Definition: how to choose an accounting package

The following article was written by Frank Arbaugh, a consultant to small businesses in the greater Philadelphia area.

How to Choose Accounting Software
The right accounting package should (1) give you the information you need for management, tax estimation and tax preparation, and (2) enable you to easily input the figures.

Management needs are usually balance sheets and P & L statements. There also may be a need for cash flow analysis, receivable/payable management and identifying profit or loss on a job by job basis (job costing).

Tax estimation/preparation functions should enable you to prepare quarterly state and federal estimated tax returns. The system should also give you annual figures that can easily be used for tax preparation, both state and federal. Much of this will depend on you and your accountant's ability to set up your chart of accounts properly. Sometimes there are conflicts between management and tax needs when setting up the accounts, but they can be resolved in time.

Most accounting software has provisions for recurring entries, math calculators (debits must equal credits), and the ability to add accounts during data entry. The issue of whether you account on a cash or accrual basis must be analyzed. Most packages do not support your invoicing if you are on a cash basis. Each package has its good and bad points in these areas.

Job costing is not a traditional accounting function. It is an additional entry that keeps track of the costs involved with a certain activity or job. Some accounting packages support it directly while others can be adapted for it.

Accounting software imposes certain demands on you or your bookkeeper. If you have a manual system, you learned which journals to keep what records in, and perhaps at the end of the month you posted them all to the general ledger. There may not have been much thought about the impact of each transaction on management information or even tax strategies. But electronic accounting forces you to deal with these issues from the start, when you set up your chart of accounts, and on a daily basis when you enter and disburse each transaction.

You now will be generating the financial statements and reports, and the overall structure and disbursements will determine the usefulness and validity of these reports and statements. The bottom line is that management must understand and participate in the setup and daily use of these systems to be sure that they serve the needs defined above.

Bookkeeping, tax strategies through your accountant as well as management needs must be closely coordinated for best results. Perhaps people who have never communicated before will get to know each other! The good part is that no tax deductions should slip away because of a lack of documentation.

How do you choose the right package? You should have identified your needs through discussions with your accountant and bookkeeper, which may be one and the same. However, you are playing Russian roulette if you expect them to make this selection for you. You will lose a golden learning opportunity if you don't take this responsibility yourself or share it equally.

Prices for accounting software packages start at $30 and range upwards to $10,000 and more, but price is not a measure of how well any system will meet your needs. Even the least expensive one takes effort to install and set up properly. If the software costs $300 or more, it might have more features than a small business will ever need.

Installing an accounting package is an ongoing process. Don't expect to get everything right or the way you want it the first time. It is also not recommended that you drastically change your chart of accounts midyear, since the validity and usefulness of the figures are greatly determined by consistency. Once you make a decision on what account to disperse a particular expense to, you should not change that during the same accounting period.

Nobody can make a specific recommendation without looking at your needs. For individuals, I have found Quicken and Money offers the most features for the cost. For small business, Quickbooks and Quickbooks Pro, MYOB and Peachtree's Complete Accounting should be considered. Peachtree is stronger for businesses that have complex inventory needs, while Quickbooks is the easiest to learn. Intuit, the creator of the Quickbook line, has set up a network of advisors to help new users get up and running. If you have more than one person working on your books at the same time, multiuser and network ready right out of the box is a consideration. Industry-specific accounting packages can be found in the higher price range. These should be approached carefully with the help of your accountant and attention should be paid to the hardware requirements necessary. Someone within your company is going to have to make a significant commitment of time and energy to get these up and running. Make sure what you really need is not 99% covered by less expensive off-the-shelf packages. You will save your organization a lot of expense and time.

There are dozens of good accounting packages on the market. All of them have their strengths and weaknesses. To be truly proficient in any of them, you must use one for at least a year. A recent trend is online accounting. It is in its infancy and has limited features as compared to even the most basic packages. Its greatest appeal should be to companies operating from diverse locations. However, accounting should be a core function of any company, and to rely on the current state of the Web for access to this important business function is risky. When the Internet matches the functionality of the phone service, then Web accounting may become very popular.

Sales people and consultants can provide assistance, but keep in mind that they have their own motivations. Remember that no matter how expert somebody is, that person can only know a handful of software packages well. No one individual can know them all; there are too many, and each one is complex with nuances and subtleties that take time to master.

Talk to other people who have similar accounting needs. Try and understand the similarities and differences between their business and yours. How long have they been using the package and has enough time transpired to point up problems? They have to go through at least one fiscal year to know what's going on.

Make the effort up front. You don't want to switch accounting packages year after year, since this may invalidate annual comparison of figures. Computer magazines have in-depth reviews of accounting software, but keep in mind that reviews are written by editors, not long-time users of the software. They view products generically, not from your perspective.

If your invoicing or inventory needs are unique, you might consider custom software or a combination of packaged and custom software. This is an expensive process but can be very rewarding, since you will get the system that you truly need.

Even if you don't require custom software, if you obtain the assistance of a consultant who will help you through the installation of an existing software package, you will have less frustration, and you will reach your goals more quickly.

Good luck!