What Accounting System is Right for Your Business?
I just Googled Accounting Systems Australia and got more than 6.7million results. On the first page alone there are ad's for over a dozen different accounting systems and several pages of helpful reviews, many of which are presented by a software provider. So the question is how does the average business owner decide which accounting system is right for their business?
This is a question we don't get asked often enough and too often the choice of accounting system comes down to price alone.
The biggest mistake with choosing your accounting system on price alone is the hidden costs associated with making the wrong choice. Not only can it mean your valuable time is taken up with non-value added tasks like data entry, you may also end up paying your bookkeeper to drink your coffee, and in many cases you will pay your accountant to reconcile things that shouldn't have needed to be reconciled in the first place.
Here is a real life example - Michael's Vending Machines:
Michael has just purchased a vending machine business, he chooses a free cashbook accounting system which he downloads from an American based website. The system keeps a running track of Michaels bank balance but doesn't really deal with GST but has a Sales Tax that Michael sets to 10% and uses to track his GST. After all GST and Sales Tax are the same thing aren't they? At the end of the year Michael prints an Income Statement and gives it to his accountant to prepare his tax return.
This is a pretty typical result where a client has found their own accounting system but what has happened in the 12 months Michael has been using the system?
- Michael has spent around an hour a week entering his bank transactions into the cashbook program. This has to be done at home after hours because the program is loaded onto his home computer.
- Michaels bank balance never quite matches his statement so he cleverly makes an entry to bank fees each month to force it to reconcile.
- Michael prepares his own BAS returns but has been incorrectly reporting his GST because the Sales Tax reports do not take into account the idiosyncrasies of the Australian GST system such as the zero rated supplies Michael sells through his machine and his new fresh fruit dispensers.
What Does This Free System Really Cost Michael?
- Michael's time spent doing his data entry could have been spent developing his business or spending quality time with his young family. Let's assume Michael makes an annual income of $50,000 from his business (roughly an hourly rate of $25), that means his 52 hours in the year have cost him $1,300. In other words if Michael was out working earning the equivalent hourly rate he could have earned an extra $1,300. The time missed out with his family is priceless.
- Accounting systems are created around the idea of double entry so if all entries are made correctly then the system MUST balance. It is most likely Michael has made data entry errors when his bank balance doesn't match his statement and the cost of that could be a direct cost of extra tax paid or might mean that of he is audited he will not be able to properly substantiate his financial statements.
- Now here is the big hidden cost: Michael's Income Statement does not match the sum of his BAS returns so his accountant has had to try to reconcile his GST to identify the variance. That task took around 2 hours and cost Michael an extra $440 in accounting fees. In addition because Michael provides a PDF report to his accountant there is an unnecessary 30 minutes taken to enter the figures into the accountants system. There goes another $110 in accounting fees.
What Would I Have Said if Michael Had Asked for My Advice?
- As a start up business it is easy to think of your time as a free resource but there is an opportunity cost associated with every minute you are not actively promoting your business or growing your sales. To really provide for your family you should focus almost exclusively on what makes you money and allow the non-value added things to be done by somebody or something else.
- Not so long ago there were only really 2 choices for small business accounting systems and it is largely true that for what they delivered those systems were expensive and delivered an over engineered solution to the needs of most small and start up businesses. Now there are systems available which cater for the needs of small and start up businesses from as little as $5 a month. What's more these systems provide many other time saving features such as direct bank feeds and the ability to automate much of the manual bookkeeping chores, can be accessible online, and fully comply with the Australian tax system.
- With an appropriate accounting system we may be able to provide you with a fixed fee to attend to your accounting work so you will not have any nasty bills at the end of the tax year. We can do this because we can rely on the systems and implement some controls to limit the scope for data error and rework.
So How Does the Average Business Owner Decide Which Accounting System is Right for Their Business?
As an accountant working with clients using different accounting systems every day I can honestly tell you there is no single solution that works for every business. Ultimately though, the decision should be made based on the following 2 requirements:
- What are the needs of your business right now?
- How do you want your business to operate in the future?
Price should only become a consideration once you have worked out the answers to the two questions above.
