Is Xero the best accounting software for small business

This article was published on: 16th April 2020

How do we define what is “the best”

To say something is “the best” is a hard call to make as it will always come down to a matter of personal opinion and perspective. The main factors that I believe weigh into the debate as to whether Xero is the best accounting software for small business include:

• functionality
• user experience
• product support
• hosting
• value for money

We also need to look at how Xeros competitors stack up in each of these areas.

Who are Xero’s competitors in Australia?

Xero currently has about a 47% market share of the Australian small business accounting software market. MYOB comes in second with 41%. The remaining 12% mostly taken up by Quickbooks, Reckon, Saasu, Sage and excel spreadsheets.

For the sake of this article, I will mostly refer to do comparisons between Xero and MYOB as I have used both these products extensively. I have dabbled a bit with the others (the remaining 12 percenters) when clients use the software. However the functionality and user experience of the others do not come close to that of Xero or MYOB.

It is worth noting that these market share percentages vary greatly between countries. This is partly due to the software having different functionality in different part of the world. The major factor causing this appears to be connected to where the products were founded and the order that they branched out into different markets. Branching out to new markets is complex as each market/country is different. Different tax, payroll and reporting requirements and legislation. New markets are often slow for accounting software providers to become established.

Xero was founded in New Zealand in 2006. It the entered the Australian market in 2008 but didn’t enter the American market until 2011. In the 9 years to date since entering the American market, Xero has yet to have the impact it has had in Australia and New Zealand. In America Quickbooks is by far the most popular software, holding over 90% of the small business accounting software market.

Functionality of Xero

Xero has all the functionality of a traditional accounting system including:

• accounts payable
• accounts receivable
• payroll
• sales quotes
• purchase orders
• fixed assets
• bank reconciliations
• reporting and multi-currency.

I consider traditional functionality as accounting tasks that existed prior to the invention of computers. Back in the dark ages of paper journals.

As well as the traditional functionality, Xero also has what I would consider modern functionality. This is functionality such as:

• bank feeds
• a mobile app
• online payments
• file storage
• GST returns
• the ability to lodge documents and returns directly to the ATO.

I will not spend any more time on the traditional functionality of accounting systems. These functions are all fairly standard across accounting software packages. It is the modern functionality that differentiates accounting packages.

Bank connections (bank feeds)

Accounting for payments in and out of the bank account can be very time consuming. Transposition and reconciling errors are common. Fortunately, Xero has functionality that allows data from banks and financial institutions to flow directly into the software. Saving hours of time keying data and reconciling accounts. Bank connections are available for bank accounts, loan accounts and credit cards.

The information flows into the Xero dashboard in a format that resembles a bank statement. From the dashboard the transactions can either be coded directly to ledger accounts or matched off with open sales invoices, open purchases invoices or payroll entries previously raised in Xero.

A full list of the banks and financial institutions this functionality is available for can be found on the Xero direct bank feeds page.

If bank feeds are not available directly from banks, bank feeds may be able to be provided by a third-party provider called Yodlee. Yodlee collects the data from the banks, formats the data and then passes the bank feed data through to Xero. Fortunately, you don’t have to create an account with Yodlee to start using, as Yodlee bank feeds can generally be set up within Xero.

When setting up a bank feed directly from a bank, the majority of the time a feed will commence overnight by either clicking on a link in Xero that connects Xero directly to your online banking software or by logging into your online banking software and connecting it back to Xero.

Yodlee feeds are not as streamlined as direct bank feeds as they often require a form to lodged and approved with financial institutions before the feed will commence. This process is relatively simple and still worth the effort at it still can also save hundreds of hours in data entry time.

Xero’s Mobile app

A good mobile app has become a necessity for any business software these days, and the Xero mobile app is no exception to this. The Xero mobile app doesn’t have the full functionality of the browser based version of the software, however the mobile app can come in very useful as a quick reference when access to a desktop computer is not available.

