Most of us understand how points are scored in football. Six points are earned when the ball is brought safely into the end zone, three points are earned if field goal is kicked, and two points can be earned for a safety. Simple, right?
Although most entrepreneurs understand how to score points in football, not all understand how points are scored in business. That’s because the scoring system behind business is based on debits and credits. Unless an entrepreneur also took a few accounting classes, they may not understand why liabilities increase with a credit but assets increase with a debit.
Startup Accounting Options
Fortunately, in the last 15 years, the more painful part of the business scoring system, known as the accounting process, has been simplified through the use accounting software. For startups and the entrepreneurs who found them, there are many accounting software options to choose from, including the following:
- Peachtree (Sage 50) – For about $950 for 5 users, this system will provide basic general ledger reporting, invoice tracking, and purchase order creation.
- QuickBooks – Retailing at $750 for 3 users, QuickBooks is the most common accounting software used by small business and startups today.
- NetSuite – Cost varies but ranges between $8,000 and $15,000 per year for 10 users.
- Everest Software – The cost also varies, anywhere from $5,000 to $15,000 per year depending on the number of users.
- inDinero – The mint.com for accounting software, this product prices by the number of transactions that occur. Less than 50 transactions a month and services are free.
Although there are many options to choose from, the question that plagues entrepreneurs is “Which software is the right system for my startup?”
Selecting the Right One
With the myriad of options available, it may be wise to step back and determine which one provides the right functionality at the right price.
Right Price: Consider the entire cost of a deliverable
When considering price, startup founders tend to focus only on the price tag of the system. A more holistic approach would be to consider the cost of delivering the desired process rather than just the system. For example, what is the overall cost of delivering GAAP compliant financial statements? By looking at cost from a process standpoint, you capture both the both extrinsic costs (licensing, server, etc.) and intrinsic costs (labor, additional reporting, etc.) that are required to produce the desired outcome.
To illustrate, let’s look further into the cost of delivering GAAP compliant financial statements if a startup is currently using QuickBooks. The first thing a company will need is the software. This would be a direct cost of roughly $750. Next, the company will need a computer to host the software. This is another $1,000 in direct costs. However, to be GAAP compliant, software startups have to follow all of the revenue recognition rules. Due to system limitations within QuickBooks, revenue recognition calculations have to be done outside the system in a spreadsheet by an accountant. The accountant’s time is indirect costs that need to be added to the cost of the deliverable.
Assuming that the Accountant earns $40,000 a year in salary, the total cost for GAAP compliant financial statements in QuickBooks would be $41,750. Compare this to NetSuite or Everest Software which come at a higher price tag but performs the revenue recognition calculations within the software and, thus, eliminates the need for the additional accountant. Even at the high end, this system is about $15,000 a year.
Before you settle on QuickBooks, you should ask yourself whether QuickBooks will require a significant increase in indirect costs to provide the desired process or does the automation within NetSuite reduce the process costs significantly enough to justify a higher price tag?
Right Functionality – Consider the Future
A second consideration when selecting accounting software is whether the accounting software is scalability. As the business grows, the system should be able to keep up and provide additional functionality to help the business grows.
For example, inDinero provides basic accounting features including cash flow analysis, budget tools, and expense categorization — and it does this well. However, it does not offer any inventory tracking or invoice and PO creation. On the other hand, QuickBooks offers all of these tools and provides some rudimentary business intelligence into each category as well.
Accounting software helps entrepreneurs understand the current “score” of their business. It can also provide insight into how well different areas of the business are managed. For startups that are trying to decide on the right software for their business, you should take into consideration the cost of a deliverable, not just the direct cost of the system. Also, look for software that is scalable and will help your business to grow.