There are two groups where this question rages: start-ups and businesses which do not invest in the tools their accountants need.
At start-up, the priority of the business is to find clients and generate the cash they need to invest and grow the business. The business is small, and the owners run the business and are close to it to know how they are doing and the decisions they must make.
To fulfill VAT and withholding tax rules, they need to track the relevant details. Their information need is basic–track a few key numbers to enable them to meet tax obligations. For this Excel is adequate. It is not a suitable tool for accounting for all the transactions of the business.
Lack of Relevant Tools
Whilst accounting is essential, some businesses do not invest in tools for their accountant. To do their work, their accountants turn to Excel. It is readily available and comes at no extra cost.
Excel has a role in accounting. It is best suited for analysis, projection, and modeling, and not for accounting.
So, what are the issues with Excel?
Capturing data in an Excel sheet is a manual activity. Accounting software has features for extracting and classifying data from supporting documents and other applications. You can post the data with minimal manual intervention.
Manual processes create room for errors, making the risk of error much higher when you use Excel instead of an accounting software.
Lack of Controls
Accounting software has inbuilt controls over data input, processing, and outputs. A software does not prevent errors entirely, but in-built controls prevent errors such as single entries, unbalanced journal and help overall to reduce errors.
Excel has no inbuilt control for preventing errors. It requires the vigilance and skills of the user to prevent errors.
Need good Excel Skills
The user must know the features of Excel such as formulas, links, and formatting. The average accountant is not a master of Excel, and this increases the risk of errors.
Excel does not have an audit trail. It is difficult to track changes to the sheets. Accounting software has an audit trail. This tracks who used it and what they did. You can find out who did what and when with the software, and that enhances security.
What do We Recommend?
I recommend you start with an accounting software, not Excel, as poor accounting is expensive. An option to doing it yourself is to outsource to an accounting service provider.
There is a variety of small business accounting software. Find one that meets your budget and needs.
To get the best results, get an expert to help you start so you avoid the problems we discussed in this article Implementing-accounting-software-without-expert-help.