On the Xero mobile app you can do things like viewing:

• bank feed transactions
• sales and purchases invoices
• contacts for customers and suppliers

All of these functions are very handy if you just need to quickly look up something. For example, you need to call a supplier when you are out of the office and only have your mobile phone or tablet.

From the mobile app you can’t do things like run financial statements or prepare a payrun. These more complex functionality must be done from the browser version of the software.

Online payments

ABA files

Enormous amounts of processing time can be saved paying suppliers and staff by using Xeros payment file (ABA file) functionality.

Once supplier and employees bank details are set up in Xero, the process to pay suppliers and staff is a very simple process of selecting items to be paid, downloading a file from Xero to your computer and uploading the file to your online banking software. Once the file is verified in your online banking software, the payment is authorised and the amount is paid from your bank account.

Xero Auto superannuation

To pay employee superannuation Xero has a very powerful payment gateway called Auto Superannuation that comes free with Xero Premium 5 plans and up.

Auto Superannuation is also relatively simple to set up by clicking a few buttons from within Xero. This will allow a 3rd party provider to withdraw funds from your bank account and to set up your phone password authentication. The process may take a few hours up to a few days for Xero to set up in the background.

The payment system works on a process whereby the superannuation accrued through Xeros payroll module appears in a table. The user goes in and selects which super payments they authorise the 3^rd party provider to make and transmit employee information to. Once selected the user then authorises payment. The funds are usually taken in a single payment from the businesses bank account and distributed by the 3^rd party providers to all nominated employees superannuation funds.

Prior to selecting superannuation payments to be made, employees details such as superfund, member number and tax file number should be checked to ensure accuracy. A rejected payment due to incorrect data matching at the superfund can be a little messy to correct as the superfund generally does not reject the payment immediately, so it is always best to set this up correctly before making a payment.

File storage in Xero

There are a number of ways that Xero stores documents so they can be easily accessed at a later date. Files can be in a variety of file formats including all the common formats such as pdf, jpeg, gif, png  and docx.

Files Library Inbox

Xeros Files Inbox allows users to upload documents up to a maximum size of 25MB per file directly to Xeros online storage. The upload can occur by either:

• attaching the file to an email and emailing the file to a designated xerofiles.com email address
• uploading the file directly through an interface within Xero
• taking a photo with a webcam or other similar device

If the file is emailed to an xerofiles.com email address. Xero strips the attachment off the email and stores only the attachment in the inbox.

Files can be stored permanently in the Inbox by creating a subfolder system that allows documents to be easily accessed at a later date. Many users choose to delete files from the inbox once they are attached to a transaction. This is so they are not doubling up on files.

Attached to a transaction

Files can be attached directly to transactions in Xero so that additional detail regarding the transaction is close at hand. These files can be uploaded while working in a transaction from the computer the user is working on, or from a file previously saved in the Files Inbox.

Types of transactions that files can be attached to include:

• spend and receive money transactions
• purchases and sales transactions
• credit notes
• pay runs
• journals
• inventory items and
• contacts.

BAS and IAS statements

Xero has reporting that generates Business Activity Statements (BAS’s) and other activity statements with just a few clicks. These closely resemble the BAS’s and IAS’s issued by the ATO.

The report that is generated is not one that should be solely relied upon in order to lodge the BAS. There is so much information that feeds into the document, and hence, many things that can go wrong. Don’t misinterpret what I have said to mean don’t use the report. The report should be used, however its accuracy should be verified.

All experienced bookkeepers will run a series of checks to ensure the generated report is accurate. These are checks on top of the standard data verification checks that are performed before the report is run. Common Business Activity Statement checks include:

• checking the GST in the report can be reconciled to the GST balances in the entities balance sheet
• tying back wages and payroll to reports generated within the payroll module

The most common reasons that can cause the BAS report generated by Xero to be inaccurate include:

• backdated transactions to an earlier BAS period. This is most commonly a result of poor period lock off procedures when the prior BAS was prepared.
• processing of wages through journals instead of using the payroll module.
• incorrect tax codes attached to transactions.

Ability to lodge documents and activity statements directly with the ATO Xero

Once all the data in Business Activity Statements has been verified, the BAS and other activity statements can be very easily lodged to the ATO directly from within Xero.

