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How to choose accounting software

How to choose accounting software

Are you looking for new accounting software?  Do you need help in making that decision?

You could be a start-up or you could be a mature business who realises that your existing accounting software isn’t doing what you need it to do.

Many businesses get recommendations from their accountant.  In some cases, the accountant recommends something that suits the accountant but may not suit the client or else may be a solution that works well for another client but may not be right for a different business.

It would be better to identify what you need and then compare the options before deciding what to buy.  You are likely to have this software for a long time so you don’t want to have regrets.

Over the course of my career in industry, consulting and in accounting practice, I have done a lot of work helping both small and large companies, select and implement accounting and operations software.

If you are a startup or smaller business, you may think that you don’t have a lot of choice – you will just have to buy a cheap solution.  That’s not the case.  Even in the most basic, entry level software, there are differences that could make life easier or more difficult and it’s better to understand what you need and what the various packages offer.

In this article, I will guide you through the approach that I use in helping clients identify the accounting software that is best for them.   I focus on a few key areas.

Integrated or Standalone Accounting Software

The first question relates to any other software that you already have in your business.  If you have software to manage your operations – whether that be manufacturing, distribution, retail or something else – then you should investigate if there is already an accounting package that will easily work with your operations software. For this situation, that will usually be the best solution.

Accounting software is now a mature product and core functionality is common to many packages.  I feel strongly that accounting software should support the business.  For this reason, a key philosophy to adopt is to let the needs of the business determine the type of accounting software needed.

I am going to assume that most readers of this post will be looking for a standalone package.  Finding accounting to suit different operations software will be much pretty much specific to each business

Accounting software functionality

The key area to spend time on is functionality – what I mean by that is getting clear on what you want the software to do.  Every business is different and different owner managers can differ slightly in how they run the business so you need functionality to support what is needed.

Sales

How do you make sales?  Do you have specific items that you sell repeatedly or do you have large one-off unique items?  Do you buy and sell in one currency or do you buy and sell in many currencies and need to manage foreign exchange?  Do you have repeat or recurring invoices where it would be good to automate the repeating elements.

Creating Sales Quotes

Do you create quotes for customers which you hope will be converted to sales invoices later on?  If you need that and the system can support it, just how easy is it to do.

Purchases Invoices

The requirements here can be similar but opposite to sales invoices.  Can you have recurring invoices?  Do you manage specific parts and will you be buying by part number?  Will you have to use your suppliers part numbers or you own in-house part numbers.

Purchase Orders

Do you want to create purchases orders and match these to supplier invoices as they are received?

Completing Bank Reconciliations

Most systems support bank reconciliations now.  How well is that done?  Can you import the bank statements into the accounting software to automate the reconciliation?  What sort of reports are available?

Tracking Stock items

Do you want to track stock items ie the system keeps track of stock and each sale will reduce stock while purchases will increase stock?  Will you want reports showing items on hand and the value for those items.

VAT Compliance

How well does the accounting system handle VAT?  Can it handle both allowable ways of handling VAT – the cash basis or the invoice basis?  What about invoices that come in late – ie June invoice that comes in after the June VAT return has been submitted? Are they treated properly?

Is there good reporting and a good trail to support a VAT audit if required?

Tracking margins on sales

Does your business have fixed cost prices for each item sold which would allow you to calculate margin either by invoice or by line item within invoice.

Supporting Budgeting

Do you want to set budgets and then compare actuals to budgets.

Importing and Exporting Data

Do you want to import data from other systems. For example, import your bank statements or import a listing of sales invoices for other software.  Maybe you have time tracking software for service personnel and you want to link that to your accounts.

Do you want to be able to export data – maybe for analysis in excel?

Locking Accounting Transactions

When you have finalised your accounts you don’t want late transactions to get added into closed accounting periods.  Will you be able to lock transactions once you have finalised the accounts for a specific accounting period.?

Accounting for Jobs or Departments

Do you want to gather income and/or costs by jobs or by departments?  For example, a building conractor might want to be able to see the revenue and costs for each individual job.   On the other hand, a larger business may want to report on costs by department – maybe sales, manufacturing, distribution, admin etc.

Creating/Restoring Backups

Things can, and do, go wrong so do you want to make makeups and be able to restore those backups.  How easy is that?  Where will be backups be stored?

