Why Accounting Software May Not Work for your Startup

Today’s small business accounting software was modeled after systems first developed in the 1970s and 1980s for fairly expensive mini-computers. The cost of these systems – and the people required to run them – had the effect of rationing their use to larger, small or medium-sized businesses (“SMEs”). A company needed to be a certain size before they could justify their use.

Let’s take a look at what the market place looks like. Most people would be surprised at how small most businesses really are –

In fact those early mini-computer systems were really designed for use by companies in the top 5% or so of businesses by size. The volume of transactions is orders of magnitude greater for a company with 50 employees than one with 5 employees. Doing an automated cheque run for a company with 50 employees makes sense. It’s a complete waste of time for a startup with 2 employees.

First you have to record all the payables in the accounts payable module. You’ll recall that our cash-basis system ignored this as superfluous for a small company. Then you have to set the printer up with specialized cheque stock and run the cheques – all of which seems harder than simply writing out 5 or 10 cheques by hand.

The theory is that this captures all the data around the payment automatically, since the cheque was generated by the computer software. This should be a time-saver, except that these days your bank very kindly does the same thing whether the cheques are manual or computer-generated…and you have to download the transactions anyway to import into your accounting software.

So startups should forget about using accounting software to automatically capture transaction data each time they write a cheque or make a deposit. The bank already does that whether you use accounting software or not…

Accounting software was originally designed for use by larger businesses (think 20 employees) – and these larger businesses usually have full-time accountants. For startups who outsource their bookkeeping to an independent bookkeeper, they will have accounting software that they use for their clients.

If you intend to do the books yourself or have one of your staff members do it, you need to think carefully about whether you have the skills – and how you plan to use the information. If the financials are only being used to accompany tax returns and SR&ED (scientific research and experimental development) claims, you should check out the following 2 articles:

  1. What a Simple Cash-basis Journal Might Look Like
  2. BPO (“business process outsourcing”) for Startups