Starting the new year, I wanted to take a few moments to see where we’ve come so far in cloud accounting, the major events 0f 2014, and then partake in a little speculation as to what 2015 will hold. So here it goes…
Where We’re At with Cloud Accounting Software
- Core functionality is mostly here. Three years ago, there were serious basic features lacking, such as journal entries or reconciliations. Now pretty much all the major cloud accounting software has these down.
- Software in the small business (ex: QuickBooks Online, Xero, and Zoho Books) and micro business (ex: Wave, Kashoo, and Sage One) categories of cloud accounting software have continued to entrench themselves in their respective categories; with small business software providing deeper functionality and a ecosystem of apps vs. micro business software providing a simple and affordable way to get into online accounting software. I believe the major factor for the further entrenchment is due to money; the money being invested in the companies and the money being charged to users. At the small business software end, there’s lots of money sloshing around, so faster and broader development could take place. Accordingly, a lot more functionality could be added to small business software in the same time period vs. micro business software. Micro business needed to drop it’s price to reflect its comparative utility, with Sage One and Kashoo both dropping their prices by about $10 a month (they are now $14 and $5 a month respectively); Wave was always free. Micro business software will on average run you less than $10 a month while small business software will on average be $30 a month or more.
- Previously, mobile apps were companion apps focused on doing very specific things, such as creating and sending out invoices or entering expenses. Now they are becoming a lot more full featured and can be used for capturing receipts, accepting payments, and even performing reconciliations.
- Online invoicing and payments are now standard features. Now most every software can send out an invoice that can be both viewed and paid online.
- Bank feeds are the default way to get data into online accounting software. This was always kind of true, but to me it became even truer when Kashflow started to use the third-party bank feed service Yodlee. If you haven’t heard of Kashflow, they’re a popular name in online accounting in the United Kingdom. They’ve been holding off from bank feeds for years, citing potential security risks. Now they’ve finally decided that either they couldn’t last without bank feeds, or that they finally trust the security and the legality of using Yodlee’s scraper service to glean bank data on your behalf. In any case, bank feeds are the norm and most major banks can be connected to.
- Paperless workflows have improved to the point where you can realistically have a paperless set of books, whether through the use of native file attachments, expense receipt add-ons (ex: Expensify and Hubdoc), or dedicated document management add-ons (SmartVault).
- For the first time, more new customers chose QuickBooks Online over QuickBooks Desktop. This is the biggest news to me. Whether you like it or not, the online user base will surpass the desktop user base.
The Bigger Vendor Updates
- QuickBooks Online finished rolling out it’s new interface to all users. This rollout took around a year to complete. I for one am glad all users are on the same page now.
- QuickBooks Online hit 739,000 paying customers and projects 3 million by 2017. On the other hand, QuickBooks Desktop has 5.2 million paying users (which means it’s nearly 8x the size). But, it’s predicting a 25% decline in desktop users by 2017, which means 3.9 million users. So in 2017, the number of online and desktop users are predicted to be nearing parity.
- A new QuickBooks Online Accountant was released late in the year. This is a major step on the way to QuickBooks Online offering a practice management solution for QuickBooks Online.
- QuickBooks Online’s API opens up and the add-on ecosystem starts to flourish. Near the end of 2013 Intuit announced they were opening up their QuickBooks Online API. Now over a year later, the API is indeed more open and apps for QuickBooks Online have surpassed those for Xero, numbering over 400
- QuickBooks acquires Lettuce, and plans to integrate its inventory functionality into QuickBooks Online.
- QuickBooks Online gets bank rules, which helps close the gap between its bank feed functionality and Xero’s.
- Xero hits 400,000 paying customers. This means they roughly have half the amount of customers than QuickBooks Online. However, the more interesting part of this number is when you break it down regionally and compare it to QuickBooks Online. Xero only has around 25,000 paying customers inside North America whereas QuickBooks Online only has 100,000 outside of it. You can see that QuickBooks Online dominates North America while Xero commands the other major English speaking countries (read: Australia, New Zealand, and the U.K.). Consider the following population amounts:
- Australia: 23 million
- New Zealand: 4.5 million
- United Kingdom: 64 million
- Canada: 35 million
- United States: 316 million
So if you add up those areas, they come up to 341 million in North America vs. 92 million outside of it. That’s nearly a 4x difference. Provided trends don’t change, QuickBooks Online will continue to grow their user base in sheer numbers a lot faster than Xero.