Remote Access

Will you want to give anyone remote access – an employee at another site or maybe your external accountant?  How easy is to do this?

Financial Reporting

What sort of reports do you want?  The basic reporting includes Profit and Loss, Balance Sheet and Lists of customer balances and supplier balances.

Do you want to have flexibility on reporting periods?   Do you want to be able to compare actual with budget or actual with equivalent period last year?  Do you want to give department managers figures only for their own department?

Drill down in reports

A very useful feature that many, but not all, accounting software has is the ability to drill down when working with reports.

For example, if I am reviewing a Profit and Loss, I might think the travel amount looks high.  With drill down, I can click on the travel number and it will open up a new window which will show me the makeup of the number.  I may be able to drill down on a number in that window and eventually drill all the way down to the lowest level transactions that make up the total number

I find that a very useful feature and would be reluctant to work with software that doesn’t does it well.

Correcting Transaction Errors

If you do find something wrong, how easy is it to correct?

Some systems will not let you edit a transaction, instead forcing you to enter a reversing transaction and then a new transactions.  I find this very cumbersome and it clutters up the database.

How easy is it to distribute accounting reports from the system.

Can you email them?  Can you export them to excel or csv formats?  Can you push them out to pdf or MS word?

Audit Trails

If somebody does something wrong, can you easily find out what happened and can you identify the user responsible so that you can train in how to do it right?

Does the system provide an audit trail that can be queried by date, by user or by account type?

How does the system handle Accounting Periods

How does the system deal with the end of an accounting period?

Most modern systems are date driven but some older systems are period (month) driven.  The problem with the older systems is that you may be still finalising last year but cannot move on properly to the new year until last year is fully closed off.  It just makes reporting for the first few months more difficult until the last period is closed off.

 

There is a lot of features listed above.  They may not all be relevant to you.  What you need to do iis to look at your own business and understand what functionality your business needs and then you need to match that to what the software delivers.

User Experience

How easy will it be for users to work with the system?  If its awkward or cumbersome, users will find it harder to work with and this can lead to inefficiencies.

What do the screens look like?  How easy is it to navigate around the system?  The only way to know this is to play around with the system.   Talk to other people who are using the system, if you can.

Does it look like you would need to be an accountant to use it or is it easy to use, with little or no jargon.  Will you be able to run your favourite reports or will you always have to rely on accounts staff?

Quality and Form of Support available

What happens if you have a query or something goes wrong?  Is support readily available?  Is this support by telephone or by email? How much does it cost?  How responsive are they – will you be long waiting?

Cost of Ownership

When buying any software, you should always consider how long you will have it and what it will cost over that time-period.

Typically, you would want to have it for at least 5 years. What will the total cost of ownership be?

This will be made up of the upfront cost.  Then add in support cost over the full life of the software.   Will you have to invest in additional modifications or customisations?  Will you have to invest in additional hardware?  Will there be obligatory updates that you will have to buy?

Add up all of these costs to determine the total cost of ownership for the lifetime of the software.

Technology Platform

Do you want software that runs on desktop or on the cloud?

The cloud comes will a lot of advantages but may have disadvantages.  If you have slow broadband it may not suit.  Some book-keepers find data entry on a cloud much slower.  Against that, some cloud solutions have data import facilities that overcome the data entry issues.

Also, it’s good to pay attention to the underlying software used to write the product.  There are still software packages out there using older database technology.  They can be harder to work with and can hit size limits – sooner than you expect.

I came across a client a couple of years ago who had database size problem because they sold a lot of small value items.  It was the number of transactions that counted and not the value so they quickly ran into database size problems.

Single or Multi User Accounting Software?

Will you be a single user site or a multi-user site?  If there are multiusers, does that put any restrictions on other users.  For example, I am working with a client and regularly, the software will prevent a user doing something – running reports or procedures – because another user is going something else in the system.

Who should be involved in the software selection decision?

The people who will be working with the software on a day to day basis should be involved.  If you have some staff with more experience with other software you may give more weight to their opinion.  Your external accountant may be familiar with many different types of software and may be able to help.

The amount of effort you put into the software evaluation should match the amount of money you will be spending and the consequences of getting the decision wrong.

