Spreadsheet or Accounting Software? What’s Right?

Wondering whether to use a spreadsheet or accounting software for a monthly fee, to help run your small business finances? There’s often a lot of confusion between spreadsheets and cloud software when it comes to small business finance. This is especially relevant for those who are newly registered as self-employed. In this guide, I share some information on how each one works and some tips to help you figure out which solution is best for you to manage your self-employed finances.

1. Is Excel Good for Bookkeeping?

Using a spreadsheet for bookkeeping is a popular choice, especially with the self-employed whose small business finances can be pretty simple. One particular appeal is the fact that they are free or cheap to use. Plus, they don’t need extensive training to learn how to use them. All you need to do is change, add or delete specific information and the cells will calculate the data for you. That means using a bookkeeping spreadsheet is an easy way to track the vital numbers in your business.

One of the drawbacks of using a spreadsheet for bookkeeping is that it can be a time-consuming way of managing your business accounts if you’re self-employed. This is because you have to manually enter the information into each cell from bank statements, expenses etc. In turn, this can give rise to human error if the data isn’t entered correctly. Just one mistake could mean you end up missing out on tax relief on your business expenses! In addition, you may need to use complex formulas to create an effective bookkeeping spreadsheet. As a result, a certain amount of knowledge is needed.

But, perhaps one of the biggest hurdles is that large amounts of data become difficult to manage, particularly as your business grows. Consequently, your small business might become too advanced for you to manage your accounting using a spreadsheet, not to mention very time-consuming.

2. Can Spreadsheets Be Used for Accounting?

Currently, yes spreadsheets can be used for accounting by business owners that are not VAT registered. But HMRC is bringing in changes called Making Tax Digital from 6 April 2024. What these new regulations mean is that if you have a business turnover of £10,000 or more, you’ll be legally required to use approved accounting software for your bookkeeping instead of a spreadsheet. However, until then you can use a bookkeeping spreadsheet.

3. Should You Use An Accounting Software?

Accounting software, like Xero, are used and managed via the internet. Although some are available for free, most are bought through a monthly subscription. Once subscribed you simply sign in, do your bookkeeping and the system will store all your data and generate reports about your business as well as for your filling in your tax returns. These types of accounting software offer huge storage space for all your small business’ vital information. For example, bank statements and invoices. In addition, you don’t have to worry about updating or backing up your business data. This is because the software will do this automatically. In contrast to a spreadsheet, cloud-based software takes into account regulatory changes too, such as taxes. This means you’re always up to date.

That said, managing your business accounts in the cloud can give rise to a range of technical issues. For example, if you lose internet connection or outages all of which can be disruptive. Similarly, having everything stored on the internet can cause problems in terms of privacy and security issues with breaches from hackers.

4. Which One is Right for You?

If you’re trying to decide whether to go with a bookkeeping spreadsheet or accounting software, then here are a few things for you to consider:

  • How confident do you feel about learning a new software, especially if you are new to business finance. Many do feel overwhelmed by accounting software. This is particularly true when they are new in business and are busy getting to grips with all the other aspects of being self-employed;
  • With the upcoming making tax digital changes, if you’re business turnover is more than £10,000, you’ll need to sign up for an approved software. Therefore, you may prefer to get set up now to avoid having to make changes later;
  • If your turnover is below £10,000 then you won’t be affected by MTD. Therefore, you could choose to use a spreadsheet saving you the monthly fee;
  • How many transactions run through your business? One of the biggest advantages of using an accounting software is that it connects to most business bank accounts. As a result, it will save you the hassle of typing in your transactions.

5. Wrapping Up for Bookkeeping Spreadsheet or Accounting Software

Whether you choose a bookkeeping spreadsheet or accounting software, the most important thing to do is to find one that fits and tracks your business, stick to it and update it regularly. Remember to give yourself time to get used to using the product you choose because chances are you may feel overwhelmed at some point.

If self-employment finance is new to you, a bookkeeping spreadsheet is often a good way to start building confidence with numbers without the overwhelm of learning complicated software. I’ve created a bookkeeping template that lets you track the most important numbers in your business. It also estimates your tax and summarises the numbers you need for your tax return. Best of all, I’ve taken care of all the complicated formulas for you. Find out more here.


About Anita Forrest

Anita Forrest is a Chartered Accountant, spreadsheet geek and money nerd helping financial DIY-ers organise their money so they can hit their goals quicker.