Review of Xero – the cloud accounting software
If you run a business, the likelihood is that you will have heard of Xero, the online accounting system. It seems to be everywhere these days. That is why I found it important to make a review of Xero.
Are you wondering if this is something that you should be using? Maybe you are frustrated by your current accounting system and you think that Xero might be better. In this blog post, I review Xero so that you will be better able to decide if it is suitable for your business.
I have been working with accounting systems for over 30 years now and I have been exposed to a wide range of solutions – from complex systems integrated into ERP packages down to the most basic solutions used by microbusinesses. This experience includes leading the selection and implementation of solutions in large manufacturing industry and also being the accounting specialist on teams to help clients select large ERP (Enterprises Resource Planning) Solutions.
I approach this review of Xero in the same way as I approached a review of any accounting software – looking at approach, functionality, costs and ease of use
Before evaluating – begin with the end in mind
Before getting into the evaluation, you need to be clear on what exactly you want your accounts software to do.
Do you want to use it simply for bookkeeping – keeping track of customer balances, supplier balances, bank balances and vat owing. Or will you be using it to get analysis and useful insights into your business. For more on this see our blog post https://www.accountsplus.ie/financial-transactions-insightful-information/.
What type of transactions do you have? How many sales invoices per month? How many purchase invoices per month? Do you give and/or take credit? Can you download your bank statements from your online banking – if yes, what format?
Who will be using it – just you, staff members? What levels of computing skills do you have?
How much support will you be getting from your accountant? Will they be supportive of this or will they leave it to you?
What reports will you want to run?
Xero is cloud based and they take advantage of the fact that it is easier to share information between cloud applications than it is with desktop applications.
With Xero, you enter your sales invoices and purchases invoices as you do with most other software. Then you import your bank statements and you assign the various transactions to your income and expense classifications.
Pretty quickly, Xero “learns” from the way you have assigned, or coded, the transactions and soon starts to make suggestions as to what they are. You can accept or edit, those transactions.
Once the transactions are entered and coded, you can run any of the usual reports.
That is the core approach. However, Irish banks don’t facilitate the sending of statement information to Xero (bank feeds) so, for Irish users, a major advantage is lost.
Ease of Use
Setting up Xero
When you first go into Xero, you will see a dashboard which is customisable. This should show all of the elements of Xero that you want to access regularly.
Setup is straightforward. You enter your company name and your VAT number etc. You may need to get opening information from your accountant so that your opening position is correct and you should tailor the list of income and expense accounts to get the information the way you want it.
Once you have it set up, you can start to enter sales invoices and purchases. For each customer and supplier, you will need to enter their details. You can do that up front, but most people do this as they are first creating the transactions for that customer or supplier.
You can tailor your invoices to suit the way you want them to look.
Day to Day transactions in Xero
Entering invoices and purchases in Xero is easy. You have the option of having comment lines on your sales invoices. Once the invoice is entered you can email it to customers and the system records that the invoice has been sent and when.
You can set up recurring invoices or bills. You can also copy an existing invoice or bill to create a new one.
Training for Xero
Xero provides online training which you can use to get familiar with the product. They also have a test company that you can use to practice on and get familiar with the product.
There are also independent online training options available on online training providers such as Udemy. Just search for Xero in these training providers.
Correcting Errors in Xero
One area where I find Xero a little bit awkward is correcting transactions. As you enter transactions, you may make mistakes in coding or maybe in the VAT rates. Some accounting packages allow you edit these quite simply, much as you would in Word or Excel.
With Xero, you have to drill down to the basic transaction and then you have to put it into edit mode before you can edit. It’s an extra step which can be a bit slower than I like.
Reports in Xero
Xero has all of the standard reports that you would need – Profit and Loss, Balance Sheet, Aged Customer Balances, Aged Supplier Balances, Bank Reconciliation Reports and Trial Balance.
Report Dates in Xero
When you go to the Profit and Loss in Xero, they present current month plus last three months plus YTD. You also have other options – year to date, month to date, current financial year – which is monthly report.
What I find I need most frequently are last month or last month YTD. I can get those but I have to do a little bit more work to get them.
