Businesses of all sizes should be using accounting software to manage their bookkeeping and accounting, and keep their financial information organized. And many are. But we’ve seen that not all businesses choose the right type of accounting software for their business. Picking software that is the wrong fit for your company could mean wasting money on features you don’t need, or struggling to manage complex finances in a platform that’s too simplistic. So what is the “right” accounting software for startups?
Many early stage startups use spreadsheets as DIY accounting tools to handle their first transactions. Spreadsheets are inexpensive and easy to use, but they are not a type of accounting software and they can only handle very basic finance records. As your startup’s transaction volume increases and you have more complex accounting needs, you’ll need to make the switch to using accounting software.
There are three main types of accounting software that offer different features and services; only one is a good fit for most startups. Let’s take a look at the different types of computerized accounting software, including the best accounting software option for startups, and my advice for founders who are picking an accounting software provider.
The 3 Types Of Accounting Software
1. Commercial Off-The-Shelf Accounting Software (COTS)
There are lots of COTS accounting software options on the market: You may recognize popular online accounting software brands like QuickBooks, Wave Accounting, Zoho Books, and Xero. Unlike more complex software options, which include tools for functions like supply chain management and e-commerce, COTS systems are focused on accounting tasks like recording transactions, organizing financial data, and generating financial statements (like your P&L, Cash Flow Statement and Balance Sheet).
Almost all startups should be using COTS accounting software as part of their financial management process. There are several inexpensive COTS options that suit startup budgets (some even offer free trials to start!), and most COTS accounting systems are user-friendly enough for startup founders to track their own finances.
- Most COTS accounting solutions integrate with popular finance tools, including payroll providers, bank accounts, credit cards, accounts payable, and accounts receivable platforms. This allows you cut down the time you spend on bookkeeping entries by automatically syncing as much data as possible.
- It’s easy to find accounting firms and freelance accounting professionals that have experience working with the popular COTS platforms, and can help you get maximum value from the software.
- Because COTS accounting solutions take a consumerized approach to their accounting software, many offer mobile apps and comprehensive customer support options to help users work with the platform more effectively.
- Some COTS features may not be advanced enough to handle more complex needs as your business continues to grow.
- You’ll still need to work with multiple tools in order to get a complete finance management system, which means paying multiple subscription fees.
2. Enterprise Resource Planning Software (ERP)
ERP software (also referred to as enterprise accounting software) is a more sophisticated platform that consolidates many different functions across the departments of your business. Popular ERP tools and vendors among later-stage startups include Netsuite Cloud ERP from Oracle, and Sage 50cloud, which is part of the Sage Enterprise Management suite. You can use ERP software to manage standard accounting tasks like generating financial reports and performing month-end close, but it also includes more advanced features and tools for warehouse management, customer relationship management (CRM), project management, and supply chain management.
As your business grows from a B2B startup to a large-scale enterprise, your business’s finance and accounting processes will become more complex; this is when you may need to move from COTS to ERP software. ERP software gives a more complete view of how your business is performing and can handle a wider range of finance functions on a single platform.
- ERP software is more holistic than COTS: You don’t need to work with multiple systems to manage functions like inventory and logistics.
- ERP software is built to help manage multiple entities, so if your business is going global, you can centralize records from multiple countries.
- ERP software is expensive: It’s only worth the investment if you’ll be leveraging the full range of functionality.
- ERP software can be difficult to use. You’ll need to work with an accountant who has experience managing your specific software, and, depending on which platform you pick, it can be hard to find someone with the right expertise.
3. Custom Accounting Software
ERP software is advanced enough to cover the financial needs of most businesses, even when the company is dealing with a huge number of financial transactions. However, occasionally, a business will have such specific accounting needs that none of the various types of business accounting software on the market can meet them, for example, if their sales model doesn’t fit existing CRM formats.
If your startup grows into an established business with unique needs, custom accounting software may become the best solution.
- You can build software that fulfills all your business’s specific accounting needs in a single platform.
- No need to pay for functions and tools your business won’t use.
- It takes much longer to develop a custom platform than to set up COTS or ERP software.
- Custom accounting software is expensive to build and maintain.
3 Tips To Get More From Your COTS Accounting Software
For startups and small businesses that are outgrowing spreadsheets, COTS accounting software is the next step to take. There are three pieces of advice I give founders and small business owners who are ready to use accounting software:
- Compare the features and services each provider offers. Two important things to consider are the usability of the software and the level of support you’ll get: Like any new tool, there’s often a learning curve when you start to use accounting software.
- Start using accounting software as early as possible. No matter what stage you’re at, these platforms make it easier to maintain accurate records and give you a solid foundation that helps you scale. Plus, you’ll save the time it takes to manually update your spreadsheets.
- Work with a finance firm to get the full benefit of your accounting software. It can be a challenge to set up your accounting software to best suit your startup, but that’s where finance firms come in. A good finance firm will make sure your system is organized in a way that supports your growing business, including properly setting up your departments and classes and your chart of accounts.