Cloud Accounting for the Small Business

My new weekly business and technology blog follows below.

Cloud Accounting for the Small Business

The general trend in the marketplace at the moment is moving from desk based accounting packages for businesses towards cloud products. Cloud based systems are growing faster than desk based systems, although it should be noted that part of that is due to the greater penetration of the market share by desk based systems.

With this innovation comes a different model of pricing. Packages like Quickbooks and Sage are usually one off licensing payments, with extra payments for a support contract if the user decides to take it.

There are also extra costs involved in upgrading to the latest version of the software, and both Quickbooks and Sage operate a “sunset” policy whereby they retire support for all but the most recent three products.

Although software is usually treated as a revenue expense, as a one off sum, it is more akin to a capital expense, and more like a car, which may be replaced after 5.

Of course there is nothing to prevent a user continuing to use the product on their PC after it has ceased to be supported, but older versions which run on XP may well not run properly on later versions of the operating system. There is also the dependency on the operating system – desktop systems in the UK and Channel Islands run mostly on the Windows operating system.

Cloud based systems by their very nature, can run on a variety of platforms as the essential is that the browser platform supports them, and browsers such as Google Chrome run on a variety of operating systems, so that one user might use the product on a PC, while another uses a Mac book.

The pricing model is more akin to a hire charge, a much lesser amount than a one off payment, but payable every month, so that it will work out more expensive, over time, than a one-off payment.

But included in that price is a helpdesk, often available online from within the product itself, and enhancements are added incrementally rather than having to upgrade to get them, and users can themselves suggest changes.

As these products are relatively new, the development teams are keen to enhance them to aid users, so feedback and suggestions are taken on board, and the products themselves are changing at a more rapid pace than their desk bound counterparts.

In some cases, the desk bound counterparts are playing catch-up. Xero has had streamlined bank feeds for some time. Sage has had bank input but is just implementing more bank streams in the latest iteration of the product.

However, this may mean that some features are not present – batch input entry of invoices, for example – is not yet available. It is something of a trade-off, to see how well the fit is between what a business wants to do, and how.

Desk products may have more features, but suffer from product bloat as successive versions have added features to the point where it would be useful to be able to turn some off. Cloud products do not as yet suffer from this, being relatively young products to the market place.

Handling large volumes of data can also be an issue. Different cloud products may cope better with larger amounts of data, and the same is true of the desk products, where Quickbooks becomes unwieldy but Sage runs rather well, and has mechanisms to archive off older data. Sage has also much better networking than Quickbooks.

An example of the rapid development of the cloud products is that after 7 years in existence, Xero is looking at some kind of archive option to speed some of the slightly slower reporting,

Interestingly Sage is starting to develop a hybrid design, whereby a Sage Drive can retain Cloud backups of data on a regular or automated basis, and these can be shared with third parties, such as accountants.

Backup is another concern, where desktop products require physical offline backups, while cloud based products are automatically backed up. Backup should be investigated to ensure it is robust with Cloud products, which is why the market leaders like Quickbooks and Xero will probably be favourites – they have solid systems in place.

While risk of internet disruption may seem a reason for preferring desktop over cloud, most disruption happens when there are localised power cuts affecting the end user, in which case neither product can be used. Reliability of electricity supply is by far the greater risk factor in today’s technology heavy world.

Another concern of end users may be where data is stored, especially given the breakdown of “Safe Harbour”. I have addressed this in a previous blog, and refer the user there.

As far as the market goes, Sage’s cloud product, Sage One, has virtually no penetration of the markets to compare with the two main rivals for small to medium businesses. The latest data shows that QuickBooks Online is ahead in the US and Canada, while Xero dominates the markets in Australia, New Zealand and the UK.

In countries like India, where internet connectivity is very poor, there is little market penetration by cloud products, and desk products dominate. A good solid internet infrastructure is a necessary condition for take-up.

On a global scale, the statistics show that QuickBooks Online has about twice as many paid subscribers as Xero. However, part of that reflects on the relative size of the geographical markets – the US and Canada has a vastly larger population than Australia, New Zealand and the UK.