Accounting software vs. spreadsheets: When should you upgrade?

When you’re starting a business, managing your books on a spreadsheet may feel perfectly practical. It’s free, it’s flexible, and when you have only a handful of transactions a month, it gets the job done.

But at some point, the same spreadsheet that once felt simple may start to feel frustrating and complex. You may find it’s difficult to track the information you need, errors may begin to slow you down, and you might start to feel a disconnect from what’s actually happening in your business. You might start asking yourself, “Do I need accounting software or a spreadsheet?”

The fact is that as your business grows and you add more customers, employers, vendors, bank accounts, and financial transactions to the mix, your spreadsheet can start taking more time to maintain than it saves. This is usually the point when switching to accounting software makes sense.

In this guide, we’ll look at what accounting software is, the differences between accounting software and a spreadsheet, when each option makes sense, and signs that it may be time to upgrade.

Spreadsheets can work well for basic accounting tasks, like tracking income and expenses, calculating basic totals, and this approach can give you a rough sense of your financial position, particularly when your business is small and your finances are relatively simple. For a solo founder with a small number of transactions, using spreadsheets can be enough.

So, do accountants use spreadsheets? Yes, but they often use these tools for specific tasks, like analyzing financial data, building forecasts, or creating custom reports.

The point really isn’t whether or not spreadsheets can handle accounting — they generally can. The point is whether spreadsheets are still the right tool for your business. Keeping spreadsheets up-to-date (and, therefore, useful) requires a lot of manual data entry and maintenance, so relying on them as your business becomes more complex can lead to more work and human errors.

The core difference between using a spreadsheet and accounting software is how much of the accounting process is automated and connected.

A spreadsheet gives you a blank canvas. You decide what to track, how to organize it, and set up logic for calculations you want. But a spreadsheet doesn’t know accounting rules. It doesn’t have preset calculations, and it can’t reconcile itself. Every function has to be created and maintained by the person who’s managing the file.

Accounting software, on the other hand, is a dedicated system built to record, organize, and report on financial transactions. You can connect it to your bank account and set it up to automatically import transactions, categorize expenses, generate financial statements, manage invoices, and keep records organized.

Here’s a summary of the major differences between using accounting software and spreadsheets.

The best choice for your business will depend on the complexity of your finances and the amount of manual work that goes into maintaining your current system.

Spreadsheets can be a perfectly reasonable starting point for managing your books if your financial operations are simple. You’ll likely be able to stick with with spreadsheets if:

• You have low transaction volume.
• You have a small number of customers and vendors.
• You don’t have employees or complex payroll.
• You have straightforward revenue and expenses.
• Your reporting needs are simple (or only for yourself).
• You’re comfortable building and maintaining the formulas required to keep the sheet accurate.

If you’re at this stage, spreadsheets probably still feel perfectly manageable, and moving to accounting software may introduce more complexity than it solves. The important thing to recognize is that what’s simple enough for now won’t necessarily be simple forever. As your business grows, your accounting system will need to evolve, too.

Even the most well-built spreadsheet will have limits, especially as your business grows. Here are a few limitations you may encounter.

Errors with manual data entry

When every transaction has to be entered by hand, even a simple error, like a typo, can throw off your entire financial picture, if you don’t have a built-in system to catch it.

Difficulty tracking changes

If a number changes, it’s difficult to see who changed it, as well as when or why they made the edit. Spreadsheets don’t include built-in audit trails, and that makes it hard to trace mistakes back to their origins or maintain accountability as more people get involved in the work.

Problems with version controls

When several people are working in the spreadsheet, you may be dealing with multiple versions of the same file, unclear ownership, or changes that are difficult to track.

No automatic reconciliation

Matching your spreadsheet against your bank statements is a manual process that can take along time. Plus, this manual, repetitive task can lead to human errors and discrepancies that may go unnoticed for weeks or months.

Weak reporting

Spreadsheets don’t have advanced reporting capabilities. To generate any sort of profit or loss statement, balance sheet, or cash flow report, you’ll have to manually build and maintain formulas that have to be redone and updated anytime anything changes in your business.

Limited scalability

As long as your business has limited transactions, a spreadsheet will work fine. But when you go from 20 to 200, for example, you might encounter issues. Although spreadsheets may be a good tool to start with, they’ll become harder to rely on once your business grows and gets more complex.

There comes a time when the advantages of accounting software will start becoming more apparent for your business. Here are seven signs to look for that will help you know that it might be time to move away from spreadsheets.