Xero also has the functionality to lodge other documents directly to the ATO from with the software. Other documents that can be lodged include:

• Taxable Payments Annual Reporting
• Single Touch Payroll
• super guarantee notifications and
• employee Tax file Number declarations.

User experience

Accounting software may have all the functionality that you could ever possibly use. However if users don’t have a good experience using the software, then the functionality is pointless as clients will leave.

User experience is one of the hardest categories to rate software. Most of the time you don’t remember a good user experience. But you do remember when you have a bad user experience.

In this section I’m just going to talk about a few of the experiences I have had with Xero and try to put them into perspective.

Having used Xero on small businesses for about 7 or 8 years now, I could probably count the not so fantastic experiences I have had with Xero on one hand. These were all extremely mild compared to other software I have used. For the sake of completeness I will include in this article.

Not so great experiences with Xero

As I’m creating this list, I’m realising that there is not much bad I can say about my experience with xero.

There have been a few outages over the years where we have been unable to access Xero for a few hours here and there. These have been very few and far in between. There was a major outage a couple of years ago when xero migrated servers. But then I ask myself the question “Has a server migration ever gone smoothly for anyone?”

Possibly the only issue I can think of where Xero could have handled a little better is a transaction listing report that Xero had available about 5 years ago. The report didn’t show the opening balance of the report as at the correct date. We lodged a support ticket to have the report fixed. Instead of the usual couple of weeks turnaround that xero seems to have to fix their software errors, the report took approximately 6 months (possibly less) to fix.

Great experiences with Xero

Using Xero is more like joining a community than just using software. Xero has an amazing ability to make you feel important.

Their user interfaces are always well laid out and continually evolving to improve. Their support is excellent, staff are always friendly. New features that make using the product even better are continually being added.

For Xero partners (accountants and bookkeepers) Xero run Roadshows once a year in many cities and towns across the country. These Roadshows not only have a fantastic amount of content regarding where Xero is planning to be in the future. They are also an excellent opportunity to network with other professionals. Xero marketplace Apps are also given the opportunity to display their products in break out rooms outside the main theatre.  These Roadshows are something that many of the xero community members look forward to every year.

Xero’s Product support

Xero offer 24/7 free online support only. This support is accessible when logged into Xero. I cannot find any statistics on their response time. From my personal experience, response time is generally within a few hours. With the occasional more complex query taking 24 to 48 hours. When the support call relates to bugs in the software, they may take a few weeks to resolve. However they generally communicate this to you at the time.

MYOB offer both online support by signing into my.MYOB or phone support by calling their 1300 support number. If you phone their support number, be prepared to be told many times how important you are to them, while you wait, and wait, and continue to wait. I personally always make sure I have at least 30% charge on my phone battery before calling MYOB support.

Hosting

The two products we have focussed on, Xero and MYOB vary differently in their hosting. This is mostly due to when the products were released and how fast technology has evolved over the last 15 years.

Xero’s hosting

In the last 15 years there have been changes to technology that allow software to be hosted 100% in the cloud. Xero has been a leader in this field. Their initial offering to the public was 100% cloud based and has been so ever since.

The only software required to access and use Xero is a web browser and an internet connection. Xero recommends the use of Google Chrome however many other browsers work.

MYOB’s hosting

MYOB’s hosting is not so easy to describe. Their most basic product MYOB Essentials is 100% cloud based however many of MYOB’s other products are hybrid products. By hybrid, I mean they operate partly in the cloud or a server and partly on the computer you are working on.

MYOB were offering products to clients very successfully before cloud hosted software was a reliable secure product. This was around the start of the century. When cloud software exploded they found themselves in the situation where it must have just been too hard to convert clients to a 100% cloud product from desktop versions of the software. So they came up with a hybrid system that they must be regretting. I know many accountants and bookkeepers who regret this decision.

