What is Accounting Software?
Accounting software helps businesses of all sizes streamline and automate finance management processes, ensuring accurate records and increasing operational efficiency across basic recurring processes such as invoicing, general ledger (GL) reconciliation, accounts payable (AP), and accounts receivables (AR). Depending on the scale of the product, accounting software can include more advanced features such as financial consolidation, fixed asset depreciation, and multicurrency support.
While all accounting tools include basic features for financial management, there are significant differences in functionality between different products. It is therefore vital to understand how robust a solution is by evaluating how its features can help a business with their specific needs. Requirements for accounting software can vary per company size and industry, as well as the geographic presence of the company.
What Types of Accounting Software Exist?
There can be vast differences between types of accounting software. Accounting programs can be very generic, providing essential features that any company can use or extremely sophisticated, including industry-specific functionality for medium and large companies. The delivery model and the way the modules of the solution are delivered are also relevant.
Suite vs. best of breed
Accounting systems can be used to manage any aspect of business finances that involves payment, but many are just the barebones: AP and AR. Suite systems often offer many modules that integrate inventory management, expense tracking, time tracking, payroll, etc., and make reconciliations between these accounts easy and automated. Companies that are more specialized may make better use of a system that caters just to their needs. For example, a service provider may only need a general ledger that includes time tracking information; an accounting system that also manages expenses might best serve a consulting firm.
Cloud vs. on-premises
Cloud accounting systems offer a software as a service (SaaS) pricing model and work inside a browser. On-premise tools are installed on hardware owned and maintained by the customer.
- Cloud: Most new accounting tools were born in the cloud; their pricing models are usually based on the number of users. Cloud-based solutions are easy to implement, don’t require hardware investments, and allow users to pay over time based on usage. Often, cloud tools have difficulty providing robust offline functionality that will enable users to complete actions and access accounts while disconnected from the internet. The cloud is usually a better option for small business accounting due to its lower cost.
- On-premises: Many vendors that offer on-premises solutions also provide a cloud version of their software. Most customers who use on-premises tools purchase a perpetual license based on the number of users and pay an annual maintenance fee. On-premises systems might be client-server tools that require software to be installed on each user’s PC or could otherwise be browser based. On-premises tools require IT support for installation and maintenance and also require investments in hardware. These systems may offer added security and usually can be customized without vendor involvement.
Based on the size of the company
Small business accounting teams will often seek out a less expensive, easy-to-use interface that covers typical use cases such as billing and invoices. These might be single-entry bookkeeping with simple, standard financial reporting capabilities, but most are typically cloud based and include mobile apps, offering a level of convenience to the harried small business owner. Larger companies will need software that can handle many complex accounts requiring input from multiple roles. These should have more rigorous reconciliation measures because higher volume and more complexity means a higher likelihood of mistakes. Additionally, audit trails and security measures help larger companies ensure the integrity of accounts maintained by many different employees.
Based on the industry
Tax codes, regulations, and best practices vary across industries. Buyers will need to determine whether a product that specializes in meeting the standards of their industry is the best solution or one versatile enough to be customized to their needs. This may apply to companies of all sizes, from small businesses to large corporations.
What are the Common Features of Accounting Software?
All accounting solutions include features for GL and chart of accounts (COA). Since GL and COA make up the foundation of any financial system, an accounting solution cannot be used without them. Other features, such as AP and AR, are also included by default, but not all accounting solutions offer the same level of support for them.
More advanced features, such as budgeting and forecasting, are included in accounting solutions for medium to large companies and are usually not included in accounting software for small businesses. These features can also be delivered as point solutions that can be used with any accounting system, but they include out-of-the-box integrations with the most popular accounting solutions.
The best accounting software includes robust core features and is flexible enough to allow companies to integrate with other solutions for advanced features.
General ledger (GL) and chart of accounts (COA)
- Journal entries: Journal entries increase user efficiency by auto populating based on previously entered information, schedules future entries, and allows journal entries to be uploaded from an external source.
- Tags and dimensions: This feature gives the ability to tag all transactions in the general ledger with customizable dimensions, classes, categories, etc. These dimensions should be available on any transaction, in any module in the system, and able to be reported upon.
- Audit trail: An audit trail provides an automated, chronological tracking of activities that have affected a specific operation, procedure, event, or record.
Accounts receivable (AR)
- Invoice customization: The layout of the invoice template is fully customizable, and users can add or remove fields, which helps to optimize the invoicing process by personalizing templates.
- AR automation: AR automation helps the user be more efficient by populating default customer data, setting up automated payments from clients, and automatically matching customer receipts to outstanding transactions.
