Invoicing Versus Accounting Software: What’s Best For Your Business?
Every business needs a way to handle its finances, and in almost all cases, that involves both invoicing and bookkeeping. From dealing with estimated taxes to collecting payments from forgetful customers, there’s a lot that goes along with operating a business – and as the freelance economy grows, more and more independent contractors are finding themselves swamped in a sea of information, rumor, and requirements. Some take a DIY approach: lots of research, spreadsheets for invoicing and accounting, perhaps a consultation with a CPA at the end of the year. Others look for tools to help automate the process and make it a little less confusing.
This article will focus on freelancers and very small businesses, because as your business grows, the benefits to double-entry accounting become more and more important. Read my article here to find out why.
But if you’re starting out, and if your accounting needs are very simple, there’s nothing wrong with starting out with basic expense tracking and invoicing software. Better yet, some of the systems out there are inexpensive (or free), easy to use, and will save you hours of time over doing things in MS Excel, Mac Numbers, or Google Sheets. And you’ll never have to worry about accidentally saving over an invoice or typing over a timesheet entry.
So, let’s dive in and answer that pesky question: do you need invoicing software, accounting software, or both? (Hint: very few freelancers or micro-businesses need both.)
Common bookkeeping software misconceptions
First, let’s start off by dispelling some basic myths:
- If the label says “Accounting Software,” that’s what it is.FreshBooks, I’m looking at you. It’s probably the most visible culprit, but it’s hardly the only one. The term you need to look for is “double-entry accounting” or “double-entry bookkeeping.” If software does not offer this, it is not full accounting software, no matter what it calls itself.
- If you create invoices, you need dedicated invoicing software. That’s the only way you’ll get features like recurring invoices and automatic payment reminders.Some invoicing software marketers would have you believe that accounting software cannot possibly meet all your invoicing needs. But for the most part, that’s just not true. Integrated invoicing features have grown by leaps and bounds as accounting software has taken to the cloud, and the result is that there are now accounting programs out there with better invoicing features than some dedicated invoicing programs.
- Invoicing software is less expensive than accounting software.It would stand to reason that a program with more capabilities would be more expensive, right? But when it comes to invoicing and accounting software, that’s not always the case.
- Accounting software is confusing and impossible for a non-accountant to use.QuickBooks has long been the gold standard of accounting software, and it’s acquired a reputation as being very confusing for the neophyte. But as a general rule, cloud-based accounting software (including QuickBooks Online) is designed to appeal to business owners more than to CPAs. That means less accounting jargon (some programs have stripped it out altogether), lots of basic help articles and walkthroughs, and a simpler, less overwhelming interface than what you’ll see in traditional accounting software.
Will invoicing software be enough?
So with all that cleared up, which one’s best for you? I’m going to start out by saying that anyone can do well with accounting software. Until very recently, in fact, that was my go-to recommendation pretty much across the board. That’s now down to about a 75/25 ratio, primarily due to Zoho Invoice’s expansion of some very impressive low-cost and free offerings. But if after reading that article on double-entry bookkeeping, you decide that’s what you want, I’ll be the last person to talk you out of it. Long-term, it’s generally the best way to keep track of your business finances.
Invoicing and expense-tracking software, on the other hand, will only work as a solution for your business if that business meets some very specific criteria:
- You have no inventory.If you sell products, you need to use full double-entry bookkeeping with correct inventory accounting. No question.
- You have no accounts payable (or what you have is so insignificant that you don’t feel the need to track it separately from expenses).Accounts payable is about what it sounds like: stuff you haven’t paid yet, but are going to have to pay. Bills, in other words. Suppose you rent an office and you get an electricity bill on the first of the month that’s due in 30 days. From the time you get the bill until the time you pay it, the funds should be logged as accounts payable.Knowing what you owe (as well as what money is coming in – “accounts receivable” in accounting lingo) is important for getting a complete financial picture of your business. Part of the point of keeping good financial records is understanding where your business stands—and the best way to get a complete picture of that is through double-entry bookkeeping.Accounts payable is not the same thing as expenses. A lot of cloud-based invoicing software includes basic expense tracking. If you pay any bills as soon as you receive them, or if your only expenses are purchases which you pay for immediately, then you can probably get by with a system that doesn’t support accounts payable.
- You don’t need much in the way of accounting reports about your business.Most invoicing programs don’t offer extensive reporting options. For that matter, most don’t even offer a simple profit/loss report. Assuming you can do basic math and subtract your expenses from your revenue, this may not bother you . . . but it’s a factor worth considering. If you want to take a look at your balance sheet, you’ll have write it up yourself. The more complex your finances get, the more you’ll need to do by hand. And remember, your time is worth money.
- You have no employees.The second you’re dealing with payroll, full accounting software is much more likely to meet your needs than invoicing software. Can you cobble together a solution to make invoicing software work? Yes, in some cases . . . but it’s better to just be handling your accounting properly at that point.
- You don’t need job costing.If you’re not sure what that is, you can read all about it here. If you need job costing, accounting software is generally the way to go—it’s the only way you’ll get all the options you need. Harvest is the exception to the general rule; it’s invoicing software that can handle basic job costing, so if you meet all the other criteria on this list and you strongly prefer it to any of the accounting software on offer, it’s a possibility you might consider.
Reasons to use invoicing software
So say you meet all the criteria in the last section. You can choose invoicing or accounting software and it will probably meet your business’s needs, at least for the near term. We’ve talked about the benefits of accounting software already. So what benefits might invoicing software offer?
- Fewer features
That may sound like a downside, but if you try out Wave or Xero and find yourself confused and overwhelmed by all the options, you might find invoicing software a more manageable place to start.
- Automated late fees or snail-mailed invoices
These are the only major features you can find in some invoicing software which I haven’t yet seen in accounting software. If you want your program to automatically calculate late fees and add them to invoices, or if you want to have snail-mail invoices sent at the click of a button, then you’ll need invoicing software.
- Better value for money
As I mentioned earlier, cost varies widely among invoicing and accounting software options. Depending on your specific needs, you may find that a certain invoicing program has a plan which gives you more value than an equally priced accounting program. For example, if you have less than 25 clients (and don’t think that number will increase substantially in the near future), Zoho Invoice has a fantastic free plan that lets you send out invoices free of Zoho branding (Wave includes its branding on all invoices and emails). Plus you get a handy client portal. Or say you want a program that supports both retainer invoicing and unlimited clients: Harvest will have you covered starting at $12/month; your best accounting option is Zoho Books, at $29/month.
- Fewer features
When it comes to deciding between invoicing and accounting software, your specific circumstances and the needs of your business will determine your best course. You really can’t go wrong with the accounting option . . . but for some people, starting out with basic invoicing and expense tracking can have some advantages.
Still debating which is best for your business? Or confused over the difference between the two? Check out our invoicing and accounting software reviews and drop us a note in comments.