I would prefer if those reports were options to just click on. It’s a small thing but it just adds to the time needed.
How Xero handles VAT?
VAT is an important element of any accounting software. On paper it looks like Xero can handle VAT the way we, in Ireland, need it to. However, its not that simple.
Irish users are given the global Version of Xero and users are reporting difficulties with that. The more sophisticated users can work around it. Other users seem to struggle.
For Ireland’s cash basis of VAT, sales are invoice based and purchases are cash based. Xero can only do either “all invoice” (i.e sales and purchases) or “all cash” but not the Irish Hybrid. You can get around this by running the reports both ways but that’s messy.
VAT in Xero needs to be well setup at the beginning so that the data is set up for easy analysis. You need a good understanding of VAT and the software to do that. When you do set it up well, the EU reverse charge and the RTD reports can all be run with some workarounds.
Another issue to be careful with is the closing off of filed periods so that a late transaction for a VAT closed period does not get missed.
Drill down in Xero
Drill down is a feature that I find invaluable. If you are looking at a Profit and Loss and see a figure that looks wrong, you can click on the figure to open a new screen showing the make-up of that item.
From there, you can drill all the way down to the lowest level transactions making up the queried figure.
Xero has drilldown and it works well.
Using Xero to Collaborate with your accountant
One of the big advantages for me as an accountant is the easy ability to access clients accounting information.
If the client is having a problem entering transactions, they can ring me and I can check it out quickly by just logging on. I no longer have to travel to their premises.
If the client is concerned about results and wants me to look review his/her accounts, that’s easy to do as well.
Xero allows the accountant to help with the setup, possibly even to complete the setup, and to help with VAT returns or reconciliations. Overall, it makes it much easier for the client to have timely and reliable accounting information to support them in managing the business
Exporting from Xero
You can export most reports from Xero to Excel. The export works well, you get an excel sheet that is formatted well.
With some other accounting software, I find the exported sheets have merged cells which make working with large blocks of data awkward. And let’s face it, you are usually exporting the data because you want to analyse or edit it in some way. You don’t want to be hindered by merged cells. With exports from Xero, I don’t find that problem.
Bank Reconciliations in Xero
The big breakthrough with Xero was the automation of the bank reconciliations using bank feeds directly from your bank.
Unfortunately, as mentioned above, Irish Banks are not yet providing those feeds.
We do have a work around however. You can download transactions and import them to Xero.
Most, but not all, banks allow you to download bank transactions to a csv file. Once you have the csv file you can open that file and edit it so that the data is presented as Xero needs it.
Once you import the file, it’s as if the automatic bank feed had worked. You will be presented with a reconciliation screen where Xero shows you all the transactions imported and offers you its suggestion for what each transaction is. If it doesn’t know what the transaction is, typically the first time it comes across that transaction, it waits for you to tell it how to analyse it.
Working with csv files is a bit fiddly and I often get files rejected for reasons I don’t fully understand. I then waste time playing around with file, deleting rows or columns to make it importable. If you are not comfortable with csv files then you are not likely to be able to use this.
You can always leave the reconciliation to your accountant. However, that’s losing out on probably the best feature of Xero.
Departments or Projects in Xero
Xero has always had the facility to organise your transactions around departments or categories. This could be useful for larger businesses that want to track profits or costs by departments.
It only added the facility to track by projects recently. This would be useful for any business that works on projects such as building contractors or event management companies.
Xero offers three different user plans – Starter, Standard and Premium. Only the Premium plan handles multi-currency.
If your business needs to be able to handle foreign currencies then you will have to choose the most expensive plan.
The foreign currency feature is neat in that they pull the exchange rates from online rate providers so your exchange calculations are always reliable.
If the exchange rates change between the time the transaction (sales or purchase) was first recorded and it was paid, the system can handle the foreign exchange gain or loss and record them correctly.
Cost of Xero
The cost of the plans are as follows – Basic $20 per month, Standard $30 per month, Premium $40 per month. (I am surprised to see dollar pricing. I thought they priced in € but dollars are what they are showing for Ireland as I write this.)
They regularly have discounts for three to six months so you may be able to avail of that.
