Tuesday, April 4, 2017

Why You Shouldn’t Use Excel for Accounting




2012 was a tough year for 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.”

That same year, 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, Excel is the default choice for bookkeeping. It’s been around for ages, there are plenty of online tutorials and it’s easy to find sample accounting formulas. Best of all, you probably already have it.

And while Excel is a great place to start, the risk of broken formulas, misplaced data and lost files increases as your business grows. The more time you have to spend in a spreadsheet, the less time you have to focus on your business and the harder it will be to keep your books in order.

There’s a time and place for using spreadsheets, but if you’re still using Excel for your accounting, it’s time consider de-risking your bookkeeping.

Excel is not as “free” as it seems

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.

A lot of labor goes into small business accounting. A 2014 survey of small businesses (PDF) found that while some companies are able to keep the amount of time spent on accounting down to a minimum, it’s simply not the case for most companies. In fact, 40% of small businesses spend over 80 hours per year dealing with just their federal taxes.


Account for the time-value of accounting


Image via the NSBA 2014 Small Business Taxation Survey


Let’s say the person spending 10 days per year doing accounting makes an annual salary of $57,000 (approximately the average salary for employees with a college degree in the US).

If they spend 10 days out of their year working on the books, then $2,192 of their salary goes towards accounting. And that doesn’t even account for the missed opportunity costs of not being able to spend that time on sales, marketing and hiring.

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

Spreadsheets can’t accurately predict cash flow

More than 80% of businesses that don’t survive cite poor cash-flow management as a primary reason (source). 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.

Get the decision-making help you need

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

But as SleepyPod grew, Michael had more balls up in the air. 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 major decisions about the business. When he started using Quickbooks, Michael could tell at a glance everything that was owed to the company and everything they owed. Nothing slipped through the cracks.

As he says, “It paints a really good picture so we can make our financial decisions, whether it’s time to buy more inventory, move to a larger location, scale back, or whatnot.”

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 manually add and change data in multiple places.

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 spot the problem. While it is possible to reconcile two spreadsheets, if an error was made back a few months ago, it’s difficult to know which spreadsheet is right and which is wrong.

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 a wrong digit, 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 huge problems for small businesses.

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.

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




Source: http://quickbooks.intuit.com


Theresa Todman, Managing Partner/CEO of B&M Financial Management Services, LLC . Theresa specializes in bookkeeping, accounting, QuickBooks solutions, small business tax issues and consulting.
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