When you first launch a business, you need tools to run accounting, inventory, payroll, marketing and so much more. Many businesses start with Excel or Google Sheets. And while that’s a good place to begin, it doesn’t take long for spreadsheets to create more problems than they solve.
Accurate financial reports are essential to running your business efficiently. Spreadsheets are prone to errors—just one bad cell can distort the numbers you use to make important decisions. Here’s a look at some of the data that needs to be tracked to create accurate financial reports and where things start to go wrong.
Start with Spreadsheets, but Don’t Scale with Them
Julie owns Marshall Custom Furniture, a furniture manufacturer that generates $3 million a year in sales. Julie’s firm purchases wood, metal, and component parts, such as handles, to make furniture. Marshall has four balance sheet accounts that require a large number of transactions:
- Fixed assets: Marshall uses many expensive pieces of equipment to make furniture, and a variety of specialized tools. These assets require a large capital investment, so Julie must track each fixed asset, the cost, and the useful life of the item. The fixed asset accounting system helps her plan for maintenance and replacement costs.
- Material purchases: The furniture company also makes a big investment into wood, metal, and component parts. Julie tracks these purchases and verifies the materials that are moved into the production process. This step is important, because it allows Marshall to track the cost of each piece of furniture.
- Inventory: Once a furniture item is completed, Julie tracks the cost of the item, the eventual sale price, and the profit earned on each sale.
- Accounts receivable: Marshall issues numbered invoices with a product description and the sale price listed on the invoice. Each invoice is posted to accounts receivable, which is a critical tool used to monitor cash collections.
Each of these balance sheet accounts has a big impact on Marshall’s financial statements. Marshall handles its accounting using Excel spreadsheets that are maintained on the cloud. Julie’s cloud system allows the documents to be shared, and each document is updated automatically after each change.
The company has a separate spreadsheet for fixed assets, material purchases, inventory, accounts receivable and cash. Less active account balances are maintained in one spreadsheet with multiple tabs. Finally, Julie has a linked spreadsheet that she uses to generate her financial statements (balance sheet, income statement, etc.).
4 Reasons to Graduate from Excel or Google Sheets
As the firm grows, using Excel to handle accounting becomes more and more difficult. Marshall must post more transactions as the company grows, and the problems of using Excel become more apparent over time.
1. Spreadsheets Are Prone to Human Error
Marshall’s accountant must manually input all of the transactions into Excel, which increases the risk of a manual error. Assume, for example, that the accountant is using last week’s invoices to update accounts receivable. The accountant enters a sale amount of “$815”, rather than “$855”. Accounts receivable is understated by $40.
2. Multiple Spreadsheets Don’t Work Well Together
Marshall totals dollar amounts at the bottom of each spreadsheet tab, and the totals of each tab are combined to generate a grand total for each account. The material purchases spreadsheet, for example, has a separate tab for wood, metal, and five tabs representing the component parts. The dollar amount for each tab is linked to the calculation of the material purchases account balance. If one of the seven links is incorrect, the entire account balance is misstated.
3. Knowledge Isn’t Easily Shared
As Marshall grows and the Excel accounting system becomes more complex, it is more difficult to understand how the entire system fits together. Julie, for example, must confirm that each spreadsheet has been fully updated before the ending balances are transferred to her financial statement Excel document.
4. It’s Not Professional
Julie will be required to supply her financial statements to stakeholders, including lenders or a potential investor. Using spreadsheets may communicate a lack of professionalism, since a growing firm should invest in software tools that help the company operate efficiently.
Given these challenges, every business should consider moving toward an automated accounting system.
The Many Benefits of Accounting Software
Here are just a few of the benefits of using accounting software to replace Excel or Google Sheets. Keep in mind this doesn’t include important things like tax preparation, payroll or inventory, all of which can be managed with software like QuickBooks.
- More transactions in less time: Automation cuts down on the average time needed to process a single transaction. If Marshall’s average sale price of a piece of furniture is $400, the firm would process over 7,500 transactions a year to reach $3 million in sales. That would translate into more than 625 sales a month, or more than 144 sales a week. Automation would help Marshall’s accounting department save time and manage the growth in transactions.
- Less risk of manual error: An automated system allows each manual input to post multiple transactions. Think about posting a new invoice, for example. Accounting software can post the invoice information to sales (in the income statement) and to accounts receivable (in the balance sheet) at the same time. The same transaction will lower the inventory balance to reflect the sale. Since far fewer transactions are posted manually, the risk of human error decreases.
- Financial statements automated: Accounting software will take all of the transactions and generate the financial statements automatically. Marshall no longer has to rely on input into a set of spreadsheets to produce financial statements. Julie can also post a budget into the accounting software, and compare the actual accounting results to her budget each month.
Each of these benefits can reduce the time needed to post accounting transactions, and Marshall can spend more time using data to make informed business decisions.
Accounting Software Pays for Itself
Change can be hard. Moving to an automated accounting system requires a financial investment and will require people to learn how to use new software. However, this change is necessary if your business wants to grow and operate productively.
More than four million businesses rely on QuickBooks to manage their finances. Learn more and join them here.