Collections automation: This feature automates the tedious process to help drive collections.
- Payment reminders: Reminders automatically email advance reminders or past due notices according to days past due, along with keeping a record of notes for each customer.
- Send invoices: Easily create, send, and track invoices and reduce time spent on manually sending and receiving payments. This feature also helps ensure that each payment is accurately recorded.
- Balance sheets: A balance sheet is a financial statement that reports a company’s assets, liabilities, and shareholders’ equity at a specific point in time.
- Cash flow statements: Cash flow statements are financial reports that include cash made or lost by the business through operations, investments, and financing.
Accounts payable (AP)
- AP automation: AP automation helps to streamline invoicing by auto populating invoices with recurring or predefined vendor values.
- Purchase orders (PO) processing: PO processing supports purchase orders and provides purchasing personnel, management, and AP with the visibility needed to streamline the procure-to-pay process.
- Payment processing: Payment processing gives theability to manage, track, and report on numerous payment types, as well as customize and automate complex purchase to pay workflows.
Companies use cost management features to capture, classify, and analyze different types of costs to determine how much they spend on each product and service they deliver. The final cost of a product or service, as well as the overall profitability of a company, can be influenced by many factors, both internal (waste or misallocation of resources) and external (market fluctuations).
Cash flow management
Cash flow management is used by companies to collect, manage, and use cash. Since cash management doesn’t only refer to cash but also to any assets that can easily be converted into cash, this module can also be used to track the liquidity of the company.
Reporting and KPIs
General financial reporting offered covers all of the standard financial statements and meets the basic needs of the business. Other standard reports usually included in most accounting tools are AR aging reports, inventory valuation, cash flow reports, and so on.
Mobile apps or mobile-friendly reports are critical for managers and business owners who require the ability to access their accounting system anytime, anywhere.
Additional features of accounting software
These features are usually not included in accounting solutions for small businesses because they aren’t always required. There are exceptions to the rule, and many vendors provide add-ons, point solutions, and integrations with software to complement their offerings.
- Multi entity or consolidation: This feature allows for multi ledger and multi-tenant architectures, automated consolidations, inter-entity transactions, and eliminations.
- Recognition rules: Recognition rules automate the recognition of revenue and expenses by defining recognition templates.
- Reconciliations: Transactions are imported from source systems, and automated matching features reconcile a majority of transactions. This includes user-flexible, user-defined matching, and grouping rules to help reduce the time needed to produce accurate reconciliations.
- Time and expense and payroll processing: The processing of payroll and time and expense includes automated time and expense approval, reimbursement, and reporting. Payroll integration with an external payroll provider can help automate the recording of payroll.
- Custom reporting: Custom reporting offers functionality for reports to be created by the user to cater to specific requirements.
- Budgeting and forecasting: Budgeting and forecasting features allow the user to create and revise an unlimited number of budgets, and plan and forecast scenarios. Basic budgeting can be useful for companies of any size, including freelancers and small businesses, while forecasting is a must-have feature for enterprises.
- Dashboards: Dashboards provide an easy to read, often single-page, real-time user interface, showing a graphical presentation of the current status and historical trends of an organization’s key performance indicators (KPIs) to enable instantaneous and informed decisions.
- Customization: Customization allows administrators customization capabilities to accommodate their unique processes. This usually includes the ability to create custom objects, fields, rules, calculations, and views.
- Workflow capability: This featureautomates a process that requires a series of steps that typically require intervention by several different users. Administrators can write rules to determine who and when a user needs to complete a step. Additionally, the feature for sending notifications to users when they need to take action is also included.
- User, role, and access management: Access management gives the ability to grant access to select data, features, objects, etc., based on users, user role, groups, etc. Some solutions provide advanced access rights such as the option to allow users to only view or change a part of sales or purchasing invoices.
- Internationalization: Internationalizationenables users to view and transact business with the same content in multiple languages and currencies. Sometimes local regulations may require specific formats and detailed information to be included on invoices and other financial documents.
- Output document generation: Output document generationallows administrators to create templates that enable users to quickly generate dynamic documents in various formats based on the data stored in the application.
- Data import and export tools: These tools give the ability to input, modify, and extract data from the application in bulk through a structured file. Accounting vendors provide their own tools or third-party applications for data import and export.
- Integration APIs: These types of APIs specify how the application communicates with other software. APIs typically enable integration of data, logic, objects, etc., with other software applications.
- The breadth of partner applications: Partner applications typically provide complimentary, best-of-breed functionality not offered natively in a product.
