12 Feb, 2024

Why is Accounting Software Better than Excel?

This in-depth article examines using Excel vs robust accounting platforms to manage small business finances, outlining key differences and when to upgrade from makeshift spreadsheets to mature accounting software solutions.

If you run a small business, tracking your finances is crucial. But what's the best way to handle bookkeeping - using a spreadsheet like Excel or dedicated accounting software? Both options have pros and cons when it comes to recording income and expenses, generating financial statements, and streamlining accounting tasks. This in-depth article examines using Excel vs other robust accounting platforms to manage your small business finances.

Understanding the key differences between spreadsheets and accounting software is vital for any entrepreneur looking to control better and unlock insights from their company's real-time financial data. While many business owners are familiar with Excel, relying solely on spreadsheets for accounting can lead to manual data entry and potential mistakes that undermine financial planning. On the flip side, software systems designed specifically for accounting can automate processes and provide more accurate reporting - but may have a steeper learning curve.

This guide covers the advantages of Excel along with leading modern accounting software options, helping you determine the better long-term tool for your growing business accounting needs.

What Does Accounting Software Offer That Excel Spreadsheets Don't?

Excel is readily available as part of the Microsoft Office suite and allows users to enter simple data, create formulas for calculations, and generate financial statements like income statements. However, even complex Excel accounting spreadsheets have limitations in handling the large and increasing amounts of data accumulating as a business grows.

Dedicated small business accounting software is specifically designed to help entrepreneurs, bookkeepers, and accountants efficiently organize financial data in a single centralized system. Popular software options like JAZ keep real-time financial records, including every business transaction, connect business bank accounts and credit cards to automatically import activity, enable collaboration across teams, and offer a wide array of accounting reports - with drill-downs to transaction details.

In essence, accounting software provides complete income and expense tracking in real-time, eliminating frustrating manual data entry even as your business scales. The depth and breadth of functionality in these platforms far outmatches what Excel can provide for accounting needs - significantly beyond early-stage ventures.

Why Use Excel for Business Accounting Needs?

Although accounting software outperforms spreadsheets in many ways, don't be too quick to ditch Excel. Millions of small business owners already have Microsoft Office licenses and basic working knowledge of building financial models in Excel - so it could be the most straightforward free option, especially when just starting out or only part-timing a passion project.

For fledgling side businesses generating minimal transactions each month, properly setting up an Excel workbook to categorize earnings and expenses may suit current needs if you remain disciplined in tracking everything. Excel also allows complete customization for tracking niche metrics specific to unique operations - say, for an Etsy shop versus chair massage therapist versus electrician.

Just keep in mind that your accounting needs will likely outgrow Excel spreadsheet capabilities over the first few years as transaction volume mushrooms. Even with some clever formulas and pivot tables, Excel needs more automation capabilities for bank/credit feeds, inventory tracking, customer billing, employee payroll, tax planning, or providing overall financial insights.

When to Upgrade from Excel to Real Accounting Software?

As your business and financial data grow in complexity, consider the following signals indicating it's time to upgrade from makeshift Excel spreadsheets to mature accounting software solutions:

  • Tedious Data Entry - If manually logging several hours each week across bank/credit accounts, expenses, invoices, and vendor bills to keep the Excel sheet updated - then automation is overdue. Accounting software connects to institutions to import recent transactions, saving hours.
  • Reporting Lacks Timeliness - Excel reports are easy to neglect to update. However, real-time insights from live accounting software help make better decisions by understanding cash balances, AR, AP, and profit margins—no more periodic suspense or surprises.
  • Data Organization Slipping - Many categories, vendors, and clients are likely managed initially in Excel, but descriptions may diverge over time, losing clean structure. Accounting systems maintain uniform references across ledgers, reports, and docs.
  • Formula Errors Persist - Troubleshooting cascading Excel formula errors from modifications consumes too much time to trust outputs. Accounting platforms are far more resilient and auditable, preventing data corruption.
  • Collaborators Frustrated - Emailing updated Excel files or keeping shared drives in sync breeds tension among staff, duplicating work. Accounting software centralizes data with access permissions, removing version issues.

If your Excel accounting needs help to handle the breadth of business financials efficiently - further research into platforms like Jaz is warranted to support scaling needs.

Key Features of Accounting Software vs Excel Spreadsheets

While no standard Excel workbook rivals mature accounting systems outright, below are some solutions that software provides for growing small businesses compared to makeshift spreadsheets:

Bank and Credit Card Automation

  • Accounting software connects to financial accounts via encrypted protocols for automated feeds of all transactions, 24/7. Manual entry is optional as data flows into proper categories, ledgers, and journals. Excel needs an external data integration capability with difficult APIs or imports.

Invoicing and Payment Processing

  • Customizable invoice templates bill clients upon delivery of products/services, then automatically track payments with reminders. Excel attempts primary forms but with no workflow automation for reminders, thanks, deposits, reconciliations, refunds, etc.

Reporting and Financial Dashboards

  • Modern accounting software generates real-time reports on collections, payables, expenses, profit margins, sales tax liabilities, and dozens of KPI financial metrics for insight into company performance. Excel reporting stagnates without disciplined updating.

