December 12, 2019 Accounting & Taxes en_US Accounting spreadsheets are a common way of keeping track of your financial accounts. But they come with risks. Learn how they can impact your business. Why small business owners shouldn't use Excel as an accounting spreadsheet
Accounting & Taxes

Why small business owners shouldn't use Excel as an accounting spreadsheet

By Chris Scott December 12, 2019

The past decade has been rough for business spreadsheets.

First, the London Olympics accidentally sold 20,000 tickets to a swimming event that could only accommodate 10,000. According to The Telegraph, “a member of staff made a single keystroke mistake and entered ‘20,000’ into a spreadsheet rather than the correct figure of 10,000 remaining tickets.”

Later, J.P. Morgan Chase lost over $2 billion due to a spreadsheet error, which was compounded because a single miscalculation was fed into other calculations. Ouch.

For many small businesses, Microsoft Excel (or Google Sheets) is the default choice for bookkeeping. This is especially true for new small business owners. It’s been around for ages, there are plenty of tutorials and Excel templates online, and it’s easy to find sample accounting formulas. Best of all, you probably already have it. When you first start your business, it’s the most accessible bookkeeping spreadsheet available.

However, as your business begins to grow, you’ll quickly realize that you don’t have the time to deal with the manual labor required to maintain Excel. You’ll soon be faced with a business decision — should you spend time and effort dealing with MS Excel and the risks associated with it? Or should you transpose all of your business’s financial information into accounting software?

If you’re still on the fence, consider this. Seasoned business owners strongly recommend using automated software for expense tracking, invoicing, and payroll, according to a 2020 QuickBooks survey. On average, 1 in 10 say they waited too long to automate these systems and invested in software too late.

In this article, we’ll outline everything you need to know about how to track your company’s financials accurately. We’ll cover the primary problems with Excel and the risks of using it as an accounting spreadsheet. We’ll also dive into the benefits that today’s accounting software can offer.

The problems with Excel as an accounting spreadsheet

Excel is an ok place to start for small business owners. It’s hard to overlook the access to customizable, simple worksheets that come with free Excel versions. However, owners will soon discover a host of problems that can arise, including the risk of broken formulas, misplaced data, and lost files. And the more time you have to spend in a spreadsheet, the harder it will be to keep your books in order, and the less time you’ll have to focus on your business.

Below are the nine reasons why Excel can be so problematic for small business owners.

1. It’s not generally accepted in the business world

While Excel may work for your small business, it’s usually not accepted by the business world as a whole. Investors may balk at the thought of you using it. So too will your accountant or bookkeeper.

Excel may be useful for data analysts who are crunching numbers and running pivot tables. But company owners concerned with things like logging business transactions in the general ledger and compiling financial statements like balance sheets, income statements, and cash flow statements will eventually run into problems when using the software.

2. Visualization is difficult

As mentioned in the previous paragraph, the Excel format is useful for large amounts of information. But it’s not very helpful when it comes to interpreting the data. In fact, Excel relies on visualization tools like tables and graphs to interpret data.

This could be useful in some fields, but not in business accounting. Imagine you’re a company with $1 million in revenue. Trying to track transactions within categories like accounts receivable or accounts payable could be challenging, especially with rows and rows of data. You can’t expand or collapse an Excel table like you can with accounting software.

3. Lack of historical data

Another issue with Excel accounting spreadsheets is that they don’t store historical data very well. Microsoft didn’t design these spreadsheets to hold years’ worth of information. Companies often lose historical data, which can make it difficult to identify financial trends. Being able to identify financial trends helps companies forecast and budget.

For instance, do you have an influx of sales in December? If so, you may need to hire seasonal workers or ramp up your supply. Not being able to identify trends could cause you to miss opportunities or lose money.

Not only is this frustrating, it could cause legal complications as well. Imagine you’re summoned for an IRS audit only to realize that your company’s spreadsheet template no longer has the information from the year in question. That’s a big problem.

4. Manual entry

The cost of a tool like Excel has nothing to do with the sticker price. It’s all about how much time it requires to manage. Those hours are hard to quantify but crucial to your sanity.

Unfortunately, Excel requires a lot of working hours. You’ll need to enter every business expense by hand. If you practice double-entry bookkeeping, as required by the Generally Accepted Accounting Principles, you’ll need to enter every transaction twice. That’s double the manual data entry.

This means that everything from expense reports to the chart of accounts requires manual entry. Not only does this take time, it increases the risk of error as well. Just how much does this cost small businesses?

Let’s say you have an employee who works part-time completing financial work. Because the employee has to manually enter information into Excel, they work 20 hours per week. Hypothetically, the employee earns $20 per hour and works for 50 weeks out of the year.

