Why Using Spreadsheets For Your Bookkeeping May Not Be A Good Idea
Ah, the trusty spreadsheet. For decades, it has stood as a pillar of business operations worldwide. The digital descendant of the ledger, spreadsheets have been the go-to for everyone from small businesses to multinational corporations. They provide a seemingly simple platform to input, manipulate, and extract data. Microsoft Excel, Google Sheets, and other spreadsheet tools are utilised for their flexibility and vast functionalities. You can create graphs, run complex calculations, and even build mini-applications. But, as times change and businesses grow in their complexities, so do their needs. And herein lies the problem. Bookkeeping, a meticulous and integral part of any business operation, demands precision, scalability, and efficiency. While spreadsheets are versatile, they aren’t purpose-built for the nuances of modern-day bookkeeping.
And if your bookkeeping is wrong, your accounting is wrong. Your annual accounts, tax returns and any reporting that can affect decision-making and thus the future of your business.
In the age of automation and digital transformation, does the spreadsheet still hold its ground as a reliable bookkeeping tool, or is it a relic of a bygone era, barely clinging to relevance?
Here at Joanna Bookkeeping, as accountants and bookkeepers we understand the importance of identifying and implementing the right methods and tools to make bookkeeping and accounting more streamlined, and we’re committed to helping you navigate the bookkeeping process. Book a free consultation with our accountant today, and let’s discuss how we can support you and your business.
Prone to Errors
The beauty of spreadsheets is in their flexibility. But with great flexibility comes an equally substantial risk of error. An innocent mistake, like altering a figure in a cell, can cascade, affecting cells far removed from the original, especially if they’re interconnected through formulas. This isn’t a mere inconvenience; it can lead to a misrepresentation of your business’s financial status, potentially jeopardising your decision-making process. Remember, while software might auto-correct or signal errors, a spreadsheet remains oblivious…
The Time Sink
At the outset, creating a spreadsheet might seem time-efficient. You whip up some columns, and rows, then plug in the numbers. But as your business evolves, so does the complexity of its finances. Managing complex financial activities with basic spreadsheet formulas can become a tedious process. A small oversight in a formula can lead to major discrepancies. Revisiting and revising these sheets not only consumes time but also detracts from other critical business operations.
Unreliability
A tool is only as reliable as its accuracy. With their susceptibility to errors and the lack of advanced error controls, spreadsheets can become a shaky foundation upon which to base important business decisions. Should you invest in more inventory? Should you hire another employee? Making these decisions based on flawed data can send ripples across your business.
We’ve got you covered!
If not spreadsheets, then what?
Accounting software is the answer. And our experienced accountants can help you set it up.
Starting from Scratch
Modern accounting tools are built with user experience in mind. They guide users through processes, reducing the room for error. With spreadsheets, you’re often reinventing the wheel, devising your own systems, formats, and methods. This is time-consuming, and as with any untested system, prone to faults and oversights.
Inadequate Reporting
Businesses thrive on insights. Accounting tools typically offer various report-generation features, giving a comprehensive view of your finances. With spreadsheets, you’re not only left creating these reports from scratch but also constantly updating and modifying them as parameters change. And each modification is another potential source of error.
A Steep Learning Curve
Unless you’re a spreadsheet guru, understanding the intricacies of various formulas, pivot tables, and charts can be overwhelming. The time invested in mastering these can often outweigh the benefits, especially when dedicated bookkeeping software can offer these features more intuitively.
Scalability Concerns
As businesses expand, their financial dealings become more intricate. Spreadsheets might not cope well under the weight of increased transactions, multiple account tracking, and intricate financial reporting. It’s not just about adding more rows and columns; it’s about ensuring the entire system remains coherent and error-free.
Notable Spreadsheet Blunders
Even the smallest of mistakes can result in significant financial discrepancies when using spreadsheets for bookkeeping. A stark example of this was seen in 2005 with Kodak. Due to a simple typo in an Excel document, the company mistakenly added excessive zeroes, which led to an overstatement of severance and retirement benefits for their employees. This error inflated the payments by a staggering $11 million! It’s alarming to note that such a substantial oversight occurred from just a solitary mistake in a spreadsheet. Moreover, this incident came at a time when Kodak was already grappling with financial challenges, further exacerbating their predicament. This case underscores the potential pitfalls of relying solely on spreadsheets for intricate tasks like bookkeeping.
Similarly, the JP Morgan “London Whale” incident in 2012 stands out. A combination of trading strategies, human errors, and spreadsheet mistakes culminated in a jaw-dropping $6 billion loss.
Spreadsheets might appear to be a cost-friendly solution on the surface, but the hidden costs – in time, potential errors, and missed opportunities – can be vast. Entrusting your business’s financial health to a tool with potential pitfalls can be risky. As illustrated by real-world blunders, even global powerhouses aren’t exempt from spreadsheet-induced crises. Investing in professional bookkeeping solutions or seeking the expertise of a dedicated bookkeeper or accountant can be invaluable, providing the clarity and assurance your business’s financial endeavours deserve.
It can help to talk to someone who understands your needs and responsibilities as a business owner, so why not book a call with one of our Oxford-based accountants? We’re able to offer support and give you advice when it comes to a wide range of accounting, bookkeeping, and tax topics and make sure that your bookkeeping and accounts are in order, giving you peace of mind from day one and beyond!
Frequently Asked Questions
Yes, you can use spreadsheets to prepare your VAT returns under the Making Tax Digital rules. However, you need a bridging software to submit your VAT returns to HMRC if spreadsheets are your bookkeeping system. Without a bridging software you won’t comply with the current MTD regulations. Accounting software instead of spreadsheets may be a better option overall.
Yes, it can. But from our bookkeeping and accounting experience, we would recommend using spreadsheets in limited cases. For example, you’re a self-employed person with a very limited number of transactions. We don’t recommend spreadsheets for limited companies due to the legal reporting requirements that limited companies have to comply with. But also scaling businesses regardless of their legal structure (so you can be a sole trader) can risk a lot by relying on spreadsheets as their bookkeeping solution. Talk to an experienced accountant or a bookkeeper for advice on the best systems to use in your business.
You are allowed to use Excel for your bookkeeping. But be aware of many limitations of spreadsheets. Spreadsheets are more prone to errors, can be unreliable in decision-making, they’re more complex to set-up and have limited scalability. To use spreadsheets for more complex needs, you also need to know what you’re doing and be familiar with their functionality and various formulas. But even then, you are risking many errors in your system that can have a domino effect on the whole business. Talk to an experienced accountant or a bookkeeper if you’re not sure whether you should use spreadsheets or accounting software in your business.
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