Multi-user Access with Granular Permissions

  • Unlike emailing Excel files around that breeds version confusion, accounting platforms allow teams to access one centralized data set simultaneously, including setting restrictions on editing privileges. Views, edits, and comments can all be monitored and controlled for data integrity.

Integrations with Operational Software

  • Accounting systems provide open APIs, allowing the connection of other tools used across business operations - e-commerce platforms, payroll, POS systems, CRMs, payment processors, etc. Two-way data flows from customer orders down through financial reporting. Excel does not natively integrate.

Secure Cloud Hosting

  • Access anytime anywhere is crucial for agile small businesses. So, modern accounting software adopts cloud hosting for 99.9% uptime guarantees, automatic backups, and redundancy. Local Excel files risk losing data from device failures, theft, or users accidentally overwriting shared files.

Final Recommendations on Excel vs Accounting Software for Small Business

As outlined above, Excel has minimal accounting capabilities compared to dedicated solutions for scaling businesses. Spreadsheets can handle simple personal finances or microbusiness operations when just starting out - but only if you remain highly diligent in tracking all data. Excel lacks the necessary controls, validations, workflows, and reporting built into accounting software packages targeting small business accounting needs.

  • If managing home finances or running a basic side gig generating just hundreds of overall transactions a year - Excel likely suffices temporarily if appropriately organized. Just be careful of data entry mistakes or incomplete tracking that can undermine planning. Monitor if efficiency starts declining quarter to quarter.
  • When officially launching an actual business venture expected to grow over 24 months - invest early in accounting software to establish solid financial system integrations, reporting, and controls. Jaz starts at $30/month for up to 10 users - efficiently handling thousands of transactions across sales, expenses, payroll, and taxes.
  • If currently relying on an Excel accounting "system" that's now tedious and error-prone with mismatched records - migrate historical data into a new platform like Jaz for much cleaner real-time tracking. The migration takes some work but pays dividends, restoring visibility and trust in financials and monitoring business performance.

No doubt Excel has limitations managing the accounting needs of legitimate small businesses - especially as operations and transaction volume expand fast. However, the right software helps owners better grasp the pulse of company finances with accuracy and insights for planning. So closely review top accounting software options that fit unique business requirements - then determine if migrating beyond spreadsheets makes fiscal sense. Just keep ad hoc accounting in Excel from spreading turmoil through payroll, vendor relations, or tax miss filings that can quickly jeopardize an otherwise promising business. Get clarity on where money flows with purpose-built accounting tools.

Key Takeaways: Accounting Software vs Excel Spreadsheets

  • Excel works fine recording minimal financial data but needs to be revised in scaling to support actual small business growth year after year.
  • Accounting software centralizes real-time finances with automation to eliminate the frustrating manual data entry prevalent in Excel.
  • It is essential to match financial tools to current needs but anticipate future requirements 12-24 months out, as choosing new platforms carries a learning curve.
  • Data validity, access controls, and reporting insights are huge software advantages over Excel's malleable spreadsheets stored locally.
  • Recommend moving to accounting software once business revenue and expenses exceed personal wealth streams for proper tracking, planning, and taxes.
  • Signs like manual entry burden, inaccurate reports, and formula errors indicate Excel is no longer adequate for expanding business accounting.

Streamline Your Business Finances With Jaz

Tired of spreadsheet headaches and manual data entry wasting your time? There's a better way to master your finances and find clarity in the numbers. Introducing Jaz - the accounting platform built just for small businesses and accountants.

Jaz is the all-in-one accounting solution built to simplify and automate your most complex accounting tasks like invoices, bills, bank reconciliations, payments, and more so you can get back to growing your business or serving more clients.

Get Started for free and take control of your financial operations with Jaz.

Frequently Asked Questions (FAQ)

1. What are the advantages of using accounting software over Microsoft Excel?

Accounting software provides real-time financial data, streamlines bookkeeping processes, offers cloud-based accessibility, and enables audit trails and security features that Excel doesn't have. It can handle a wider range of accounting problems and tasks compared to Excel.

2. What are the key differences between accounting software and Excel in managing financial data?

Accounting software enables real-time data tracking, more secure and centralized storage of financial information, and ensures that data cannot be compromised. On the other hand, Excel is a spreadsheet tool for data analysis and might not offer the same level of security and real-time data updating as accounting software does.

3. Why should businesses consider using accounting software for their financial management?

Accounting software programs are designed to keep balance sheets, bank statements, and other financial records in one place, offering real-time data tracking and comprehensive accounting solutions. This helps businesses streamline their financial processes, enhance accuracy, and maintain efficient accounting practices, which Excel doesn't fully provide.

4. What are the benefits of cloud-based accounting software compared to using Microsoft Excel?

Cloud accounting software offers accessibility from anywhere, real-time data updates, and improved collaboration and data security, which Excel as a standalone tool might not offer. It enables businesses to have their financial data stored and managed more efficiently and securely in the cloud, giving them the advantage of flexibility and data accessibility.

5. How does using accounting software overcome the limitations of Excel in managing business finances?

Accounting software can handle a wide range of accounting tasks, provide an audit trail for better financial transparency, and ensure that data integrity is maintained, addressing the limitations that Excel might have in efficiently managing and securing business financial data.