In this case, you’re dedicating $20,000 strictly to entering accounting information. Not only is this steep, but it also doesn’t account for the missed opportunity costs that come from not being able to spend that time on sales, marketing, or hiring.

With better tools, the amount of hours spent on accounting goes down, and the time-value cost decreases accordingly.

5. No integration

Similar to the fact that Excel requires a lot of manual labor is the fact that it does not integrate well with your other financial apps, like credit cards and bank accounts.

Your credit card and bank companies may allow you to download your statements in a spreadsheet format, but you’ll still have to import and organize all of this data into your existing accounting spreadsheet. Again, this takes a lot of time and exposes you to risk.

If you make a mistake when entering information, it could take you hours or days to locate the error. Having your transactions import into your accounting software automatically reduces the likelihood of this occurring.

6. Spreadsheets can’t accurately predict cash flow

82% of businesses fail because of cash flow mismanagement. It’s not that these businesses aren’t making money, it’s that it gets increasingly harder to forecast and budget as the company grows. Unfortunately, Excel doesn’t have projection tools for small businesses.

Take Michael Leung’s company SleepyPod, for instance. SleepyPod is a company that manufactures pet carriers. When Leung first started the company, it was easy to forecast how much money the company would have a few months down the line.

But as SleepyPod grew, Leung’s plate began to fill more and more. He was selling to different retailers at different prices, shipping internationally, and managing a growing company.

This made cash-flow more complex, which made it harder to make significant decisions about the business. When he started using Quickbooks, Leung could easily see everything that was owed to the company and everything they owed. Nothing slipped through the cracks.

7. You’ll wind up with dueling spreadsheets

One of the toughest problems with Excel usually isn’t noticeable until it’s too late: inconsistent spreadsheets.

This happens all the time. Because Excel isn’t a central hub for all your accounting, budgeting, and inventory needs, you need to add and change data in multiple places manually.

Businesses of all sizes face this problem. But the bigger a company gets, the more likely they are to encounter it. According to Ventana Research, around 44% of enterprise-sized companies grapple with inconsistent spreadsheets.

The real problem with numbers not adding up is that it’s hard to figure out why. While it is possible to reconcile two spreadsheets, if an error was made a few months ago, it’s challenging to know which spreadsheet is right and which is wrong.

8. Small errors compound

Spreadsheet errors tend to have a waterfall effect.

If even one cell in your spreadsheet is wrong, it can have huge repercussions down the line. Mess up one input with an incorrect digit, or misplaced comma or decimal point, and your spreadsheet will use that to miscalculate other computations.

Back in 2003, a small spreadsheet error cost Canadian power generator TransAlta $24 million. According to The Register, “chief executive Steve Snyder said the snafu was ‘literally a cut-and-paste error in an Excel spreadsheet.’”

Maybe you won’t lose $24 million, but human error costs businesses real revenue all the time. The risk of underestimating your monthly inventory expenses or overstocking your inventory can create enormous problems for small businesses.

9. Spreadsheets don’t scale

Excel might work when you first start your business. But as your company grows, things change — you might change your prices, raise financing, roll out a few new products or hire a few people. Before you know it, your spreadsheet can’t keep up with your business finances.

There are plenty of business challenges you can’t control. This isn’t one of them.

Why switch to modern software?

If you’ve decided to forgo the outdated accounting template known as the spreadsheet, you’ll want to consider switching to bookkeeping software. Quickbooks, for instance, is an all-in-one software that allows you to take control of your business’s finances. Not only will you gain access to things like invoice templates, balance sheet templates, and income statements, you can also:

  • Manage income
  • Manage sales
  • Track bills and expenses
  • Forecast and project future earnings
  • Run payroll
  • Manage tax payments
  • Track inventory
  • Accept online payments from vendors and customers
  • Scan receipts for expenses

Accounting software may cost a bit more than the free OpenOffice versions of Excel, but it’s an investment well worth making. Accounting software can save you time and money. The small amount that you’ll pay for software pales in comparison to the amount you’ll save on salaries and lost opportunities.

Take your business’s finances to the next level

If you use Excel as your accounting spreadsheet, you’ve probably grown tired and frustrated with your bookkeeping system. Thanks to today’s reliable accounting software, business financials no longer have to be challenging.

Accounting software allows you to take hold of your company’s finances and use them to your advantage. Not only is the process more streamlined, you’ll also gain access to real-time data that allows you to forecast and project where your company is headed. Using accounting software instead of spreadsheets will revolutionize how you look at your financial information.

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Chris Scott is a finance expert, consultant, and writer. He graduated from the University of Maryland with a degree in Finance and currently resides in Boston, MA. Read more