Choosing accounting software

In short

A friend of mine ran a small bakery for six years and kept her books in a shoebox. She told me it worked fine until tax week, when it did not. If you own a small business, you have probably felt a little of that dread yourself. Good accounting software gives you one clear place to see what came in and what went out. Start by writing down what you need it to do, such as send invoices, track bills, or handle payroll. Try two or three products on a free trial before you pay anything, and enter a real month of your own numbers. Ask your tax preparer which programs they can already work with. Pick the one you will open every week. Not the longest feature list.

The whole of it

What it is

I once watched a plumber spend an entire Sunday hunting for one receipt. He was a good plumber, a careful man, and he felt small doing it. You have probably known that feeling, and it says nothing bad about you. It only means the paper is winning.

Accounting software is a program that records the money moving through your business. It keeps a running list of sales, bills, and payments, and it sorts each one into a category. Those categories feed reports that show what you earned and what you spent. Some products live on the web and open in a browser, while others install on one computer. Many small businesses today choose the web kind, since it works from any device and updates on its own.

Think of it as a very patient bookkeeper who never forgets a receipt. It does not replace your judgment. It just hands you honest numbers to use your judgment on.

How it works

A neighbor of mine once told me the hardest part was not the money but the habit. He was right. The software is built around that habit.

You start by connecting your business bank account or card. The program pulls in each transaction as it happens. You then tell it what each one was, like rent, supplies, or a customer payment. After a while it learns your patterns and suggests the category for you, though you still check its work, and you should.

Most programs also let you send invoices, which are bills you give to customers. They can track which invoices are paid and which are late. Some add payroll, meaning the pay you give employees along with the taxes held back from it. Others add tools to track hours, mileage, or stock on your shelves. Each extra feature can cost extra, so pay only for the ones you truly use.

At the end of each period, the program builds reports. The two you will see most are the profit and loss report and the balance sheet. The first shows income minus expenses over a stretch of time. The second shows what the business owns and what it owes on one given day. Your tax preparer will want both.

The numbers, and where to find yours

If you are holding a pile of price pages and feeling lost, you are in good company. The costs come in a few plain kinds. You can learn each one quickly.

The main cost is the monthly or yearly plan fee. Nearly every vendor lists its plans and prices on its own pricing page, and those prices change, so read the current page and note the date you looked. Many plans come in tiers. A cheaper tier may limit how many invoices, users, or bank connections you get, so check those limits against your real month of activity.

Next come add ons. Payroll, card processing, and extra users are often priced apart from the base plan. Card processing takes a small percent of each sale, and the exact percent is set by the vendor or payment company, so find it in their fee schedule. Ask what it costs to export your data if you ever leave. That answer matters more than people think.

Then there is your own time. Setup takes hours. Learning takes weeks. A cheap program that you hate costs more than a fair one you like.

One more place to look is the IRS. Its Publication 583, called Starting a Business and Keeping Records, explains what records a small business should keep. You can read it free on IRS.gov, and it will help you judge whether a program keeps the records you are expected to have.

For anything set by law, such as payroll tax rates or filing deadlines, do not trust a vendor's marketing page. Look at the current rate here: the current figure, which the official source publishes each year. The figure comes with its source and date, so you can check it.

A worked example

Maria runs a small landscaping business with two part time helpers. Last year she kept records in a spreadsheet and lost about four hours every month to fixing mistakes. She decided to compare two programs.

Program A costs 30 dollars a month and includes invoicing and bank connections. Payroll is not included. Program B costs 45 dollars a month and includes payroll for up to three people.

Maria needs payroll, since she pays her two helpers. If she picks Program A, she must pay for payroll elsewhere. Say a separate payroll service costs 40 dollars a month. Then Program A plus payroll costs 30 plus 40, which is 70 dollars a month. Program B costs 45 dollars a month. The gap is 70 minus 45, which is 25 dollars a month.

Over a year, 25 dollars times 12 months is 300 dollars. So on price alone, Program B saves her 300 dollars a year in this made up case.

Now she looks at her time. She values her hour at 25 dollars. Suppose the simpler program saves her two hours a month. That is 2 hours times 25 dollars, or 50 dollars a month. Over 12 months, 50 dollars times 12 is 600 dollars of her own time. Both figures favor Program B, but the time savings hold only if the program really is easier for her.

So Maria signs up for the free trial of Program B. She enters one real month of jobs and pay. She checks that the reports match her bank statement. Only then does she pay. These are her own plain figures, and yours will differ, so run the same steps with your real prices.

Where it goes wrong

I have made this mistake myself, so I say it gently. It is easy to buy the biggest program because it feels serious. Then you use a tenth of it and resent the bill.

The first trouble is picking for features you will never touch. A shop with no employees does not need payroll. A shop with no shelves does not need stock tracking. Pay for what you do.

The second trouble is skipping the trial. A demo video always looks smooth. Your own messy month of numbers tells the truth.

The third is never checking the work. The program guesses categories, and guesses can be wrong. A personal lunch filed as a business meal is still your problem at tax time. Look over your entries once a week. It takes ten minutes.

The fourth is forgetting your exit. Ask now how you can export your records, because locked in data is a bad trap. The fifth is skipping your tax preparer. Some prefer certain programs, and a quick call can save you a headache.

Last, do not confuse software with advice. The program records and reports. It does not tell you what to do with the money, and it cannot promise you a tax result.

Questions to answer before you leave this page

What do I need this software to do in my business today, and what can wait a year? Which two or three programs will I try free, and when will I enter a real month of my numbers into each? Does my tax preparer work with any of them, and have I asked? What is the full monthly cost once I add payroll, card fees, and extra users? Can I export all my records if I decide to leave? Will I actually open this program every week, and if not, what would make me do it?