Xero (pronounced 'zero') was founded in New Zealand in 2006. They were cloud based from the beginning and grew rapidly to become the number one challenger to Intuit’s QuickBooks software. With over 3.75M paying customers, they are the second largest accounting software for small and medium size businesses. They have excellent core features for eCommerce businesses, and we recommend them for people who are looking for an easy to use software or a cheaper alternative to Quickbooks Online.
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Best for: Small ($0-10M revenue) and Medium ($10-50M revenue) size companies.
Xero is the second largest accounting software for small and medium size businesses and is our recommended tool for those looking for something that is easy to use and affordable.
Xero was founded in 2006 by Rod Drury and Hamish Edwards in Wellington, New Zealand. Drury, a software entrepreneur, and Edwards, his accountant, saw an opportunity to develop online accounting software for small businesses as an alternative to desktop accounting packages that would make it easier to share financial data. Xero launched in 2006 with a cloud-based accounting platform that enabled small businesses to access their financial data anytime. It focused on making accounting tasks simple and its platform open to allow integration with hundreds of third-party apps. Drury invested his own funds initially and secured further investment from entrepreneurs Peter Thiel and Craig Winkler. Xero quickly expanded internationally and by 2013 had customers in over 100 countries. It went public in 2012 on the New Zealand Exchange and then the Australian Securities Exchange in 2013. Xero continued growing globally, competing against accounting software giants like QuickBooks. By focusing on small business customers and utilizing the cloud, Xero became a leader in online accounting software. Today, they have over 3.75M paying customers and are second only to QuickBooks online (6.5M paying customers) in the accounting software industry.
Excellent Core functionality
Xero is a well designed product that will execute on the core functions of accounting and bookkeeping well. We won’t dive into accounting 101 here, but at the very core of accounting sits the General Ledger (GL). This is where your accounting data is aggregated and forms the backbone of your company’s “books”. Xero allows you to easily input data to the GL and reconcile the data once it’s there. It also has strong reporting features where you can create the three core financial statements: balance sheets, income statements, and statements of cash flows as well as other views of your financial data.
User Friendly
If you read any article about Xero one thing that will continually emerge is the idea that Xero is user friendly. We agree. But what does that mean exactly? It shows up in small design choices in the software. For example, rather than using the debit and credit terminology they use “spent” for credit and “received” for debit. In their dashboard, instead of accounts receivable, they use “invoices owed to you” (the Chart of Accounts and Balance Sheet still use accounts receivable). This language is more intuitive for non-accountants (although accountants might complain about this and prefer the accounting specific terms). Xero’s UI is generally simpler and less overwhelming for new users. Two column reconciliation is also probably faster in the Xero format than in QuickBooks. It’s important to note that the ease of use can be a double edged sword and can sometimes frustrate more advanced users and accountants. We heard accountants complain of certain accounts being locked to Journal Entries (good for preventing user error), but that it required reaching out to Xero support to find a workaround to achieve their desired outcome. Decisions like this reduce the potential for bookkeeping mistakes, but frustrate more experienced users.
Integrations
Because your accounting software forms the core of your company's books and finances, it’s crucial that the software you choose integrates well with other software. Like Shopify forms the backbone of your eCommerce stack, your accounting software forms the backbone of your financial stack. Like Shopify, Xero relies on third-party integrations that greatly expand the core functionality of the software and make it scalable. Xero excels with its integrations and has over 1,000 apps that it integrates with. It integrates with banks, payroll providers like Gusto, bill pay companies like bill.com, and expense management companies like Expensify. There isn’t a single tool that we recommend in addition to your accounting software that doesn’t integrate with Xero. As a market leader, partners are eager to integrate with Xero.
Scalability
If your goal is to grow your business, it’s important to choose an accounting software that can scale with it. We think Xero can do that. Because of the integrations mentioned above, it can scale an eCommerce business to $50M in annual sales and beyond. Since switching accounting tools is a painful process, we think it's smart to choose a tool that can scale. Even switching between QuickBooks Desktop and QuickBooks Online which are made by the same company can be painful. So even if software companies market an easy switch between accounting tools - don’t believe it. Each company structures their backend data differently which will make the process of switching time consuming and difficult. Xero has public companies that use its software which we think is testament to its scalability. At some point, it will make sense to switch to a more robust ERP solution like Oracle’s NetSuite or SAP, but we think Xero and its competitor QuickBooks will give you the longest runway on a single tool.
Note on Scalability
While QuickBooks and Xero are the most scalable of the accounting tools in our opinion, we would love to see one or the other build out features that could make them truly enterprise level tools like Shopify has done with Shopify Plus or Klaviyo with Klaviyo One. In order to do this, the companies would need to add permissioning and user access features that would make them more comparable to the NetSuites of the world. Additionally, they would need to add features that would increase the audit trail.
International
There are several benefits to being the category leading software. From the ease at which you can find bookkeeping help to making it easier for potential acquirers to diligence your business. Although QuickBooks is by far the largest in the US, Xero has a larger presence internationally (especially in New Zealand where it was founded and Australia and the UK). If you are based in one of these markets, then we would recommend Xero over QuickBooks. Additionally, because of this international focus, Xero has a better VAT module than QuickBooks.