Be realistic, consider what the accounting system enables in your business, the "hidden" savings achieved, and then and only then if the cost is too high think about reviewing how your business operates. What I mean by this, is if you think your business is not capable of affording $10 or $20 a month for an accounting system that will save your time and money, then you really should reconsider whether you are in business to create value or just take up time.
All accounting systems have some core functionality related to recording transactions and reporting them in a manner that enables you to comply with tax laws, most provide some capacity to present business management information to you in a way to help you make decisions, some provide internal capacity to manage your business processes, while others achieve this through a network of add on applications.
This checklist is presented as a guide to help you determine your key business needs. Once you have worked out your critical system needs it is a relatively simple matter to work out which of the available accounting systems don't provide you with the functionality you require and eliminate them from your search. Choosing the right solution from the remaining options may be easy or you may need to think a bit more about the following issues.
Manual vs Systemised
Many smaller and start up businesses can get by quite satisfactorily with manual systems and there is nothing wrong with using a manual system. The local gardener can give his customers a hand written invoice and will tend to pay his bills from the accounts mailed to him so there is no need for a debtors or accounts payable function. The same is true with payroll.
Gone are the days where you had to pay for accounts receivable, payable, and payroll inclusions even if they weren't needed. Now you can pretty much choose the functionality needed for your own business process and eliminate the historical over engineered (and over priced) solutions provided by the previous duopoly.
What you need now compared to what you might need as your business grows
Some of the core functions may not be needed immediately but if you plan to grow your business then you should also consider whether the functionality of your accounting system will also need to grow. Some of the accounting systems have a seamless transition from the basic cashbook level product through to the business enterprise level.
For example MYOB provides a basic cashbook solution called Banklink. This is a simple cashbook that links directly to your business bank accounts and is controlled by our accountant so they can prepare your BAS and end of year tax reports. However, if you want to expand your business to include payroll then you will need to change to a completely different system altogether. Even if you stay with the MYOB product range their next level product is completely different than Banklink. Similarly if and when you progress to an enterprise level type solution then the MYOB product for that scale of business is completely different again.
Xero on the other hand provides an identical accounting product through its entire product range.
If you are not great with learning new systems and want a seamless transition through your growth then the MYOB product range might not be suitable for you even if it is the ideal solution for your current business scale.
Online, local, or hosted?
This is a common conundrum and will usually come back to how you operate your business and your personal view on internet security. Bear in mind, not all online products are actually online and not all businesses need or want true online access. My personal view is that if you cannot access your system from any device any time through the internet then it is not a true online product.
For example, Xero can be accessed from an internet café in Paris while you are on holiday by simply logging in through the website. MYOB AccountRight cannot be accessed from any device without having the appropriate software installed although the file can be accessed from any computer with the software. This is because the MYOB file is hosted but you still need their software to access the hosted file even if it is stored online. Other systems like the older versions of QuickBooks not only need the software to be installed locally but also need the file you are trying to access to be stored on the same computer.
The question to ask yourself is do you need to access your system when you are not in the office? If the answer is "yes" then you can further narrow your choices down to those that are truly online systems. If the answer is "no" then a hosted or stand alone system might work for you.
Local back up or cloud only?
Here is the most subjective factor to consider when making your decision. Subjective because everybody tends to have their own view on the stability of the internet and everybody has a different appetite for risk. The laissez faire amongst us will say the internet won't crash and if it does I will cope, while the Machiavellian types will never believe that data is secure or safe online. Irrespective of your view, there is a system that will help you sleep comfortably at night.
Some online only providers do not provide any offline back up or access. With Xero, MYOB Essentials, Reckon One, Freshbooks, and Phoenix Live for example you will not be able to access your system if your internet crashes or if their internet crashes because there is simply no scope to work with these systems offline. MYOB AccountRight, QuickBooks, and Reckon Hosted products all allow you to take offline back up files and these can be accessed on any computer with the appropriate software installed even without internet access. Unless you are predominantly using the systems offline though your local file will only be as complete as your last back up.
How to Work Out What Each System Offers
There is a lot to consider when deciding on your accounting system and there are an endless array of possibilities