Meet Xero, the small business hero

By Vikki Bland

With tens of thousands of small businesses still running their accounting systems on spreadsheets, start-up company Xero believes there's a market for an online accounting service that negates the need for installed software and automates common accounting processes.

The new Xero online service includes an online cashbook with automated daily bank feeds via a direct link between Xero and specific customer banks - ASB, KiwiBank, ANZ and National are on board and Xero is working to establish links with the remaining major banks. Delivering business applications over the internet in this way is commonly termed "software as a service" and Xero CEO Rod Drury says it's ideal for countries like New Zealand that have large small business populations.

"Small businesses tell us the most important thing to them is cash flow visibility and time so we have looked at how we can best deliver both. Automated bank feeds change traditional accounting processes and require a small amount of online work a day - it's easy for small businesses to enter their latest accounts payable and receivable data because they normally use online banking every day to see who has paid them," says Drury.

Xero's software as a service model caters for debtor and creditor accounting and financial reporting, but does not support inventory or retail point of sale applications, making it mainly suited to service-based small businesses, accountants and financial service companies.

A few of its compelling benefits are daily data backups, online storage in third-party data centres and 24/7 browser-based access to the same accounting information from several internet-connected devices. Interestingly, some installed software competitors also see the benefit of an online accounting service.

"To be able to pay a small amount of money per month and not worry about accounting maintenance and backups for a [small business] seems like a great solution. The fact your accountant can jump on and help is also great. Bigger companies don't really suit this model but it must be a concern to the [small business] competitors in this market segment," says one accounting software supplier.

A listed company on the NZX (Trade Me founder Sam Morgan is on the board of directors). Drury says Xero only recently emerged from start-up mode and is now in the process of enabling accountants to use the service and act as a "virtual CFO" for small businesses. Olga Vakhrousheva, a chartered accountant for EWPA Chartered Accountants in Auckland's Parnell, says the benefit to accountants is the ability to access up-to-date client accounting information from any computer with internet access. She says this allows accountants to oversee accounts when clients are away and to collaborate with clients on accounts as only one online version of the data exists.

"We are trying the service with service companies like electricians, plumbers, and business advisory and property service companies. Before that, we had no control over the accounts of these businesses during the year - with Xero the client can manage their accounts on a day-to-day basis and we can see what is happening with the business and can advise on managing risks and growth," says Vakhrousheva.

Are there any downsides to using software as a service instead of a business buying and installing its own software? One obvious risk is that software as a service requires a reliable internet connection - lose internet access for four days (not unheard of in New Zealand) and you lose access to your accounts. Other criticisms are that online offerings tend to lack processing-intense functions that slow down online service delivery.

"Accounting is not just about cash flow - it's about inventory, manufacturing, payroll, job costing, CRM services and so on," says one software supplier.

Another observes that while many installed accounting packages are capable of being accessed via a secure online connection to a business network, accounting software hosted online is not operated and controlled internally. Access to historical data depends on the monthly subscription fee being paid - no fee, no access. So, what if a small business wants to move its accounting information from Xero to its own internal software?

Drury said in the event a customer wanted their historical data, Xero would send it back at no charge.

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