1. You’re spending hours each month just maintaining the spreadsheet

If you’re spending hours every month entering, categorizing, and reconciling transactions, that’s a strong signal that automation could save you time — which could be better spent on actually running and growing your business.

2. You’ve hired employees and are managing payroll

As your team grows, factors like payroll, contractor payments, and related tax obligations will each add a layer of complexity that spreadsheets aren’t built to handle.

3. Your transaction volume has grown significantly

When you’re handling more customers, vendors, and recurring expenses, a spreadsheet becomes harder to accurately maintain.

4. Multiple people need access to your books

When more people get involved in handling company finances, and they need to view and edit financial data, spreadsheets can become difficult to maintain. Accounting software can provide permissions and workflows that make it easier to collaborate while maintaining control and security at the same time.

5. You’re making mistakes you did not catch until later

If you’ve found reconciliation errors, miscategorized expenses, or discrepancies between your spreadsheet and bank statements, that’s a clear sign that your manual process isn’t working.

These risks may be starting to outweigh the cost of the sorts of automations that come with accounting software.

6. You’re making decisions without a clear view of your finances

If you find yourself asking questions like “How much cash do we have this month?” or “Have all customers made their payments?” your current system may not be giving you the visibility you need. Good accounting software provides a real-time view of your cash position, and it can help you understand trends and forecast more accurately.

7. You’re preparing for fundraising or have growing financial reporting needs

If you’re looking to raise capital or grow, you’ll need clear and accurate financial reports. Investors require clear reporting, and using spreadsheets can signal a lack of professionalism, which could hinder your fundraising efforts.

While evaluating accounting software, these are the key features to look out for:

• Bank and card integrations: Your accounting software should sync directly with your bank accounts and credit cards, allowing you to pull in transactions, instead of having to manually enter them.
• Automated categorization: Look for software that automatically categorizes your expenses based on historical data and input.
• Invoicing and accounts receivable: If you’re billing customers, having invoicing built into your financial workflow can reduce the need for manual work. Good accounting software also lets you see what balances are outstanding directly within the platform.
• Financial reporting: Look for software that allows you to generate profit-and-loss statements, balance sheets, and cash flow statements, without having to manually build them.
• Multi-user access with permissions: As your team grows, you’ll want to have accounting software that gives you the ability to grant different people different levels of access.
• Tax readiness: Good accounting software will organize your finances in a way that makes tax prep dramatically easier, and some options integrate directly with tax-filing tools.
• Scalability: Choose an accounting software that will be able to handle more transactions and complexity as your business grows.

For best success, choose a system that will reduce manual work, simplify your workflows, and give you better visibility into your business finances.

Making the switch to accounting software doesn’t have to happen all at once. There’s no need to rush into the process, but you’ll also want to make careful choices, so you set things up correctly. So, take your time choosing software that works for your current and future business needs.

Once you’ve selected accounting software, follow these steps:

• Connect your bank accounts and cards. That way transactions will start flowing in automatically.
• Import historical data from spreadsheets or bank accounts. If you want continuity in your reporting, import all relevant data. Or, start fresh from a clean cutover date.
• Reconcile with care. Make sure to reconcile your first month carefully, so the new system matches your actual bank balances.
• Rethink financial workflows. This is also a good opportunity to rethink your approach. You don’t want to simply recreate a spreadsheet inside a new tool. The point of moving to accounting software is to automate some of your repetitive tasks, so you can save time and energy for more important business activities.

Moving to accounting software doesn’t mean you have to stop using spreadsheets altogether. Spreadsheets can still be useful for financial analysis, financial modeling, or forecasting. You could also use them for things like evaluating certain pricing models or hiring scenarios, or for presenting data in a custom format, such as for board or investor reporting.

The difference in these cases is that the spreadsheets complement your main system, instead of being the system of record itself. Your accounting software holds the source of truth for your books, while spreadsheets support analysis that’s built on top of it.

Whether or not you need accounting software or a spreadsheet to handle your books will depend on where your business is today and how quickly you expect that to change. As your team, revenue, and financial complexity grow, the manual work required to maintain a spreadsheet —and risk of human errors — tend to grow with it. Setting up accounting software begins to make sense at that stage. No matter what stage your business is in, the goal is to build a financial system that gives you accurate, trustworthy information, without requiring hours of manual upkeep every month.

Explore Mercury’s accounting tools to see how you can automate your financial workflows and build a system that grows with your business.