Additional Benefits
Xero is the cheaper than QuickBooks Online. So if pricing is your number one concern, we recommend Xero. Xero also has unlimited seats vs QBO which tops out at 25. If for whatever reason you imagine yourself needing lots of separate users, then choose Xero.
Drawbacks to not being the largest
The main reason we give the slight edge to QuickBooks over Xero (especially for US based companies) is that QuickBooks is the most popular accounting software which will have downstream benefits. To be clear, QuickBooks and Xero are both incredibly popular. They are the number one and two most popular accounting software for SMBs. However, QuickBooks is the larger of the two. As of 2023, QBO has 6.5M paying customers where Xero has 3.75M paying customers. This size advantage creates benefits for QuickBooks users.
For the do-it-yourselfers, there is more content on the internet dedicated to troubleshooting QuickBooks problems. A quick Google search is more likely to yield results for a QuickBooks issue than a Xero issue. There are also more dedicated YouTube channels for QuickBooks where people can learn from accounting experts.
For those looking to hire outside accounting help, there are more accountants that are familiar with QuickBooks. This will let you more easily shop around for bookkeepers. Most accounting firms work with both softwares but some specialize in one to streamline their operations. You will be less likely to be turned down by an accounting firm because they only work with QuickBooks clients. If you’re hiring for internal finance roles, it will also be more likely that your candidates are familiar with QuickBooks.
Finally, if you go to sell your company, there’s a higher likelihood that the acquirer is familiar / comfortable with Quickbooks data. This can speed up the diligence and acquisition process.
A couple of notes: QuickBooks size advantage is most pronounced in the US. In international markets like Australia and the UK, Xero has the advantage. Xero is also growing faster than QBO so at some point QBO will no longer have the advantage. None of the above is binary and only means to us, at the margin, QBO is better.
Phone support
We heard mixed reviews on both Xero and QuickBooks’ support. Some people loved it and others thought it was the worst support ever. We think it’s a tie when it comes to support, but we do note that QuickBooks is the only company that offers live phone support [tip for Xero users: leave your phone number in your email and let them know that you’d like to be contacted via phone - this typically results in a phone call with support].
Bank feeds
QuickBooks users pointed to their bank feeds being stronger than Xeros. The US banking system has tons of regional banks with unique (bad) technology. Since they are based in the US, QuickBooks has spent time ensuring that their integrations work with all of these regional banks. Xero users might be frustrated that their bank feeds aren't working or stop working especially if they bank with a smaller regional bank.
Out-of-the-box dimensionality
QuickBooks comes with more transaction tagging options out-of-the-box than Xero. Xero only allows for two active tracking categories whereas QBO supports 40 in their least expensive plan. This makes Xero's data a little bit ‘flatter’, and gives QuickBooks deeper out-of-the-box analysis capabilities.
Invoice limit
QuickBooks allows you to create unlimited invoices on all of their plans. Xero caps out at 20 invoices per month with their Early plan, and scales up to the 1,000 invoices with their Established plan. So if you’re a business that generates a lot of invoices, you should choose QuickBooks.
Xero has three pricing plans. The Early plan is $15 per month and comes with all the necessary core functionality to manage your books and unlimited users but limits the monthly invoices you can send to 20 and caps the bills you can enter to 5 per month. The Growing plan is $42 per month and adds the ability to bulk reconcile transactions. The Established plan is $78 per month and adds the ability to manage multiple currencies, track projects, claim expenses, and deeper analytics.
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Do it for me solutions
What is Xero used for?
Xero is a cloud-based accounting software designed for small and medium size businesses.
How is Xero different from QuickBooks?
At their core both Xero and QuickBooks are very similar. When people argue about their differences they typically fall at the margins of both products. Xero has a cleaner UX that will be less overwhelming for new users and is less expensive than QuickBooks online.
Why is Xero better than Excel?
Xero has many advantages over excel:
Excel is okay to launch your eCommerce business, but we recommend switching to a proper accounting tool once your business scales beyond around $100k in annual revenue.
Can Xero import QuickBooks?
Yes, Xero can import QuickBooks data, but we don’t typically recommend it. Xero and QuickBooks structure their data differently and the import from QuickBooks will require time and effort. Typically accountants will charge a couple of thousand dollars to assist the transition from one to the other.
Do I need a bookkeeper if I use Xero?
You don’t NEED a bookkeeper since Xero is user-friendly enough for most users, but we typically recommend one so that you can focus on product and marketing while someone else spends time keeping your books up to date.
Is Xero good for eCommerce?
Yes, Xero and Quickbooks are our recommended accounting softwares for eCommerce companies. They can scale with your business from zero to $50M plus in revenue. You will eventually want to switch to a more robust ERP system like Netsuite or SAP, but Xero and QuickBooks will give your eCommerce business the longest runway until you need to switch.
Does Xero work with Shopify?
Yes, Xero has a Shopify integration. Some users complain about the integration and use an additional integration tool like A2X to aggregate data across sales channels, but we think the out-of-the-box integration is fine for most small Shopify brands.
Is Xero ISO 27001 certified?
Yes, Xero is formally ISO 27001 certified.
Is Xero SOC 2 compliant?
Yes, Xero is SOC 2 compliant.
Is Xero PCI compliant?
Yes, Xero is compliant with PCI DSS v3.
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