Choosing the right accounting software for your business is an important exercise for small business owners. It may not be the most exciting exercise, but the choice will affect your business every day going forward. Plus, switching is difficult if you make the wrong decision.
Your business runs on accounting software. How well the software fits your business will determine how much time and money you spend on separate products and processes. How well the software works will be a big factor in how productive (and sane) your team is. The information you rely on to make decisions needs to be accurate without taking too much extra work to generate.
I’m a big fan of online accounting software, or software as a service (SaaS), as opposed to desktop software. With SaaS you don’t have to manage software installations or data on your own equipment.
Two of the leading accounting SaaS products for small business are Xero and Quickbooks Online (QBO).
I wrote a post almost a year ago extolling the virtues of Xero. I criticized Intuit for how slow they were to release QBO and build out its features.
However, I recently noticed that QBO has rapidly improved. I think it’s time to update my opinion.
I still love Xero and use it for most of the companies I’m involved in. It was good when I started using it five years ago (much better than QBO), and it has improved since then. QBO was extremely bare bones at the time and didn't come close to having the features we needed, such as bank feeds and multi-currency.
I recently took another look at QBO, and it has come a long way in the last 5 years. As far as I can tell, it has all the features of the Quickbooks desktop version, and possibly more. It just added multi-currency support and redesigned many of its standard reports.
Here is a comparison between Xero and QBO in a few key areas.
1. Data entry
Quick and easy data entry is essential, especially for high-volume businesses. Even a few extra seconds on each transaction adds up over time.
Both Xero and QBO have bank feeds, and the process for entering transactions from the bank feed is similar. Both allow you to create new transactions or match to existing transactions right from the feed.
Xero has a feature called cash coding. Cash coding puts all new and unmatched transactions in a list with fields that can be edited without going to a new screen. This allows you to quickly tab through and assign a name, account, and description to a long list of transactions.
2. Flexibility and ease of use
Xero is easy to use, but it is not very flexible. Usually there is only one way to do something. In addition, you can’t edit some transactions. Instead, you have to delete and re-enter if you make a mistake. For example, you can’t edit bank transfers or payments applied to bills/invoices.
Also, you can’t apply one payment to multiple bills denominated in a foreign currency. You have to pay each bill separately, and then match the separate payments to the actual payment in the bank statement.
QBO is extremely forgiving. As far as I can tell, any transaction can be edited. Further, any transaction can act as any other similar transaction. For example, you may add a bank feed withdrawal as an expense. After reconciling the bank account you may realize the withdrawal should have been a bill payment.
You can simply change the name on the expense to the vendor name and change the account to Accounts Payable. This creates a credit on the vendor account, and then you can apply the credit as a payment against the bill. No need to delete the expense, re-enter a bill payment, and re-reconcile the bank account (as you would have to do with Xero).
QBO also has familiarity going for it. Many accountants are familiar with Quickbooks desktop version, and the QBO functionality is similar.
Software bugs are frustrating. QBO seems to be more buggy to me. I don’t have specific examples, but often screen don’t load properly or features don’t work as expected. Sometimes the Xero site will go down for a few seconds, but I don’t remember coming across any bugs.
Neither product has the great reports compared to more expensive systems, such as Netsuite. Of course, you can find all of the standard reports like Income Statement, Balance Sheet, Aged Payables, Aged Receivables, General Ledger, etc. However, customization options are limited.
Xero has better options for customizing individual report layouts. You can group accounts together and create various detail and summary templates. It has the awesome feature of being able to use the same template across multiple companies. For example, I customize the layout of the income statement and balance sheet based on the range of account codes (from the chart of accounts). I use the same chart of account rules in most companies, which allows me to use the same template.
QBO has a wider range of reports and better ability to drill down into detail. They have also recently released a new set of nicely redesigned reports.
Winner: it’s a toss-up with a slight edge to Xero
5. Payroll integration
Both products have integrated payroll. Xero’s service is relatively new and is being gradually rolled out to US states, but it still has a ways to go. I haven’t used Xero payroll so I can’t speak authoritatively, but it appears that state and federal filings are not automatic (a big drawback in my opinion).
QBO has both basic and full service options. I use Intuit full service payroll for several companies, and I find it extremely simple, easy to use, and inexpensive. Tax filings are completely automated. All you have to do is enter hours (if you have hourly employees) and press a button to submit payroll.
As you can see, Xero and QBO have their strengths and weaknesses. Until recently I would have recommended Xero hands-down. However, QBO, with its recent improvements, is now a contender.
Rather than recommending one over the other, I suggest signing up for a free trial and exploring the features that are most important to your business.
If you are moving from Quickbooks desktop, you can automatically convert the Quickbooks data file to either Xero or QBO. This will allow you to test the software with real data. You can re-import the data file when you make a decision and are ready to move forward.
Good luck with your accounting software search!
Question: What other accounting software should small businesses consider?