For once, here is a non-technical post from me. I’ll describe my experiences of changing from Sage 50 to Xero accounting software. In particular I’ll highlight a number of pitfalls that you might wish to be aware of prior to switching to Xero.
Skip this bit if you don’t like politics.
HMRC (the UK tax authority) is imposing a policy called Making Tax Digital (MTD) from 1 April 2019. The policy applies to most companies whose turnover exceeds the VAT registration threshold of £85000 per annum. Therefore, a large number of small business are caught by it.
Let me say straight away that IMO, MTD is a bad, unnecessary policy. I have no issue with the requirement to submit VAT returns online instead of on paper – I have been doing that for many years. What I take issue with is the requirement for companies to use approved accounting software that sends VAT returns direct to the HMRC. You can no longer use a spreadsheet to do your accounts and calculate VAT, then log on to the HMRC portal and enter the figures. For now it’s still permitted to use a spreadsheet, but you must use approved bridging software to load that data directly from the spreadsheet and transmit it to HMRC. What is the purpose of this? The chances of someone entering an incorrect figure in the VAT form – which he/she will surely check before submitting it – must be tiny compared to the chances that an error has been made somewhere in transferring the data from paper or PDF invoices into the spreadsheet in the first place.
I’m very disappointed that the Federation of Small Businesses hasn’t opposed MTD.
None of this should have mattered to me, because I was using Sage 50 to manage my accounts and submit the data directly to HMRC. Unfortunately, Sage is a classic example of a company abusing monopoly power. Back in the late 1980s and early 1990s, there were several UK-developed accounting software packages to choose from. But over several years, Sage bought up all the competition and acquired a near-monopoly in small business accounting software suitable for UK-based businesses. Accounting software from overseas was generally unsuitable for use in the UK because either it didn’t understand VAT or it was in the wrong language.
My company was using Sage 50 Accountant Plus. This package was somewhat more powerful than I needed at the time, but it was affordable because I didn’t need continuous support, so I could avoid paying the annual support fee. About once every 4 years I would buy an upgrade to the latest version, costing around £600. So I was paying on average about £150 per annum.
Two factors made this approach no longer viable. First, would software that was MTD-approved when I purchased it still be approved 3 to 4 years later? Secondly, Sage started using aggressive tactics to try to force me to pay around £600 every year for support, such as sending me bills for annual support that I hadn’t ordered, threatening to use debt collectors if I didn’t pay, and changing the license terms. On top of this, Sage software had shown hardly any significant improvement over the 20 years I had been using it, and they started pushing customers to use Microsoft Office 365 in conjunction with their software – but I ditched the bloated and overpriced MS Office years ago for a mixture of Libre Office and Google Docs.
So I had reason to despise Sage and to look for alternatives.
Choosing a new accounting software package
The leading small business accounting software solutions are all cloud based. When I started looking, the popular choices appeared to be Xero, QuickBooks, and KashFlow. Sage made a belated entry into this market with Sage One, later renamed Sage Business Accounting.
The factors on which I made my decision were:
- Did the package have all the features that I needed?
- Could it import my existing data from Sage 50?
- What was the monthly cost?
- Could it import statements directly from my bank?
- Was my accountant able to produce annual accounts from it easily?
- Did existing users recommend it?
Regarding costs, all of them came in around £22 to £25 per month (most also had a more basic option at lower cost that didn’t meet my needs). Further research suggested that KashFlow was probably too basic for my business. Xero and QuickBooks both looked adequate, but UK-based accountants who were familiar with both tended to prefer Xero (including my own accountant). Xero would import my Sage 50 current year and previous year data at no charge. Incredibly, Sage doesn’t provide any facility to transfer data from Sage 50 to Sage Business Accounting.
So I chose Xero.
Making the switch to Xero
I chose to switch right after submitting my VAT return at the end of a VAT quarter. Switching at the end of an accounting year was not possible because my financial year ends after the MTD compliance deadline.
