As a new small business owner, maintaining your finances is pivotal.
If juggling business expenses and finances leaves you feeling lost, you’re not alone. According to Business Insider, the number one reason that over 80% of small businesses fail is cash flow mismanagement. This is evident from the fact that almost 20% of businesses fail during their first 12 months and approximately 50% of the businesses last over five years. Without a steady cash flow, there is no business.
Bookkeeping and accounting software is a god-given during such a period. However, many people don’t know the difference between bookkeeping and accounting software, let alone choose the right one. And the plethora of options available online just worsens it.
But fear not. This article explores what bookkeeping and accounting software are, and the key differences between them.
Understanding Bookkeeping Software
Bookkeeping software helps record day-to-day dealings like sales, purchases, and expenses.
Its main purpose is to track income and outflows so you can generate financial statements like profit and loss reports. Benefits of using bookkeeping software include automating the recording of transactions, online payment processing, organizing finances in one place, and saving time on manual tasks.
This gives you up-to-date visibility into the financial health of your business.
Understanding Accounting Software
Accounting software analyzes historical data to provide financial insights and projections.
The goal is to help with forecasting, tax planning, and identifying opportunities to reduce costs and improve profitability. Moreover, according to The Practice of Now 2020 report, over 56% of accountants agree that accounting technology helps improve their productivity. Some even agree that it helps improve retention rates and stay updated with their client’s requirements.
Some key benefits of accounting software include the ability to forecast cash flow needs, optimize taxes, and identify issues early so you can correct them. Consider bookkeeping as capturing financial data and accounting as making strategic sense of the captured data.
Key Differences
Now that you know the basic purpose of each type, here are the key differences:
Automation and Efficiency
According to Mango Practice Management, bookkeeping often involves manual data entry, endless spreadsheets, and calculations, which can be time-consuming and error-prone.
In contrast, accounting software automates many of these tasks, reducing the risk of errors and saving valuable time. With features like bank reconciliation and automatic expense categorization, the software simplifies the bookkeeping process, allowing you to focus on strategic financial decisions.
Scope of Tasks
While bookkeeping primarily focuses on recording transactions and maintaining financial records, accounting software offers a broader range of functionalities.
From generating financial reports to forecasting cash flow, accounting software provides comprehensive tools for managing your finances effectively. By merging various tasks into one platform, the software enhances the efficiency and accuracy of your finances.
Analysis and Reporting Capabilities
Simply put, bookkeeping is transactional, like data entry, whereas, accounting is analytical.
What separates accounting software from bookkeeping software is its ability to generate detailed financial reports and perform in-depth analysis. With customizable dashboards and real-time insights, accounting software allows users to make smart decisions based on accurate data.
Whether you’re tracking expenses or monitoring revenue trends, the software provides crucial insights into your financial performance.
Scalability and Adaptability
As you scale your business, your financial needs grow exponentially.
While bookkeeping software may keep the records accurate, accounting software helps interpret them. Moreover, accounting software offers scalability, allowing you to expand your operations without outgrowing your financial tools.
Whether you’re managing a small startup or a large corporation, accounting software can adapt to your changing needs, providing flexibility and scalability as your business evolves.
Cost Considerations
Bookkeeping is typically done daily or weekly. While manual bookkeeping may seem cost-effective initially, it can be time-consuming and labor-intensive in the long run.
Accounting software, on the other hand, offers a cost-effective solution for managing your finances efficiently. With affordable subscription plans and customizable features, accounting software provides excellent value for money, allowing you to invest in tools that streamline your financial processes.
Which Software Is Right for You?
Whether you need bookkeeping and accounting software depends on your business size and financial management requirements.
But it isn’t just limited to software, you also require skilled accountants to handle it. Experts recommend hiring accountants who can build relationships, manage multiple projects, give business advice, and have experience besides accounting. 57% of the professionals believe that tech literacy is the most significant skill to look for when hiring accountants.
Many small businesses can start with just bookkeeping software to track income and expenses. But as you grow, accounting software becomes more useful for forecasting and identifying opportunities. Choosing the ideal software depends on your personal needs.
When considering software, ask yourself:
- What’s the size and complexity of my finances? Are you managing personal finances, a small business, or a large organization?
- What tasks do I need help with? Do you need basic transaction recording or deeper financial analysis?
- What’s my budget? Software pricing varies significantly, so determine your comfort level.
Many websites offer software comparison tools and free trials. Don’t hesitate to seek professional advice from an accountant if needed.
In conclusion, when evaluating bookkeeping and accounting software, you must understand your unique business needs.
While bookkeeping and accounting have different focuses, having the right foundations and financial insights will help your small business thrive. Assess your growth plans and financial management needs. For many small businesses starting, bookkeeping software provides enough visibility.
As you grow, layering on accounting software helps optimize strategy. The key is choosing a suitable solution for where you are today and where you want to go tomorrow.