- Xero acquires Monchilla to accelerate rolling out payroll to all States. This is important, because Xero has only been able to provide payroll in seven states at the time this article was written.
- Xero builds out its new reports centre. It’s not completed yet, but the work done has already gone a long way in making the service on par with QuickBooks Online’s reports.
- Xero adds Practice Manager to its U.S. version of Practice Studio.
- Zoho Books adds inventory, joining QuickBooks Online as the only other small business and micro business online accounting software that I’ve reviewed to get the feature. It is basic functionality though.
- Zoho Books now integrates with Avalara’s AvaTax for US sales taxes. Calculating US sales taxes in multiple States has never been a forte of online accounting software, so this is good news for those running businesses across many tax jurisdictions.
- Wave gets reconciliation! This was a big update for me, since it finally allowed me to recommend Wave.
- Wave got a new invoicing interface and customer statements. The new invoicing interface hasn’t rolled out to legacy accounts, as far as I’m aware, but the new interface is much friendly to use.
- Wave Payroll is now available in all U.S. States.
- Kashoo revamps the look of its web app. It’s mostly a cosmetic change, but it does allow for responsive resizing, which is nice.
- Kashoo gets an Android and iPhone app. The iPhone app is nearly as functional as its iPad app, whereas the Android can only really enter income and expenses.
- Kashoo gets basic project accounting.
- FreshBooks gets its own payment service. Provided that FreshBooks is indeed getting a cut of transaction sales (and it’s not all being passed on to WePay), this may be a profit centre that more and more online accounting software tap into (QuickBooks Online has its own merchant services and Wave partners with Stripe).
- FreshBooks gets an accountant center. Currently it’s little more than single login access to client files, but hopefully there will be more functionality in the future.
- FreshBooks gets $30 million in funding from investors.
- Sage One added some more basic functionality such as a general ledger, year-end closing, and more reports.
- Sage One releases an iPhone app.
Current Problems with Cloud Accounting
While cloud accounting software is great, there are still some ongoing issues:
- Add-ons are often basic import / export tools instead of truly seamless integrations.
- There’s no solid restore point system. QuickBooks Online lets you download an emergency backup that can be opened in QuickBooks Desktop, but its not a proper backup system with restore points.
- If you stop paying for the subscription, there’s still no standard export all button in all software, so this makes people nervous.
- Security is still a major concern, especially with all the news of hacks from major companies like Sony, Target, and Home Depot.
- While performance is fast and automation helps certain businesses, data entry heavy users find the software slower than desktop.
- The functionality is still not as deep in certain areas as desktop. This situation, however, will continue to erode as products mature.
- Ease of completing government requirements is not uniform across the vendors. There’s sales taxes, payroll taxes, and income taxes, to name the top ones. Better integrations and easy online filing will help convince users that online is the place to be.
What to Expect
Before you read the bullet points below, please know that this is purely speculation and I don’t have any inside tracks to what’s going to be coming out. I could be entirely wrong. But after watching the different players for a few years now, this is what I expect to see. Take it with a huge grain of salt.
- The ground seems to be shifting from getting extra functionality through add-ons to getting them natively. A couple examples are Xero with its payroll service and QuickBooks Online acquiring and integrating Lettuce apps. I expect deeper integrations with popular SAAS (software as a service) companies and potentially some more buyouts of popular add-ons. The user base is getting to the point where it makes sense for both sides to strengthen these integrations. It also makes sense from a product differentiation stand point where solid integrations are a real benefit to users.
- User adoption will continue to exponentially increase.
- Instead of news users asking “Why should I go online?”, the question will be “why should I go with desktop?”
- I wouldn’t expect to see the formation of new online accounting software companies. Rather, I’d expect the number of vendors to start shrinking as leaders consolidate. The new kids on the block, like Xero, Wave, and FreshBooks have been around for more than a half decade already.
- Vendors will expand upon their hybrid desktop app approach. A hybrid desktop app is one that is native to your desktop OS (like Windows 8 or Mac OS X), but it interfaces with the cloud for the data (this is actually how mobile apps work). Intuit has done this with its QuickBooks App for Mac app and Zoho Books with its Windows app. More native Windows and Mac apps seems inevitable. This may help with the slow performance issues that desktop users complain about.
- Practice Management will be a big focus for Xero and QuickBooks Online. With the core functionality of both software largely built-out and the functionality of both software getting more and more similar, appealing to accountants becomes even more important.
So, that’s what I saw happen in 2014 and what I expect to see in 2015. What about you? Is there anything I missed or think I got wrong? Speak out in the comment section below!