Evaluation Matrix for software selection

At the end of the day, you will have done your research and there may be a lot of factors to consider.  You may feel confused but you want to make a decision.

What I find helpful in these situations is to create an evaluation matrix and use that to guide the decision.  Have a read of another of my blog posts about creating a decision matrix.

What I find is that the evaluation matrix will help you to organise your thoughts and to identify your priorities.  It will not make the decision for you but it should trigger a discussion about just how important some elements are and it’s important to have that discussion.

At the end of the day, you are going to be living with the software you select for a number of years.  Unless your business is very straightforward, the chances are that some software will work much better for you than other software.  It’s well worth investing time up front to get it right.

I would love to help you identify the best solution for your business.  We hope you found this blog post helpful and wish you all the best in your journey to find the best accounting software for your business.  If you have any questions or comments, please feel free to contact me on 086 2323525 or by email at jim (at) accountsplus (dot) ie.

Do you know much it costs you to open your doors? Predicting Business Costs.

A friend of mine, a retired banker with lots of experience dealing with owner managers, has a phrase he uses about those business owners that he feels are in control of their business.  What he says is that ‘they know exactly how much it costs them to open their doors in the morning.’  Are you one of those businesses?  Many people think that this is a very difficult thing to be able to do, but in fact it’s not.

Overview

To know what it costs to open your doors, your first need to know what you will be doing when you open the doors.  So you need to have a good sense of what the activities will be like the day or week.  In the short term – ie next few weeks.

In most cases that will not be too difficult.   You may have an order book that will tell you what will ship the next few weeks.  If its retail, you should have data over the last few years that will give good guidance on what happens at this time of year.

Once you know what’s going to be happening, then you should be able to put costs on that.

The importance of a budget

A good business will prepare a budget of some sort at the start of the year.  When preparing that budget, the business will develop assumptions or rules about the various costs.  You will use those rules throughout the year to help you anticipate what will happen and to convert the expected activity into reasonable cost estimates.

Direct Costs

If it’s a factory making products, the cost of the product will be made up of direct costs and indirect costs.

Direct costs are those costs that are easily linked to the product.  If I am making a chair for example I can see the timber that went into that chair, I know how much timber was needed and I know what it cost. The cost of timber in the chair can be directly linked to purchases of timber.

Similarly, if it’s a convenience store, I can say that for every item that I sell, eg a litre of milk, then I must buy in a litre of milk in order to have it to sell.  So the cost of the litre of milk is a direct cost.  If I sell 10 litres I have to buy 10 litres.  If I sell 200 litres then I have to buy 200 litres.

Labour can also be a direct cost.  Even though, we can’t point to a chair and see the labour that went into making it, we might know that a workman might make 10 chairs a days.  So if we have to make 100 chairs then we can calculate that we will need 10 workmen to do that.  As we know what a workman costs, we can predict our labour cost.

Indirect costs or Overhead Costs

These are costs where it is harder to make the link between the individual item sold and the costs that the business incurs. For example, if I have a convenience store and I pay €1,000 rent per month.  I cannot link the rent to any particular sale – there is not a direct relationship.  I may sell € 5,000 worth of goods on a Monday and € 15,000 worth of goods on a Saturday but the rent cost for each day is the same.

These costs that are hard to link to a product are often called overhead costs. I think of them as costs that are hanging over the business and that vary little for different levels of activity.

Indirect or overhead costs will include marketing costs, premises costs, office consumables, staff travel, professional fee and financing costs.

In some businesses, eg a convenience store, labour costs are more of an overhead.  I will have to staff my shop to a certain level even though sales for can fluctuate.  For example, a restaurant will have wait staff on in anticipation of trade but the level of trade may vary significantly.  For these businesses, we have to plan on having staffing levels that will not vary much will activity.

When you are doing your budgets or projections at the start of the year, you list down all the different types of overheads that you have and you put in your best estimate of what is going to happen. In that way, you pull together some sort of projection of your P&L as to what your costs are going to be.

Applying this understanding of costs

As you progress through the year, you know from your order book, or from your activity plans, what’s likely to be happening in the weeks ahead. With this awareness, you are likely to start asking yourself- “if my sales go up – what is going to happen to my materials?”

