One of the questions a self-employed person asks when they get serious about maintaining their books is what software to use. QuickBooks, Xero and Freshbooks are the top 3 accounting online solutions in the market. The best way to understand accounting software is to first understand the components that make it. Every accounting system is made up of 5 parts namely:
- Inputs: Inputs are the documents that are gathered from your business. For example you might use harvest, a time tracking software. You should be sure that your time tracking software integrates with whatever system you choose.
- Processes: Whatever system you choose you have to be sure that your accounting software is able to accommodate your internal processes. If two people need to be logged on at the same time, then you will need a system that supports multiple users. If you are using a perpetual inventory system where you keep track of inventory levels as you go (versus periodic where you count inventory once a period), you will need a system that accommodates that process. In short, define your processes and what information you will need to capture, then, be sure your accounting system can capture the required information.
- Outputs: what kind of reports can be generated from the software? Does it capture the level of detail you need? Most organizations will need financial statements (the balance sheet, income statement and statement of cash flow) as well as internal reports that management can use to make decisions. The software should be capable of generating the main reports you need.
- Internal control: What checks and balances do you have in place for catching theft, mistakes and errors. There should be safeguards provided by the software to trace back transactions. What behaviors would you like to encourage by enforcing certain procedures. Can the accounting system accommodate the processes you have in place?
- Storage: Where will your data be stored? How do you handle storage when working with a remote/virtual accountant? Does the data need to be accessed from different websites? You can choose to store your data on your desktop or you could choose a cloud solution if you need to access data from multiple websites.
Steps to choosing an accounting software
#1 Break down your business processes
The first thing you should do before choosing an accounting software is to break down your business into the processes that will be handled by the software. See an example for an online business below:
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A sample business process – whatever software this business chooses should accommodate all processes |
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| Inputs | Processes | Outputs | Checks & Balances | |
| Accounts payable | Bills, purchase orders, invoices, etc. | Employee places order, purchase order is entered in software, invoice is sent to AP, Order is received and verified, AP sends payment. | Checks, Purchase Order reports, vendor reports, purchase order received, bills paid, Cleared checks report. | Ability to allow different people log in to perform tasks and track what purchases have been made. |
| Sales | online form, verbal order | Customer calls or orders online. A record of sale is made, Sales Receipt is generated and sent to customer. | Sales receipt, sales report, sales by item sold. | Ability to track duplicate charges, deleted transactions, etc. |
| Bank Reconciliation | Bank statements, online feeds | Reconciliation report | This is a check & balance. | |
| Payroll | Employee Contract | Employee information is entered after hiring, payroll clerk runs payroll. | Pay checks, payroll reports, liability reports | Paycheck matches employee contract. |
| Sales Tax | Produce sales report | Generate sales tax liability from product sales. | Sales tax liability report | |
#2: Do an online search for possible solutions:
Most people are going to come up with Xero, QuickBooks or Freshbooks.
#3 Compare the features to your processes
Once you have narrowed your search down, compare features. In most cases you will find out both Xero and QuickBooks meet the needs of the self-employed individual. Do not be afraid to call the vendor to verify the software does have the needed features.
#4 Compare costs
Once you figure out if your software of choice and handle all these functions you compare costs. It all boils down to how much you’re willing to invest in the accounting system?
The one thing to consider when comparing cost is to know that desktop software should typically be upgraded at least every 3 years. Using this logic a 3-year subscription for cloud software is equivalent to the price of an off the shelf software. So if an online subscription is $30 a month, you are paying the equivalent of $1080.
On the other hand, if you are tight on cash, incurring a monthly fee might be easier on the cash flow.
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Advantages of Cloud Solution QuickBooks, Xero and Freshbooks