Remember that this is an ongoing monthly cost so if you are on the standard plan then that is going to cost you $360 per annum. This seems expensive when you consider that you can still buy Quickbooks desktop for about €180 and you will usually get 3-4 years out of that.
On the other hand, Xero is constantly being updated and, it being a cloud product, you are always working with the latest update. Also, unlimited support is included in the monthly fee and you also have access to an online user community. With desktop products, you typically have to pay extra for support.
Also, you won’t’ have to run a server if you are a multiuser site and you won’t have to worry about backups as Xero look after that.
What platforms can you use Xero on
Xero is a cloud product. You can access it through a browser (on Windows, Apple or Linux) or through apps for Android or IOS.
In my experience, the apps are best kept for creating and entering transactions. For working with reports or for importing bank transactions, you are better working in a browser on a desktop or maybe a large screen tablet.
A really attractive feature of Xero is the number of add-ons that are available for it.
Xero can communicate with other applications using APIs (Application Programming Interface). In practice, what this means is that lots of other cloud products have been developed that provide additional functionality to what is in the standard Xero.
A small industry has emerged of developers who create products to fill the perceived gaps in Xero. For example there are inventory apps, receipt management apps, crm apps, time tracking apps, job costing apps, integration with paypal etc.
A full list of apps can be found here – https://www.xero.com/ie/marketplace/s/app-functions.
Not every company seems to manage stock, or inventory, in exactly the same way. The standard Xero stock may not give you all the flexibility you want. In that case, there are likely to be add-ons that will help you.
Its good to have that option to expand functionality.
Xero is constantly being updated
One of the things that I am very conscious of with this article, is that, like most cloud apps, Xero is constantly being updated and those updates are automatically rolled out to all users.
I plan on updating it as often as I can and definitely for all major changes. But when you are reading this, keep an eye on the date and realise that there may have been new features added or problems since it was written
What other products compete with Xero
Right now, the main competitors are Quick Books Online and Sage Online. In Ireland we also have The Big Red Book Online , Sortmybooks and Surf Accounts.
I think Quickbooks is likely to be the biggest challenger to Xero. Xero was first to market but Quickbooks had an excellent desktop product which they have been migrating to the cloud. A few years back, QB started to move to the cloud. At first, I thought their cloud product was a long way behind the desktop offering but it has improved. Quickbooks pricing is slightly cheaper – € 14, € 21 and € 29 – and there is currently a 70% for the first year.
If you want cloud accounts and haven’t already switched to Xero, I think you should also keep an eye on Quickbooks Online. In recent months, I have been looking again at their cloud solution and I think it’s now probably as good as and may be getting better than Xero.
They seem to be bring a lot of the features of the desktop product into the online product which can only be a good thing. They also have the bank feeds functionality which, I hope we will one day be supported by the Irish Banks for all cloud solutions.
Their desktop product also has a weakness with VAT and I assume the online is similar. Like Xero, there are workarounds but it’s not ideal.
Unlike Xero, they have a companion desktop app that addresses slow internet speeds. You enter transactions into the app which buffers the transactions and uploads them as fast as your connection allows. I think that will address the complaint many bookkeepers have about cloud accounting performance.
I have been using Xero for my own accounts for a couple of years now. Before that I used Kasfhlow, another cloud accounting solution, for many years.
I think that for Xero to be a good fit for you, you will likely have
- A good broadband connection. Even with fast broadband, experienced bookkeepers entering large numbers of transactions, report that online accounting software is slower than desktop.
- Created your sales invoices on a computer already so entering them in Xero will replace what you are currently doing and not creating more work.
- Little or no purchases on credit. Won’t be entering many bills and your expenses will be made paid by bank or credit card transactions.
- Had either no inventory transactions or a small number of inventory transactions.
That mix of transactions will not be affecting as much by performance issues.
I have been happily using Xero for almost three years now and its a good fit for me. If you have high volumes of transactions or you have inventory items, it could still work but you would want to make sure that you can process those transactions fast and efficiently. That may require the use of add-ons.
Have I missed anything? Do you disagree with anything? Let me know. Every user and every business has their own way of doing things. I would love to hear other views on Xero.