You can then predict that if your sales are going to go up by 20%, your materials might go up by 20%. If your sales go up by 20%, but the mix of sales differs, your materials mightn’t go up in exactly the same way, but if you understand your costs and you understand your sales, you will have a very good idea of what is going to happen to your materials.

Similarly, if your sales are going to go up and your activities are going to go up, you are going to have a very good idea of what is going to happen to your labour.   Think back to the example about the chair making factory.

So as a good business owner/manager, you will have a sort of sense of what is coming at you and you will be quickly able to turn that sense into rough and ready figures – but reasonably accurate rough and ready figures.

Finally, you will be able to run through your overheads – certain overheads will not vary at all – rent for example. Other overheads, such as electricity, may vary.  If you are running machines for longer, then you are likely to use more electricity.  While some overheads are reasonably constant, there are other overheads that you will need to tweak.

You know what is happening in your business and you should be able to estimate what is likely to be happening to your overhead from that. You can do that very quickly, you can do rough numbers or you can do it a bit more precisely. For most people, it is enough to be able to do this roughly.

Building your knowledge of the business

But how do you develop this knowledge? – That is the question I am most often asked. There is definitely an element that comes from experience, but even with the experience, it all goes down to understanding the accounts and the information that you already have about the business.

If you prepare accounts every month and you spend some time understanding those accounts, and even better, if you have what I call a feedback loop, or a feedback control, you will quickly improve you understanding of what is happening in the business.

The feedback loop

The feedback loop can be summarised as Plan – Act – Review – Adjust.

We’d say that at the start of the year you make a PLAN for the business, and then you go ahead and take ACTION to deliver on that plan.

Out of that action you’re going to get results, so you look at the results, you REVIEW these results. When reviewing, you ask yourself – ‘Did what I expected to happen, happen?’, ‘Was it different?’, ‘Why was it different?’.  As you review these results you’re going to get learnings. You absorb and apply those learnings and then you ADJUST your  plans for the next period.

Applying Feedback Loop to Management

Putting all this together, you start off with a budget or a projection (PLAN)  , you run your business (ACTION), you prepare your accounts and then you go back and see how do my accounts compare to my original budget. What was different? Aah, I misunderstood that or something changed. (REVIEW).  Through this review process you develop your experience.  Then you take that learning and revise your projections (ADJUST).

And that is how you develop your learning.

And that learning helps you develop a good understanding of the costs of your business, and how they relate to the activities of your business.   Then you will be one of those business owners who knows how much it will cost them to open the doors of their business.

If you have any questions, or items needing clarification, feel free to drop me an email.  Remember, we’re available if you want to improve your financial control expertise.

Putting your accounting knowledge into practice: an engineering perspective

What should a business owner do to make sure he or she has the best possible information at his/her fingertips?

We’ve already discussed how to identify the key transactions of the business and also how to record the information that’s important to your business and pull it into insightful reports. Now let’s look at how you put this all into action.

Making your finances work for you

So, with your understanding of the financial basics, how do you start putting this knowledge into action and making your finances work for you?

  • Firstly, you must have systems that are appropriate for the business and decide who’ll be responsible for the recording of information. The methodology for this and the level of detail you get into will depend on the size of the business.
  • Secondly, you must list the types of reports you need and what types of information and analysis will help you prepare these reports easily. This involves adapting your accounting system to capture the information needed and making sure it’s easy to pull the reports from the system, no matter how simple or complex.
  • Finally, you need to have a routine to help you check the information. You’ve no doubt heard the hackneyed phrase ‘garbage in, garbage out’ – it’s a truism that’s as applicable for accounts as anything else. When someone gives you financial information, you need to know how reliable this information is.

So how do we sanity check your reports? And what should you be looking for when carrying out these reviews?

Using your reports in the right way

In my experience, when business owners get their financial reports, most of them jump straight to the profit and loss report. However, I’ve learned that it’s more important to start with the balance sheet.

To explain why, I will ask you to remember the ‘Wile E Coyote and The Road Runner’ cartoon that used to be on television many years ago…

The road runner was always speeding along a road, with milestones at the side. If he first passed the 5km mark and later passed the 15km mark, he knew (and we knew) that he’d travelled 10km in total. However, what if the 15km had been mistakenly put in the wrong place, say at 14km? The roadrunner would think he’d travelled 10km when he’d actually only travelled 9km!