Converting the data was done using movemybooks.com. Xero pays for the conversion of up to two years of data. You can have additional years converted for £60 each. The first time I tried to do the conversion, there was a problem with a couple of transactions. A quick search of the help explained the problem. I fixed those transactions in Sage, tried again, and the conversion succeeded.
Later, I found that I needed to make some manual changes to the imported data.
Flag all bank transfers in the imported data as reconciled
When I came to reconcile bank statements with bank transactions, all my previous bank transfers in the current and previous year showed up as not reconciled, despite having been reconciled in Sage. This means they were offered as possible matching transactions to un-reconciled bank statement lines. To prevent this, I had to open each bank transfer transaction individually and then tell Xero to flag it as reconciled. It was only later that I discovered that there is “Enable flag as reconciled” option, not in the Settings where you might expect to find it but hidden in a Help menu. With that option set, you can select multiple items and flag them all as reconciled in one go.
For each supplier account, enter their credit terms
When I started entering purchase invoices (“bills to pay”) in Xero, it insisted that I enter a Due Date before it would accept the invoice. But then I realised that Xero allows you to set up the credit terms provided by each supplier, and once you have done that it will populate the Due Date automatically.
Correct the VAT number and country in records for overseas customers
Some of my EU customers had the VAT number imported correctly. Others showed a VAT number without the 2-character country prefix and the VAT country shown as “EU country”. For these I had to enter the correct country and insert the 2-character country prefix. Otherwise the VAT number isn’t be shown correctly on invoices to that customer, and the EC Sales List data contains invalid VAT numbers.
Xero: the good points
Using Xero has been mostly painless. The bank feed integration works well and bank reconciliation is generally much easier than it was with Sage 50. Having fetched the transactions from my bank, it lists the unreconciled bank transactions. For some of them, Xero suggests a transaction to match it against, for example an unpaid sales or purchase invoice. Otherwise, you can search for transactions to match it against, or enter a new transaction.
I have found Xero support responds quickly, although they were not always able to provide solutions to the problem I was having.
Xero: the bad points
As Sage 50 was much more powerful than my business justified, and Xero had such good reports, I was expecting Xero to do everything I needed with the exception of departmental analysis (which I knew that the Xero packages I subscribed to wouldn’t do, but decided I could manage without). So a few things came as a nasty shock.
Xero assumes that you don’t manufacture your inventory, you purchase it
I manufacture electronic parts for 3D printers, and I wanted to track my inventory. Nothing complicated like a bill-of-materials, I just need a means to tell Xero that I have manufactured X items at a total cost of £Y each. But I can’t enter an item cost without Xero assuming that I must have purchased the items from someone. So I’m having to enter the cost price as zero, which of course means that the stock valuation is completely wrong.
Xero support for printing packing slips/delivery notes is very poor
To create a packing slip in Xero, you need first to create custom invoice branding. The problem for me is that this has to be a .docx file and it can only be created in Microsoft Word. I ditched the overpriced MS Office years ago in favour of Libre Office. Xero does provides a .docx template to print both an invoice and a packing slip. Like many businesses I send packing slips with the goods and invoices by email, so I wanted to print a packing slip without printing the invoice. I tried editing their .docx template in Libre Office, but then Xero won’t import the .docx file written by Libre Office.
To their credit, when I reported this problem to Zero, they sent me a modified version of the template that prints just the packing slip. That is what I now use. But I am unable to add my company logo to it without buying MS Word. To print a packing slip, I have to select the invoice, switch the branding to “Custom branding”, then print it. Then remember to switch the branding back to Standard before I email the invoice. Come on Xero, printing packing slips/dispatch notes is such a basic function that it’s crazy that you don’t provide a separate “Print packing slip” button. Likewise, it should have a “Print pro-forma invoice” button.
You can’t enter bank transactions directly, you can only import them from statements
The bank feed took some time to set up, so when I came to reconcile my first set of bank transactions, there were about 6 weeks of bank transactions listed on bank statements that were not included in the bank feed, and therefore unknown to Xero. No problem I thought, I’ll enter them manually as I would have done in Sage. But there is no facility to enter a bank transaction manually. The only way to get bank transactions into Xero is to import them, for example in a .csv file. In case you want to enter them manually, Xero provides a .csv template that you can populate in a spreadsheet. I tried this but found it a pain to use. Fortunately, I was able to get a .csv file listing those transactions from my bank’s online service, and even after sorting out the columns, that was probably quicker than entering them all manually would have been.