What are the Benefits of Accounting Software?
There are various benefits of accounting software that can help track and organize financial data, producing an accurate, real-time look at business finances. It also contains features like automatic invoicing, which saves time by automating tedious accounting tasks, and more advanced features or add-ons like payroll, shipping inventory, and project management that can streamline other aspects of a business.
Data accuracy: The software increases data accuracy by removing the risk of human error in calculations.
Compliance: Accounting solutions helpmaintain government compliance by enhancing the activities that impact regulatory standards.
Automation: Accounting automation speeds up the entire accounting process through automated calculations and streamlined workflows.
Data organization: The organization of dataallows data to be accessed in a central location.
Reporting: Reporting gives the ability toquickly pull together various accounting reports.
File sharing: File sharingefficiently conveys accounting data to various departments across an organization.
Who Uses Accounting Software?
Accounting software is used by accountants, controllers, chief financial officers (CFO), and other members of accounting departments. Depending on the company size and the complexity of its operations, the accounting department varies in size and can include one person responsible for everything or many employees in charge of specific financial operations such as AP, AR, cash management, or expense management.
Accountants: Accountants use accounting software for financial reporting, such as forecasting, profit and loss reports, balance sheets, and cash flow statements.
Accounting firms: Accounting firms manage finances for their customers. External accountants may use their own software to help clients or they may need to use the software of the customer.
Controllers: Controllers use this software to oversee accounting activities and ensure that ledgers accurately reflect money coming in and out of the company.
CFO and managers: Executivesuse accounting software to ensure that controls are built into the way their system compiles data, and assess the financial situation of the company. Executives usually need to access financial reports and dashboards and rarely manage transactions or any other accounting activities.
Software Related to Accounting Software
Point solutions fill the gaps left uncovered by accounting programs or modules of ERP systems. Their purpose is to provide additional features for modules that already exist in accounting, such as AP and AR. Some examples of point solutions for accounting are: AP automation, AR automation, budgeting and forecasting, financial planning, cash flow management, etc. While small companies can use them, these solutions are a better fit for medium and large businesses.
Advanced accounting refers to complex software designed for sophisticated financial analytics. Usually known as corporate performance management(CPM) or enterprise performance management, these solutions provide features for data collection, deduplication, processing, and analysis, which are generally not included in accounting systems. CPM software can also be used to create complex budgets and provide forecasting information based on historical financial data.
Challenges with Accounting Software
Business owners and executives looking for accounting tools should be aware of some of the possible challenges and limitations of this type of software:
Internationalization: Not all accounting services can handle operations outside of one country. If a business conducts transactions in other currencies or languages, they will need to narrow their search to systems that have been internationalized efficiently.
Compliance: There are many accounting standards and financial regulations; not all accounting systems cover them all. Basic financial statements and reports for compliance purposes are usually included, but buyers need to make sure that financial compliance features specific to the industry are covered.
Consolidation: When accounting systems are used across multiple locations, all financial information needs to be consolidated to be processed at the company level. This is not a problem when all users are using a single accounting solution, but it becomes a challenge when separate solutions, or different versions of the same software, are being used.
Access to sensitive data: Accounting systems store personal and business financial data such as bank accounts and credit card information, as well as other confidential information, including social security numbers. It is therefore vital to ensure that only a limited number of users can access this type of information and that it is protected against external threats such as viruses or hacking attacks. A significant challenge that vendors need to address is the bring-your-own-device trend, which means that users access accounting apps on their personal mobile devices, which aren’t always secure or protected against viruses.
Integrations: Much of the information managed in accounting software is shared with, and can be leveraged by, larger ERP systems; oftentimes, these systems may offer their own accounting modules. Ensuring accounting information integrates well with current systems or expanding the search to more complex systems that can manage all of the company’s resources can be the key to choosing the right software.
Which Companies Should Buy Accounting Software?
Companies of all sizes that have an accounting or finance team can use accounting software. Accounting software comes in all shapes and sizes and is designed for small-sized businesses through enterprise companies, as well as nonprofit organizations.
Small business: Accounting software for small businesses is usually more user friendly, and offers available add-on features such as invoicing and payroll. Small businesses can find increased financial visibility and more easily record bank reconciliations if they are switching from spreadsheets to accounting software.
Enterprise: Large organizations that often do business internationally can benefit from accounting software because they need to manage regulatory and tax compliance with varying requirements. Enterprise accounting software is often integrated with ERP software and helps to automate and consolidate many of an enterprise-sized company’s financial tasks, including invoicing, budgeting and forecasting, and reporting.
