Top 5 Tips for Picking the Right Accounting Software (Don’t miss #4)
Founders, at the earliest stages of their businesses, have a number of high leverage decisions to make. As these relate to their bookkeeping and accounting, those decisions include deciding on the type of accounting method to abide by, as well as the specific accounting software they'll trust to get the job done. There are many inherent tradeoffs that come along with making these decisions—and unfortunately, if you choose wrong, you could end up in a world of hurt down the road (particularly if you wish to seek investor money). By being aware of some important considerations for choosing both an accounting software and an accounting method, your company can get off to the right start.
1. Scalability (Now and Long-Term)
For starters scalability is an important factor in choosing any accounting software, as you have no way of knowing what the future holds. You'll want to make sure that the software you're choosing will be able to grow and scale with your business easily, especially as it relates to sustaining volume increases in the number of transactions you have. When you’re early-stage, you probably will start off with a simple platform, like Xero or Quickbooks. These can most likely meet your needs for a while, but ideally you will outgrow those platforms and need to migrate to an ERP, which is not always an easy task, and is incredible expensive both for implementation and ongoing software fees.
2. What Investors Expect
Furthermore should you ever have plans to seek financing from an investor for your business, you'll also want to think carefully about whether cash or accrual basis accounting is right for you. Serious investors will demand that your financials are presented on accrual basis. It is the preferred method because it provides greater overall insight to a company's performance, as well as a more realistic account of how money is being spent and coming in.
What if you've already been using cash accounting for your business? Is it really that big of a deal to "convert"? It depends on the amount of financial data you need to convert and how good your reporting process is, which brings us back to the point of having the right platforms and systems in place. You certainly can have professionals help you with converting from cash to accrual, but it can be costly.
3. Potential Tax Implications
Equally important is understanding that switching your accounting methods can have an impact on your tax forms that you may have already begun preparing or filed. By ensuring that your reporting is set up correctly from the start, you can avoid having to make changes to financials, which can trigger unfavorable tax burdens as well as cost more to redo the same work. As you grow, there are also IRS rules about what kind of accounting methods you use. Keeping track of all this is hard, and we recommend never managing these filings or tax strategies on your own.
4. You Get What You Pay For
Of course cost is a concern for any new businesses and you'll want to make sure your software is within a comfortable budget. At the same time, keep in mind that accounting software is not something you want to skimp on, as doing so can actually cost you more money in the long-run. If your financial reporting isn’t structured properly and your data is a mess, the migration will be extremely time-consuming and labor-intensive. As a result, your business could end up losing a great deal of money in an effort to switch accounting software or clean up the financial data. This is especially true if your business has a high volume of transactions that need to be converted for any given year. This is exactly why many businesses that find themselves in this predicament end up contacting professionals for help in making the switch.
5. Proprietary Files and Software
Important to realize is certain types of accounting software make it more difficult to convert or transition your financial data than others when you eventually have to change or upgrade. For example, software like Bench and inDinero, which does cash based accounting for small businesses, use proprietary systems, files, and information. Converting to Quickbooks or Xero, or upgrading to an ERP like Intacct or Netsuite, is challenging and usually expensive. This is either because of the software’s simplistic functionalities or an intentional lean towards creating switching costs for the user. Regardless, it becomes a true logistical nightmare when you need to migrate historical data from one platform to another. So make sure the platform you go with has the capabilities to easily take your data with you when you migrate.
Ideally, you will have selected an accounting software from the beginning that's able to let you migrate your financial data easily and seamlessly. Quickbooks is a good example of a specific software that tends to make this easier by not holding you hostage with proprietary files and is compatible with a multitude of different platforms.
Overall, it's helpful to look at accounting as a language; when you're able to speak an investor's language with the right accounting method, you're better able to communicate and ensure you're on the same page. And by choosing the right accounting software and method from the beginning, you can save yourself major headaches down the road. If you’re a little lost as you go through this, that’s normal. Just make sure to find a professional who can help get you set up properly, speak and teach that language, and set you up for success.