If Xero doesn’t support direct feeds from your bank, and you are unable or unwilling to get a bank statement in .csv form, then this will be a severe disadvantage to you.
When you import a credit card statement from a .csv file, Xero may import all the transactions with the wrong sign
I didn’t want to set up a feed to my credit card provider via Yodlee, because all those online banking details must be a very tempting target for hackers. So I opted to download statements in .csv format from my credit card provider (RBS) and import them into Xero. The .csv files they provide include an Amount column that contains a positive figure for expenditure and a negative figure for payments you make to the account. Unfortunately Xero assumes the sign is the other way round, and there is no option to tell it otherwise. So I have to open each .csv statement in a spreadsheet, add a new column, populate it with the negated transaction values, and save it. Then import that one into Xero, taking the transaction amount from the new column.
Bank reconciliation doesn’t take account of credit notes
When bank reconciliation in Xero works well, it is a joy to use. But it ignores credit notes, which is bizarre. I had two supplier accounts which each contained multiple unpaid invoices and a credit note. For each one, I had made a bank payment to pay of the net amount due. When attempting to reconcile those transactions, in each case Xero found the matching invoices, but it wouldn’t include the credit notes in the list of available transactions. So it refused to reconcile them because the totals of the invoices didn’t match the bank payment. But if I went to the supplier account, the total outstanding amount shown matched the bank payment! I found that I had to allocate the credit note against one or more invoices manually; then the outstanding invoice total matched the bank payment and I was able to reconcile it. Why doesn’t Xero allow credit notes to be included in the reconciliation?
Xero won’t submit EC Sales Lists direct to HMRC
I was used to having Sage list my EC sales and then submit them for me direct to the HMRC portal. But Xero can’t do this. It will list the EC sales for the period you choose, but then you have to log on to HMRC and enter them manually. Fortunately I only sell my products in bulk these days, so the number of EC sales transactions I make is small enough that copying them across manually isn’t too tedious. However, if you make a large number of sales to EU VAT-registered companies, then this could be a compelling reason not to use Xero.
Xero doesn’t allow negative stock
Xero won’t let you invoice a customer for stock items unless it thinks you have enough stock. In an ideal world I would always book items into stock before I dispatch them to customers; but sometimes I need to ship goods to customers as soon as I have received and inspected or tested them. But Xero forces me to adjust the stock first, which is a nuisance – especially when I am not ready to book the entire batch into stock because I have only tested the units that I needed to ship urgently. I’ll probably give up using Xero’s inventory management.
User interface is confusing in places
Finding the right functions in Xero can be difficult, because some functions are hidden in categories that they really don’t belong to. For example, Reports is just for reporting functions right? Wrong! If you want to enter a journal, you have to go to Reports, then Journal Reports, where you will find Add New Journal. To enable bulk “Mark as reconciled” for bank transactions, you have to go into the Help menu.
Expenses are an expensive extra
The Expenses subsystem used to be included in the Standard subscription. Unfortunately, Xero changed to making it a chargeable extra right around the time I made the switch. If you want to use it, it will cost you £2.50 per user per month. It may be worth it if you employ travelling salespeople or the like, but it’s not worth it for me.
From my perspective, the difference between Sage 50 and Xero is this. Sage 50 is fully-featured accounting software, but lacks the ease-of-use of Xero. Whereas Xero has a much better user interface, but is less mature in terms of the features it offers.
Overall, I’m still happy that I made the switch, because I am paying less than it would have cost me to continue using Sage 50, I like the Xero user interface, and Xero appears to be a responsive company. But I expected more. I’m still fairly new to Xero, so I’ll update this blog entry as I learn more – and hopefully, as Xero continues to improve.
[Last updated 2019-02-27]