Nonprofit: Nonprofit accounting software, also referred to as fund accounting, assists not-for-profit companies in managing tax-exempt transactions, grants, and reporting. Besides standard accounting tools, this type of software also helps nonprofits accept and record donations, manage trusts, and maintain compliance.
Accounting firms: Companies providing accounting services should also buy accounting software. This type of software is used to organize the service offerings of a company, as well as to track delivery using workflows and task management. Software for accounting firms help accounting professionals increase productivity and improve the relationships with their customers. These software products can be implemented and used across the entire company but are most beneficial for independent accountants. This type of software often needs to integrate with accounting softwareorsmall-business accounting software.
How to Buy Accounting Software
Requirements Gathering (RFI/RFP) for Accounting Software
When selecting accounting software, it is important to first look at how the business operates, and then familiarize oneself with the different types of software available. There are a variety of options when it comes to accounting software products, including those designed for the business needs of small- and medium-sized businesses.
Compare Accounting Software Products
Create a long list
Depending on the industry, the buyer might want to first create a long list of software that is designed to help businesses in the particular industry. For example, there are platforms specifically built for businesses in retail, manufacturers, restaurants, etc., as well as for many other types of commercial organizations.
Another factor to consider when creating this list is how user friendly the software is in bookkeeping and reconciling. Even though accounting software can make certain tasks easier, it still requires a certain amount of financial understanding. Oftentimes, accounting software built for small businesses is more user friendly but has less features than enterprise software.
Create a short list
After reviewing and researching the software on the long list, the buyer can widdle down this list based on the budget. Accounting software is available to suit all budgets and some general accounting applications may be downloaded free or bought off the shelf at a lower price.
Buyers must keep in mind, however, that the more specialized a software is, the more expensive it gets. This is the case because the user base for specialized software is usually relatively small. If the company wants something specific to their industry or customized for the business, they should be prepared to pay a premium.
As a rule of thumb, companies should make sure to demo all of the products that end up on their short list. During demos, buyers should ask specific questions related to the functionalities they care most about, for example, one might ask to be walked through all of the bookkeeping features, how to run reports, or how to import financial data from other systems.
Selection of Accounting Software
Choose a selection team
It is important that the accountants who will be using this software are involved in the selection process.The accountant may prefer an application that is compatible with the ones they currently use. Every business is different and the accountant is most likely in the best position to offer an educated opinion about which one is the best choice for the particular needs of the business. The accountant may even be able to help the company install and set up the software of choice.
After choosing a software, buyers must remember that they don’t have to be stuck with this selection forever; most platforms allow for add-ons or modifications. However, this decision shouldn’t be made lightly because no matter what software is chosen, it will be a big time and money commitment. In order to see ROI, buyers can’t change their minds a few months later and switch software again.
Negotiating a software contract is important to minimize risk, whether it is in terms of performance protection, security protection, or simply making sure that both parties are in complete agreement with what to expect from the other.
If the business has the cash flow, they could ask for a discount in return for annual upfront payment, and many software providers are happy to make that deal. Other times, a software provider may offer unlimited usage if the buyers pay upfront instead of paying a monthly or quarterly package price.
Buyers should also determine if they will need help implementing the accounting software or integrating with another system. Usually, a software provider’s first offer will include some implementation services in a given timeframe. Buyers can ask for these services to be removed if they can manage it themselves, or if a third party can do it for cheaper.
They also need to decide for how long they will need this software. If the company will use the software for years and years, the buyer can negotiate longer terms which sometimes results in more favorable pricing.
The final decision should be based on all the information gathered previously. Businesses should try to prioritize needs and select the solution that meets most of, if not all of, their requirements. Companies must remember that there is no one perfect software, but there is one that is best for their business.
If possible, buyers must conduct a pilot program with a smaller sample size of users to gauge how well the software is received. If the platform gets high marks, they can buy with more confidence. If the tool is found to be inefficient or not performing as expected, it might be time to test another software.
Accounting Software Trends
Bots and artificial intelligence (AI)
While AI for accounting is in its early stages, more and more vendors are starting to include it as part of their offerings. Most of these vendors released intelligent assistants that use machine learning and AI to help accountants with their daily tasks. All types of companies, including freelancers and small businesses, can benefit from accounting intelligent assistants.
Due to the limitations of some accounting solutions and ERP systems, companies sometimes choose to adopt two separate solutions to manage their finances. For instance, a manufacturer may choose an ERP that provides robust production functionality but weak accounting, as well as a different accounting solution that will better cover their needs.
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