Making Tax Digital: accounting software for businesses

Making Tax Digital (MTD) is the Government's scheme to drive all businesses to modernise by switching to online accounting software. If you've never used accounting software to manage your taxes, it can be difficult to know where to start.

In this article, we:

• explain what accounting software is and how it can benefit small businesses
• look at some options available on the current market — particularly for MTD — so you can consider which package could be suitable for your business

What is accounting software?

Accounting software is an electronic program you use for various accounting tasks, such as:

• calculating taxes
• raising invoices
• paying bills
• managing payroll
• processing expenses
• controlling stock levels
• managing projects
• administering pension payments

Once you've entered your financial information, the software can perform calculations, conduct transactions, analyse data and generate reports, among other capabilities. It can also automate these processes so they're quick and easy to repeat.

Most modern accounting software is hosted in the cloud. This means it's stored online rather than installed on a company server or network. As a result, you can connect to the software not just from your computer but from any internet-enabled device, such as a smartphone or tablet.

How does accounting software benefit small businesses?

Many small businesses do their accounting either on paper or with computer spreadsheets (in Microsoft Excel, for example). However, there are lots of benefits to switching to a digital software package that's purpose-built for business accounting.

Better accuracy

Accounting software reduces human error. Bookkeeping on paper or with spreadsheets means making mathematical calculations “manually”. Mistakes are easily made and putting them right can be time-consuming and expensive.

Providing the data is correct to begin with, accounting software can carry out complex calculations with speed and accuracy.

Saves time

Accounting software can work through huge sets of figures quickly and accurately, particularly when configured to run tasks (such as calculating taxes or salaries) as automated processes.

Deeper insight into finances

Accounting software is able to analyse financial data and generate detailed reports on things like cashflow, profits and stock levels, or create a more general balance sheet.

Most programs have this function built in and are so intuitive that they require just a few clicks of a button. This cuts down your administrative time significantly and is invaluable for auditing purposes.

Better invoicing

Accounting software lets you keep a close eye on payments and identify customers whose payments are late.

You can generate reports that tell you how much you're owed and when these amounts are due, and send automated reminders to your debtors, giving you much greater control over your finances and profits.

Better stock control

Many accounting software packages let you closely track your stock levels as you satisfy orders and dispatch products to your customers. Automated processes tell you when levels are depleting so you can order items well before you run short.

What types of accounting software are there? How do I choose one?

There are accounting software products to suit every size of business. For example, software packages designed for small and medium-sized companies should offer the functionality you need to have control over your finances, without being too technical or unwieldy.

While there are programs out there that are free to use, the software packages sold as paid subscription services often have a wider range of capabilities. Most are cloud-based, which means everything is stored online and you can access your data remotely from any internet-connected device.

Choosing software for your small business

Here are some things to consider when selecting an accounting software package for your business. Note: There may be other factors particular to your business which will influence your decision.

Analysing your needs

Selecting the right accounting software for your business means analysing exactly what it is your business needs. It's important to think about this in some detail, to avoid choosing software that quickly becomes unfit for purpose as your business grows and changes over time.

Considering your budget

Obviously, your budget plays a part. Many of the well-known and highly rated accounting software packages (see Paid subscription services below) have tiered pricing structures that make them affordable for most small businesses. They also offer free trials so you can try before you buy.

Consulting your existing teams

If you have an accountant, ask them for their input. What do they think would best suit your business? What works well for their other similar-sized clients?

It's also worth consulting your IT team (if you have one) as they will be able to weigh in on what type of software your computer system is set up to accommodate.

Learning about finance

If your understanding of small business finance is limited, take the time to educate yourself — don't assume that the software will do everything for you. Your accounting software will only be as good as the data you give it, so it's crucial to get it right from the very beginning.

Small business accounting software - current products

The following table shows some of the accounting software packages currently on the market that are aimed specifically at small businesses.

(Note: This isn't an exhaustive list, nor is it a list of recommended products. It's worth doing your own research to determine which option is most suitable for your business.

The information and prices in this table are accurate as at December 2019 and taken from the websites of the respective software manufacturers.)