Accounting software for small businesses: how to choose the right system

Why use accounting software?

Accounting software can help you record income and expenses, create invoices, reconcile bank transactions and keep your financial information organised.

Keeping your records up to date can also give you a clearer view of sales, expenses, outstanding invoices and cash flow throughout the year rather than waiting until your accounts or tax return are due.

For many small businesses, software can also make it easier to share financial information with an accountant or tax adviser.

Start with what your business needs

There is no single accounting software package that is right for every small business. A sole trader with straightforward income and expenses may need a relatively simple system, while a growing limited company may need more advanced features.

Before choosing software, consider how you currently manage your bookkeeping and what you expect your business to need over the next few years.

Think about areas such as invoicing, expenses, bank reconciliation, VAT, payroll, stock, reporting, project tracking and access for your accountant.

Check the bookkeeping features

Good bookkeeping software should make it straightforward to record and categorise your business income and expenses.

Look at how the software handles transactions, receipts, invoices, supplier bills and bank reconciliation. If you have a high volume of transactions, consider whether the system can reduce repetitive data entry without removing the need to review the records for accuracy.

You should also check how easy it is to correct mistakes and whether you can access useful reports about your business finances.

Consider bank feeds

Many accounting systems can connect to a business bank account and import transactions automatically. This can reduce manual data entry and make regular reconciliation easier.

However, an imported bank transaction is not automatically a correctly categorised accounting entry. You should still review transactions and make sure they have been recorded appropriately.

HMRC also makes clear that some information may need to be added separately even when software connects to a bank account, particularly where the bank feed does not contain all the information needed for the relevant digital record.

Look at invoicing and payment tracking

If you invoice customers, consider whether the software makes it easy to create professional invoices, record payments and identify overdue amounts.

Useful features can include recurring invoices, automatic reminders and an accounts receivable report showing what customers currently owe.

Good invoicing processes can support cash flow by helping you raise invoices promptly and monitor outstanding payments.

Check VAT functionality if you are or may become VAT registered

If your business is VAT registered, make sure the software supports the VAT processes you need and can produce the information required for your VAT returns.

VAT-registered businesses are generally required to keep digital VAT records and submit VAT returns using compatible software under Making Tax Digital for VAT.

If you are not currently VAT registered but expect your business to grow, it can be useful to choose software that can accommodate VAT rather than having to change systems later.

Making Tax Digital for Income Tax

If you are a sole trader or landlord who is within Making Tax Digital for Income Tax, your software choice becomes particularly important.

HMRC requires those within the rules to use compatible software to create and store the relevant digital records and send quarterly updates. The software must also support the required end-of-year tax return process.

HMRC provides a software finder for Making Tax Digital for Income Tax. You should check that the software you choose meets the requirements that apply to your circumstances rather than assuming that every accounting package is compatible.

Can you use more than one piece of software?

You do not necessarily have to use one system for every part of your accounting process. HMRC allows businesses using Making Tax Digital for Income Tax to use more than one product where the software works together appropriately.

For example, some businesses may continue using spreadsheets for certain records while using compatible software or bridging software to meet their Making Tax Digital obligations.

If you use more than one system, make sure you understand how information moves between them and that the records remain complete and accurate.

Think about working with your accountant

If you already use an accountant, ask which accounting systems they support and whether they can access your records directly.

Giving your accountant appropriate access can reduce the need to send files manually and can make it easier for them to review your bookkeeping, prepare accounts and deal with tax matters.

If you are choosing an accountant at the same time as choosing software, it can be sensible to consider the two decisions together.

Do not choose software based only on price

The cheapest accounting package is not necessarily the lowest-cost option if it lacks features that your business needs or becomes unsuitable as the business grows.

Compare the features you actually need, the subscription cost, any additional charges, user limits, integrations and the support available.

Also check whether the advertised price is an introductory offer and what the normal ongoing cost will be after the promotional period.

Check ease of use and support

Accounting software is only useful if you can use it consistently. A system with a large number of features may not be suitable if it is difficult to understand or takes too much time to maintain.

Look at the quality of the help resources, customer support and training available. If several people will use the system, consider whether it is easy for them to understand their responsibilities.

A short trial period can be useful for testing the bookkeeping workflow before committing to a longer-term subscription.

Think about security and access

Your accounting system will contain important financial information, so security should be part of your decision.

Use strong passwords and appropriate multi-factor authentication where available, and make sure access is limited to people who need it.

Check how the software handles backups, data access and user permissions. You should also understand how you can retrieve your information if you eventually decide to change software.

When should you change accounting software?

You may eventually outgrow your accounting software or find that it no longer fits the way your business operates.

Common reasons for changing systems can include increased transaction volumes, new VAT or payroll requirements, the need for better reporting, changes in your business structure or a requirement to use software that supports Making Tax Digital.

Before changing, check how your historical records will be transferred or retained and make sure the new system is set up correctly before relying on it for important filings.

A simple checklist before choosing software

Before choosing accounting software, list the features your business needs now and the features you are likely to need as the business grows.

Check bookkeeping, invoicing, bank feeds, VAT, payroll, reporting, integrations, user access and compatibility with any Making Tax Digital obligations that apply to you.

Then compare the total ongoing cost, ease of use, support and how well the system works with your accountant or tax adviser.

The aim is not to find the software with the most features. It is to find a system that helps you keep accurate records efficiently and gives you useful information about your business.

Get help choosing the right system

If you are unsure which accounting software is appropriate for your business, an accountant can help you assess the options based on your bookkeeping, tax and reporting requirements.

This can be particularly useful if you are becoming VAT registered, moving from sole trader to limited company or preparing for Making Tax Digital.

Choosing a suitable system at the start can make your bookkeeping easier and reduce the disruption of changing software later.