Wave Accounting: How does it compare?
As a small business, there are few things that will have as big an impact on your ultimate success or failure than keeping good accounting records. The New York Times recently published an article identifying the top ten reasons why small businesses fail. Number four on the list was “Poor Accounting.”
A business can get by with a paper-based accounting system, but it isn’t really useful for making meaningful management decisions. It is also much more time consuming to maintain. What’s more, a paper accounting system does not have the infrastructure necessary to grow with your company. Every small business should start off managing its accounting in a computerized program. There are many programs to choose from; some are paid, some are free, and each has its strengths and weaknesses.
QuickBooks is the most widely used accounting software for small businesses in the United States and has been my software of preference for many years and, as a QuickBooks ProAdvisor, I have recommended it for years.
Recently, however, a new class of accounting software has been encroaching on the space where giants like QuickBooks or Peachtree have always stood. These are free cloud (or internet) based programs like Wave Accounting. Wave accounting has been featured in the New York Times, PC Magazine, and Inc. Magazine. With all of the hype and a free price tag, I wanted to see how Wave compared to the features I was accustomed to seeing in QuickBooks.
As a note, I understand that Wave’s market is the micro and small businesses and it seems like they are trying to fill the gap for companies who may not be on a software yet. To be fair, my review is based on a small, single person, retail business with inventory that is simply purchased and resold.
Lightning Fast Setup
The feature that most stood out to me was how easy it was to set up a new account on Wave. There are only two steps to registration: First, you put your email address and password (it didn’t even require a verification link, which surprised me); Second, you answer a few simple questions about your business. That’s it, you’re in! The whole process literally took seconds.
Another major plus feature for Wave is the ability to create multiple user access for free. Most small businesses want their bookkeeper and/or accountant to have remote access to their file in order to help them enter transactions, correct mistakes, and prepare their accounting for taxes.
Simple invoice and expense recording
No sub accounts
Although not a big issue, sub accounts are an excellent way to categorize expenses to allow for versatile analysis that is useful in budgeting and project costing. This is not a deal breaker, but I would have liked to have seen it included.
COGS Accounts not separated
Not inventory friendly
The other major disappointment that I found in the software was a major deterrent for small resellers. Wave accounting has very poor support for inventory maintenance. Inventory was listed in the recommended accounts list under current assets, however it was an essentially useless account in our test for several reasons. First, when you set up items for resale or purchase, you have the option to set the item as a sales item, a purchase item, or both. It made logical sense to set our item as both since we would be reselling the purchased items. The draw back to this method is that there is only one price. So when we purchase the item, the bill or expense defaults to the sales price. To avoid this you would need to create two separate items for sales and purchases or remember to alter the amount on the expense every time. I would have liked to have seen a sales and purchases amount field separately.
Second, and more serious than the first, when you go to purchase an item, the expense and bill windows restrict you to selecting only expense accounts. There is no way to assign an item to an asset account (like inventory) on a purchases screen without first flowing it through an expense account. The only way to fix this is to create an expense clearing account and flush it to inventory regularly using a General Journal. This adds an extra layer of complexity that should be unnecessary if the software were properly designed for inventory.
Finally, there are no reports that track inventory easily by item count meaning that, in order to perform inventory counts and track inventory correctly, you will need to maintain the inventory off of the software which again adds an unnecessary level of complexity.
Who would use Wave Accounting
Based on my experience with Wave accounting, I see Wave as being a powerful and useful tool for very small service-based companies with little or no employees who are looking for a simple tool to help organized their income and expenses for tax preparation at year-end.
This may not be the best tool if you like using standard analytics or ratios with your accounting records, if you use inventory as a major portion of your business or if you are anticipating heavy growth in the next few years.
Although I think Wave Accounting has a great potential to be a powerful accounting platform, and I like the model of add-based accounting freeware, I just don’t think Wave is there yet. The lack of inventory support and the problems organizing the chart of accounts are major black marks against it that sway accountants like myself away from Wave and back to traditional software such as QuickBooks. I will grant that my verdict is based on limited use of Wave and there are a lot of happy Wave clients out there. If you are using or have used Wave Accounting, I would love to hear your experiences. Please leave your comments below.