By relying unquestioningly on the miletones, our road runner is misinformed and doesn’t understand his performance correctly.

Accounts are similar. The balance sheets provides the milestones and the profit and loss is a measure of the progress or profitability. If you get the balance sheet wrong then the profit and loss will also be wrong.

I recommend that businesses start by looking at the balance sheet and ask if the figures for the various assets and liabilities look reasonable and reliable.  If they’re reasonable then the profit and loss is also likely to be reliable.

Checking your balance sheet

So, how do we check the balance sheet?

We check the bank accounts by comparing them to the records that the bank has – the bank statements – and being sure that we understand any differences. The only difference we should have are timing differences; e.g. we pay a cheque but it’s not cleared at the bank yet. Accountants call this checking process bank reconciliation, but what you’re doing is simply proving your records are correct by comparing them to another source.

We should also look at customer balances. I find that most business owners are very much on top of who owes them money. If I give them a list of customer balances with something wrong then they’ll quickly tell me. So check your customer balances, look for anything that looks dubious and correct when you find something that needs correcting. Remember, if a customer balance is wrong then your sales figure could also be wrong.

Lets move on to the supplier balances. Again, most business owners are very aware of who they owe money to, so they will quickly spot anything that’s wrong and we can fix that. Again, if supplier balances are wrong, then your purchased costs could also be wrong.

Your inventory or stock number is a key figure in your accounts.  If your inventory is overstated, this has the effect of making it look as if you got stock for free so you profit will be overstated.  If your inventory is understated, then it looks as if you lost stock somewhere so your profits will be understated.   It is very important to get your inventory or stock number right.

Finally, we can quickly look at the other assets and liabilities that might be in the balance sheet and check if they look ok. For example, if there’s machinery or equipment listed in your assets, do the balances look ok? If there are tax liabilities, do those amounts seem right?

Once you are happy that your balance sheet is reliable, then you can rely on the related profit and loss account.

Getting your head around shareholder funds

There’s one section of the balance sheet that sometimes confuses clients. This is the section called shareholder funds or sometimes called owners equity/capital. In essence, this section represents the value of the business to the owner.

To understand shareholders funds, you need to ask the question, ‘If the business makes money, who does that money belong to?’ The answer is that it belongs to the owners.

So the difference between what the business has (the assets) and what it owes (the liabilities) represents an amount owing to the owners. We think of it as a liability to the owners and we call it shareholder funds (or owners equity) for companies or owners capital for non-company businesses.

Shareholders funds are reduced by moneys taken out of the business as dividends or drawings.  So the difference between any two balance sheets represents the profits made by the business in the period, less any profits taken out in the same period – in other words, the profits kept by the business.

Check your reports regularly

Your reports are a real goldmine of information. So I recommend to my clients that they get into a routine of regularly – at least monthly – reviewing and checking their reports. By regularly looking at your reporting, you learn as much as possible about the business and can quickly identify where action may need to be taken.

If you are familiar with the ‘Lean thinking’ approach to business, you may have heard about the three voices in any business that give feedback, helping you to manage and improve.

  1. The first voice is the voice of the customer, giving feedback on the quality of the service your business is supplying to them.
  2. The second voice is the voice of the people working in the business. They see up close what’s actually happening and are often an untapped source of information regarding how well the business is operating.
  3. The final voice is the voice of the process. We access the voice of the process by identifying the key measurements that let us know how the process is doing.

Your accounts should be looked at as a voice of the process. When your accounts are designed and implemented well, they provide extremely valuable information about the performance of the business.

So, rather than thinking of accounts as a compliance-type chore, think instead of the rich information that’s hidden within your accounts – and consider how best to access this.

Getting in control of your business performance

When you understand your accounting basics, the value of good reporting and the insights provided by your business numbers, you’re in real control of your enterprise.

And when you add the benefit of working with an experienced, process-driven accountant, you’ll soon start to the postive changes and improvements in your sales, cash flow and the profitability of your business.

If you’d like to know more about working with AccountsPLUS, and applying our ‘engineer’s perspective’ to the machinery of your accounts, please do get in contact. We’d love to help you get complete control over your finances and business performance.

Get in touch to arrange a meeting with the AccountsPLUS team