- ✓Minimal use of jargon
- ✓Live bank feeds and PayPal support
- ✓Automated reconciliation of bank transactions
- ✓Multi-user at no extra cost
- ✓Support for flat rate and cash accounting VAT schemes
- ✓Customisable invoices, credit notes and statements
- ✓iPhone app
- ✕No automatic filing of VAT returns
- ✕Payroll limited to simple payment runs
- ✕Inventory option very basic
- ✕Non-UK servers
In a crowded market, another online accounting service doesn't, on the face of it, seem like much to get excited about. However, Xero stands out in that it delivers what SMEs need to run their businesses — and it does so online in a way that's both easy to use and affordable.
As with other SaaS (Software as a Service) offerings, you don't need any special hardware or software to use Xero — just a PC or a Mac, an internet connection and a browser. You can even keep on top of your finances with the inevitable iPhone app (and, soon, one for Android too) which, among other features, allows you to take photos of receipts and upload them to Xero for the ultimate in paperless expense claims.
You can access Xero via an iPhone app, as well as a browser on a PC or Mac
The main accounting software runs on Xero servers in Houston, accessible over 128-bit SSL encrypted links from just about anywhere. To use the service, you simply sign up for an account, provide your credit card details and you're good to go.
Of course, some initial setup work is required, to provide Xero with details of your business, the start of your financial year and so on. You also need to specify the VAT regime you want to follow — there's support for both cash accounting and flat-rate schemes that are popular with the small and medium-sized business Xero is looking to serve.
Most users will also have existing bank balances and outstanding invoices, purchase orders and other data to transfer. Those with existing Sage and other accounting packages can import this information electronically, but for our tests we opted for manual input, using real figures from a small company that had just gone through its year end.
A wizard helped us through the process and, apart from initially getting our debits and credits the wrong way round, it took less than 30 minutes to get our test accounts up to date and ready to use.
Invoicing is a key component of any accounting system, so we made 'accounts receivable' our first port of call. We found it all very straightforward. To raise a new invoice you just type in the figures — Xero automatically adds customers and suppliers to the contact database as you go and allows you to apply standard tax rates from drop-down lists.
Invoicing in Xero is easy — just type in the figures and apply tax rates from drop-down lists
On the downside, there's no facility to produce quotes and convert them to invoices later. However, invoices can be safely filed away until approved, which in some respects is just as good.
Products and services can both be handled here, with a basic inventory management tool to help with the former. There are also three levels of customisation for invoices, statements and credit notes: you can simply accept the Xero default; or you can upload a logo and specify its position; or you can download Xero's standard DOCX templates and edit them to suit.
Once raised and approved, invoices, statements and credit notes can all be printed or emailed to customers as PDFs, with a nice batch-release option to, for example, send out all the invoices raised at the end of the day.
Of course invoicing is only one part of the accounting process, and a really nice feature of Xero is the way in which it tries to continually reconcile real financial transactions — money actually received and paid out — against those entered in the books.
Xero makes it easy to reconcile bank and credit card transactions, with support for PayPal included
To facilitate this you can import electronic bank and credit card statements rather than have to key the data in from paper copies. You can even set up real-time bank feeds: HSBC is a full partner for this option, although accounts with other leading banks can be included. Traders on eBay will also be pleased to learn that PayPal can be integrated here and used for payments in and out, with BACS support another option.
There are also tools to discover how payments and charges are assigned, and the end result is that you can virtually automate the reconciliation of bank and credit card transactions. It's a bit like having an assistant continually checking what's coming in and going out, enabling bookkeepers and other users to keep on top of cashflow at all times, confident that the figures in Xero are an accurate reflection of what's actually in the bank.
Xero's dashboard gives an executive summary of your business's financial position
There's a dashboard display for an at-a-glance summary of the current position — useful for financial and line managers — plus extensive reporting tools for more considered analysis and planning.
Straightforward yet scalable
We really like Xero, which is one of the most usable online accounting systems we've examined. You will encounter terms such as 'accounts payable', 'accounts receivable' and 'chart of accounts', but the bookkeeping jargon is kept to minimum, with English explanations provided and plenty of help throughout the product.
Another big plus point is multi-user support, which comes as standard and is not a chargeable extra as with some rival products. Xero also makes it easy to delegate tasks and involve professional advisors — all at no extra cost, no matter what level of subscription you select.
Talking of which, although there's a budget (£12/month) implementation of Xero, most buyers opt for the £19/month service that removes the five-invoice and 20 reconciliation limit of the entry-level subscription. Alternatively you can pay £24 a month and get multi-currency support with automatic exchange rate calculations.
These differences apart, all subscriptions offer the same functionality, and Xero worked extremely well in our tests. We did notice a few limitations, such as the inability to file VAT returns automatically — but the software can produce the figures required and take you to the right screen to do it yourself, which is arguably just as good.
Similarly, although there's no payroll option you can do a pay run to print payslips and make payments based on PAYE figures provided by HMRC tools — an approach that many users will prefer.
Finally, because it's SaaS, any updates or bug fixes are made available to all Xero users automatically, at no extra cost and with no real effort required. Moreover, functionality can be further extended using add-ons, with a long list to choose from including an eBay connector and others to integrate Xero into various time management, payroll, CRM and other systems.