How to Choose Accounting Software for Your SMB and Set It Up for Year One

Choosing accounting software is a strategic decision that affects cash visibility, tax compliance, and investor or lender confidence. This guide helps you shortlist the right tool and walk through a practical first-year setup so you can close months cleanly and make decisions with reliable numbers.

Evaluate Your Needs and Shortlist Tools

Define your requirements

• Business model: service, product, hybrid, subscription/SaaS, project-based, nonprofit.
• Sales channels: retail POS, e-commerce, B2B invoices, marketplaces, international.
• Complexity: inventory, multicurrency, multiple entities, departments/classes, project costing.
• Compliance: sales tax/VAT, industry rules (construction WIP, nonprofit 990, grants).
• Collaboration: number of users, accountant access, approvals, audit trails.

Compare core features

• Banking: live bank feeds, rules, cash vs accrual reporting, reconciliation tools.
• Sales: quotes, invoices, recurring billing, payment links, dunning.
• Purchases: bills, approvals, purchase orders, vendor credits.
• Inventory/projects: items with COGS, landed cost, project time and expense.
• Reporting: customizable P&L/Balance Sheet, budget vs actuals, cash flow, dashboards.
• Integrations: payroll, POS, e-commerce, expense management, CRM, tax engines.
• Security: MFA, role-based permissions, SOC 2/ISO attestations, automated backups.

Pricing and fit (common options)

• QuickBooks Online: broad ecosystem, strong for US SMBs; good for inventory and job costing with add-ons.
• Xero: clean UI, robust multicurrency and integrations, strong for international teams.
• Zoho Books: value pricing, solid automations, fits if you use other Zoho apps.
• Wave: very small businesses; basic invoicing and accounting. Tip: Model 3-year total cost (base plan + add-ons + per-user + payment processing). Verify data export formats (CSV/Excel) to reduce lock-in.

Test Before You Commit

• Run a 14–30 day trial with a sample month of transactions.
• Connect a bank feed and test rule accuracy on 50+ transactions.
• Create an invoice-to-payment flow; confirm fees, deposit timing, and reconciliation.
• Enter a bill, approve it, pay it, and match to the bank feed.
• Check mobile app capabilities (receipts, approvals) and support response times. Common pitfalls: choosing on price alone; underestimating sales tax complexity; ignoring export/API limits; picking a tool your accountant won’t support.

Set Up for Your First Year

Prep your data

• Gather legal info (EIN, address), fiscal year, tax rates, bank/credit accounts.
• Create opening balances: cash, AR, AP, inventory, loans, equity. Bring over AR/AP aging from your previous system or spreadsheets as of the start date.
• Decide accounting method (cash vs accrual). Many SMBs report taxes on cash but manage internally on accrual for accuracy.

Build a lean Chart of Accounts

• Start simple: Assets (1000s), Liabilities (2000s), Equity (3000s), Income (4000s), COGS (5000s), Expenses (6000s+).
• Example: 1010 Checking, 1200 Accounts Receivable, 2000 Accounts Payable, 4000 Product Sales, 5000 COGS, 6100 Software, 6200 Marketing.
• Use classes or tracking categories for departments, locations, or projects instead of exploding accounts.

Configure taxes and compliance

• Set tax rates and jurisdictions; enable automatic sales tax if supported.
• Map taxable vs nontaxable items. Set filing frequency reminders.
• For subscriptions or projects, set up deferred revenue or WIP categories if needed.

Connect bank feeds and set rules

• Link checking, savings, credit cards, payment processors.
• Create rules for common vendors (e.g., “Stripe fees” → Bank Charges; “Google” → Advertising).
• Reconcile weekly to avoid month-end pileups. Never accept duplicates when importing.

Invoicing, bills, and payments

• Customize invoice templates, terms (e.g., Net 15), late fees, and payment links.
• Enable customer portal or recurring invoices if applicable.
• Establish a bill approval workflow (requester → approver → payer). Attach PDFs to transactions for audit trail.

Payroll and integrations

• Choose built-in payroll or integrate a provider; verify GL mapping of wages, taxes, and benefits.
• Connect e-commerce, POS, and expenses. Map payouts and fees so deposits net to zero after reconciliation.

Month-End Close Checklist

1. Reconcile all bank and credit card accounts.
2. Match all customer payments and vendor bills; clear undeposited funds.
3. Review AR/AP aging; follow up on overdue invoices, resolve credit memos.
4. Record accruals, depreciation, and payroll liabilities.
5. Review P&L and Balance Sheet variances vs budget; investigate large swings.
6. Lock the period after review to prevent backdating.

First-Year Roadmap and Metrics

• Q1: Stabilize bank feeds, finalize chart, document close checklist.
• Q2: Automate rules, implement approvals, build budget vs actuals.
• Q3: Add cash flow forecasting and project/job profitability reports.
• Q4: Tax readiness: 1099/contractor reports, inventory counts, year-end adjustments. Key metrics: gross margin, operating margin, cash runway, AR/AP days, recurring revenue retention (if subscription), and burn multiple (if venture-backed).

Best Practices

• Enable MFA, restrict roles, and invite your external accountant early.
• Keep business and personal transactions separate.
• Back up exports monthly; test restoring from CSV.
• Avoid over-customizing the chart; rely on tracking categories.
• Review integrations after major software updates to ensure mappings remain correct.