as it simply requires that you add up all your income, and expenses by category.  Corporations, conversely, in addition to the profit and loss are also required to include the information from their balance sheet which includes assets, liabilities and equity.  Balance sheets are more complicated and requires a knowledge of accounting to compile using a spreadsheet while an accounting software will automatically generate a balance sheet.   As such, I recommend using accounting software if you are incorporated. 

What is your time worth.?

One of the benefits of accounting software are the time efficiencies that are achieved through automation.  They are designed to make the process of entering financial data simpler and are often specifically targeted to small businesses owners who are not accountants.  It can be useful to determine what your time is worth to see if using an accounting software is worth the additional cost.  If you only bring in a small amount of profit and you have extra time on your hands, using a spreadsheet might make more sense.  Calculating how much your time is worth is a useful exercise as if your time is used more productively on other tasks, then it can be worth paying $25-50 per month for an accounting software such as QuickBooks online.

Do you have other more complex reporting needs Such As Sales Tax and payroll?

If you are registered for sales tax, tracking the data on a spreadsheet is certainly doable.  However, an accounting software makes this much easier and also generates a report that can then directly be transcribed on to the sales tax report. 

Having employees requires that you pay deductions at source to Revenue Canada.  While this can be calculated manually it is generally better to use a payroll software to accomplish this.

Some businesses have special reporting needs such as sales breakdowns by region or customer, payroll , commissions or product lists.   Accounting software keeps track of all your data since inception and allows you to create custom reports for these purposes thereby saving time and ensuring accuracy of data.

Do you need Historical Data?

Having all your data in once place can be very useful for reporting purposes, analysis of your data or in the event of an audit.  This is much more difficult with spreadsheet where data is usually compiled on an annual basis whereas an accounting software keeps track of all your transactions since you started using it.  Additionally, some accounting software will let you attach source documents such as receipts and bills to the transaction making it much easier to track everything relating to a transaction in one place. 

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