Hybrid solutions

The problem with MYOB’s hybrid solutions is that it requires constant updating of desktop computer software. This isn’t really a problem if you are one person using the software for your small business. If you are a medium or large business you may have 50 people using a hybrid version of MYOB in an office. If one person upgrades the file to the latest version of the software, the other 49 people also have to upgrade their desktop software as well before they can continue using MYOB. A problem you just don’t have when using 100% online software like MYOB Essentials or Xero.

Above I mentioned that many accountants and bookkeepers regret the hybrid product. Why I say this is because they can’t just have one version of MYOB on their desktop to access the data for all their clients. Even if they only have clients that have MYOB AccountRight, AccountRight can have multiple versions.

If you want to investigate this further go over to MYOB’s software download page. Expand all the different products on this page to understand the level of the problem. To further complicate this, this page only lists the most recent versions. It is not unusual for new clients to have kept an ancient version of MYOB software alive on life support. Especially if they don’t require updates because they don’t have employees.

Value for money

Xero plans and prices

Xero pricing plans commence at $25 for their starter plans and increase based on the number of bank transactions, staff on payroll, and if multi-currency or automated superannuation is required.

Most small businesses don’t last long on a starter plan as the plan only allows up to 20 bank transactions. The only businesses that tend to remain on starter plans for long periods are contractors who don’t have a lot of expenses, only work for a small number of clients and only bill these clients once a month.

Their next plan up for Xero is the standard plan. This plan is aimed at small family businesses that are hiring or hired their first one or two employees. The price for this plan is $50. It is by far the most popular plan for small businesses with turnover under $250,000.

The Xero pricing plans increase from here based on the number of employees and if multi-currency is required. Xero also has plans that are available to Xero partners only (Accountants and bookkeepers). These are for clients that are not GST registered. These plans are lower cost and provided so that data can be collected throughout the year to prepare tax returns.

MYOB plans and prices

Choosing a MYOB pricing plan can be extremely frustrating. MYOB has quite a number of different software packages that have multiple pricings within these packages depending on functionality.

I am only going to look at their most popular product AccountRight Plus so I can compare to Xero. AccountRight Plus is $54.50 a month. On this plan you can have up to 200 employees and access to MYOB’s employee superannuation payment platform Pay Super.

Value for money – Comparing Xero to MYOB

If you are just shopping on price, then MYOB’s AccountRight Plus plan at $54.50 appears to be better value than Xero’s Standard plan for $50. MYOB’s Accountight Plus has a superannuation payment solution and payroll up to 200 employees for an extra charge of only $4.50. The Xero Standard Plan only has payroll up to 2 employees and no superannuation payment solution.

This however assumes that you are shopping on price. What you then have to ask yourself is why are so many small businesses currently switching from MYOB to Xero. The answer most likely lies in some of the hidden cost of MYOB, in particular the cost of time.

For instance, I know that when we onboard a new Xero client it is generally a lot quicker to gain access to their Xero file than it is with MYOB. With Xero it is a simple case of the subscriber inviting us into a Xero file. Xero then automatically sends us an email, we click on a link and we’re into the file. It is honestly a one minute job is you have the new client on the phone and they are in from of a computer.

MYOB version issue

MYOB is a different story all together for their many of their products. Being invited into a MYOB Essentials file (MYOB’s most basic product) is fairly easy and similar to Xero, but this is where the ease ends.

The multiple versions of MYOB mentioned under the Hosting section above can be real problematic, as you need to get the right version downloaded onto your PC to gain access to the file. This can sometimes take upward of an hour accountants and bookkeepers to gain access to a client’s file.

This is just one example of a hidden cost that needs to be considered in comparing value for money between Xero and MYOB.

Conclusion

I don’t think it will come as a surprise to you if you have read my article that I believe that Xero is the best accounting software for small businesses in Australia. It is always going to be horses for courses, but in general, more horses are suited to the Xero racecourse.

Prior to first using Xero I was running around preaching MYOB to every small business owner I could. With good reason so, it was the best there was on the market at the time. Xero came along and changed the accounting software industry forever.

Xero has trademarked the term “Beautiful accounting software” and not a truer term has ever been trademarked.