Online Accounting - A beginner's guide
This is the cornerstone stage two text (delete me later).
Chapter 1 - What is Online Accounting Software?
Online accounting has one goal: to help business owners track expenses and sales and facilitate the running of the business. The better a business can track its incomings and outgoings, the more likely it will be to control those two variables to maximise the profit.
Already use desktop accounting software? Go to Chapter 2: How Online Accounting Works
Why is accounting software better than a spreadsheet?
“If accounting is just a matter of tracking expenses in one column and sales in the other, why don’t I just stick with a spreadsheet?”
Before we look at online accounting it’s worth reviewing the merits of accounting software versus the trusty accounting tool of many businesses, the spreadsheet.
The short answer is that as a business grows the number and type of expenses (and sometimes revenue) expand. A sole trader adds staff and starts paying payroll tax, withholding tax, buying computers, office chairs and other equipment, and paying sales tax or duties in other states or countries.
The more entries in the expenses column the harder it is to see your biggest costs. And runaway costs are one of the biggest killers of businesses.
As spreadsheets become more complex, a business owner needs to spend more time keeping it up to date. For example it can take hours to enter receipts line by line into a spreadsheet. The same for copying details of sales invoices from Microsoft Word or typing in bank transactions into Excel. All three processes can be automated when you use online accounting software.
Lost time is the tip of the iceberg. Manual data entry is prone to errors. While it is worth checking all data – whether added manually or automatically – the probability of errors should decrease under an automated system.
Another major reason to move to accounting software is to reduce anxiety in sending information to the tax office. Accounting software automatically calculates how much tax a business should pay and it can electronically lodge tax forms for payroll and retirement or superannuation benefits.
The greatest loss to the business owner is the understanding of what is happening within your business. It is difficult to look up commercially useful information such as comparing sales over several years to spot seasonal differences. Or finding the top customers for a particular product this year compared to the previous.
While these tasks can be achieved using a spreadsheet, accounting programs can show you the answers in seconds and often without an accountant. Accountants and bookkeepers can help you interpret these reports into actions to grow your business, and accounting software makes it much easier to work with these experts.
Accounting software can increase the efficiency of a business through indirect ways too. For example it can connect very easily (and often for free) to many other business programs. You can pull up a list of customers from your accounting program and send them a special offer or your company newsletter through an email marketing app.
Or you may want to pass the details of customers who have bought items from your online store into your accounting program so you can match invoices to payments.
The money you save by sticking with Excel comes at a great cost. You miss out on the business secrets contained in your financial reports and the efficiency and productivity benefits of online software.
The advantage of accounting software
In one sense an accounting program is a complex spreadsheet with a much prettier interface. It has two major functions – recording financial data and creating reports to learn from it.
Let’s look at the types of information worth tracking in your business.
Who owes you money? Have they paid? How much have they paid you this year compared to last year? These questions can only be answered by recording the invoices you send to your customers.
The information contained in sales invoices is critical to commercial survival. If you don’t know when you have asked your customers to pay then you and your business could run out of money. Plenty of businesses fail because they couldn’t manage their cash flow.
Online accounting software can also help you get paid faster through online invoicing.
For more on online invoicing, read Chapter 3: Making and Taking Payments
Bills and expenses
To whom do you owe money? When are they expecting it? Are you spending more money this month than last month? Tracking your bills is essential to knowing whether you are spending more than you’re earning.
Bills show your level of debt to your suppliers. Your expenses show how much you have paid already. Together these items show how much money your business is consuming in order to generate a revenue.
Strong businesses keep a close watch on their outgoings and make sure they don’t rise above a fixed percentage of their business.
Invoices and bills show you the money that should be flowing in and out of your business. Your bank transactions show you the reality. This is where online accounting software really rises above spreadsheet accounting.
Online accounting software can automatically import streams of transactions from banks; these streams of information are called bank feeds. The bank feed updates the list of transactions each day and online accounting software can instantly match deposits to sales invoices and withdrawals to bills. This greatly improves the accuracy and speed of financial reporting over manually updating a spreadsheet.
For more on transactions, read Chapter 4: How Bank Feeds Work
Once your business is large enough to hire employees the level of financial reporting jumps several notches. Now you have to worry about superannuation or retirement contributions, income tax payable, holidays and sick leave.
This complexity is handled easily by an accounting program and very badly by a spreadsheet.
For more on payroll, read Chapter 5: Paying Your Staff
Many businesses maintain simple inventories on spreadsheets. An accounting program makes it much easier to track the number of items on your shelves or passing through your tills.
This simple or periodic inventory is included in most online accounting programs. Desktop accounting programs and online inventory programs have a more advanced inventory that shows which customer has bought an item and how many they bought previously. It can also show seasonal demand – a time of year when one product outsells others – and tell you when an item is running low. They can also track where the items are stored (in shops or warehouses) and other variables such as the age of foodstuffs.
Most businesses need things to operate. Cars and vans, furniture, machinery, buildings and other fixed assets are the cogs and wheels that run an enterprise. They need to be tracked and managed like everything else.
You could do this in a spreadsheet quite easily. Or you could record it in the one program will all your other financial data. Online accounting software again makes a time-consuming process simpler and faster.
A business can choose to store all these details in a collection of spreadsheets or replace them all with a single program. A good accountant can show you how to use the reports in your online accounting software to see incredibly valuable trends.
A sales report might show a new area of demand which will require restocking earlier than planned. An expenses report could reveal a cost blowout that must be reined in immediately.
You don’t need to run any reports to see key trends. All online accounting programs use a dashboard to summarise the most important information on a single screen. This can include the balances of your bank accounts, upcoming sales invoices and bills, a cash flow indicator, and highlighted spending or sales accounts.
Accounting software sounds like a good idea, right? But why use online accounting software and not desktop accounting software which you have to download to your computer?
Online accounting programs are popular because they combine the power of the spreadsheet with a format much easier to use by non-accountants. While many accountants still love the power of desktop software, business owners are much more likely to use online accounting software because it has been designed for them, not an accountant.
While there are many reasons why online software is superior to desktop software, in some cases desktop software is a better solution. To see the strengths and weaknesses of online accounting software jump to Chapter 6: Strengths and Weaknesses.
If you’re wondering how online accounting software works – where is my data stored, how do I know it’s safe? – then continue on to Chapter 2: How Online Accounting Works.
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