When an entrepreneur decides to start a small business, accounting software usually isn’t the primary concern. A company thrives on making sales, so product development, pricing and a strong customer base are the main focus. But what happens when the company starts making money? If an accounting process isn’t already in place, there’s no way to keep track of inflows and outflows, and the entrepreneur could be looking at a budget deficit. For small business owners, accounting software is critical for a strong bottom line. Without it, the company’s finances are absolute chaos.
Accounting Software Keeps the Company Finances Organized
Without accounting software, company’s must rely on spreadsheets (or worse — pen and paper). Obviously, this system can lead to a lot of issues down the road. For one, spreadsheets can’t automatically track bank and credit card account transactions, which is a crucial part of maintaining accurate books. That means this process must be done manually, taking much more time and leaving room for human error.
Accounting Software Helps Protect the Company From an Audit
Most people immediately think of the IRS when an audit is mentioned, but there are actually several types of audits. Tax audits are common when the IRS flags a tax return because something seems unusual. When a company is audited for taxes, they’ll need to provide detailed information that supports the tax return. Obviously, this information is much easier to find when it’s organized neatly in a software program. Likewise, it’s easier to prepare an accurate tax return in the first place when there are organized reports that list income, expenses and other items in an easy-to-read format. When utilized correctly, accounting software generates these reports at each month end and year end.
In addition to tax audits, publicly owned companies are required by law to provide accurate financial statements to investors. These reports are reviewed by an auditor, who determines whether Generally Accepted Accounting Principles (GAAP) have been met and grades the company’s accounting practices accordingly. Obviously, it’s much easier to prepare accurate statements with accounting software versus manual accounting.
Most Entrepreneurs Don’t Have an Accounting Background
Entrepreneurs also need to consider that they most likely don’t have a background in accounting. Whether they’re performing the accounting functions themselves or overseeing an employee’s work, it’s difficult to make sure the task is done correctly without sufficient accounting experience. Accounting software is much easier to learn and implement. Business owners can hire a CPA to help set up the software and explain daily tasks. The owner or employee then performs the tasks, and the CPA can check in every quarter to prepare tax returns and make sure entries have been performed correctly.
A Typical Small Business Example
Jared is an HVAC technician who decided to open his own contracting company. He has the HVAC experience and a strong customer base, but he lacks any accounting experience. He decides to save the money by performing the accounting himself. He does an excellent job of balancing the bank account each day, but he doesn’t properly organize transactions by category. He estimates his quarterly tax payments based on his income projection for the year.
The first year is a great success for Jared. He makes much more than he projected, and he’s worried that he may owe more taxes than he’s paid. He asks a CPA to prepare his tax return for the year and discovers that he owes a large amount of taxes, as well as a penalty and interest. The next year starts off slowly for Jared, and he struggles to keep the business afloat while paying last year’s tax debt. He decides to purchase accounting software and enlists the CPA’s help with the setup. Now that his finances are organized, he’s much less stressed and has more time to perform his other duties as owner of the company.