Xero Wants All Small Businesses To Do Accounting In The Cloud

For many small business owners, accounting can’t be further from being fun. Yet accounting is a vital function of any small business to manage their finances to ensure survival and long-term success. Understanding the necessity of accounting as much as its pain for small business owners, Xero (ASX: XRO) has made accounting fun, something that it never really has been.

From Zero to Xero

Xero is a cloud-based software as a service accounting platform. It has grown phenomenally from a tiny startup in New Zealand to a successfully dual-listed public company on the ASX and NZX with over 1,000 employees globally. In fact, the company’s value has grown exceptionally. After listing in November 2012, the stock peaked at more than 800% above the offer price. Today it trades at a more modest AUD$15.56, giving it a market capitalization of AUD$1.97 Billion. Some analysts rate the stock a sell, based on challenges with entering the U.S. in a bigger way. Revenues for the year ended 30 March were NZD$70 Million, up 83% from last year’s $38.4 Million . The company is yet to turn a profit.

While many small businesses were still using rudimentary accounting systems or even Excel spreadsheets, Xero knew the future was in the cloud. By giving small businesses, accountants and bookkeepers a way to do accounting online and from mobile, has revolutionized how they work. A survey by Xero revealed that 46% of businesses in Australia, not using cloud, are planning to do so in the next 12 months. Awareness of cloud accounting has been the driving factor.

By meeting the market need, Xero has grown rapidly. Last year in terms of customer growth, the business grew 83% globally and 100% YoY in Australia. By the end of 2014, Xero clocked over 400K users globally and signs up over 300 new customers daily. Last year Xero processed NZ$250 billion of transactions and 95 million invoices.

Scaling through add-on apps

Supporting much of that scale has been the early creation of an app add-on marketplace. Like the iOS or Android app markets, third parties are able to develop and distribute apps that hook into Xero via its API. Today the platform supports 350 apps. KPI and dashboard apps like Fathom, Spotlight and Crunchboards are popular. If you’re running twenty bars, you can quickly interrogate real time data in five minutes to identify which beer is selling the best. As the user base of Xero expands, more developers and entrepreneurs have been able to build solid businesses on top of the platform. Many pick up new customers from the networking at the annual XeroCon conference.

Beyond an app ecosystem, Xero has made the software extensible into other practical areas. Small businesses can link their point-of-sale transactions directly to Xero, through Square for instance. Xero has also processed over 250K tax lodgments and is venturing into assessing insurance premiums for CGU workers compensation.

Dominating Australia and New Zealand, U.S. a challenge

In Australia, the accounting software market was dominated by first-mover, MYOB. However, when MYOB ventured into the cloud market with its AccountRight product, a hybrid of online and downloadable desktop software, it already lagged behind Xero, which only offered an online product. According to Chris Ridd, Xero Australia Country Manager, half of Xero’s new daily customers in Australia switch from MYOB.

But in the U.S., Ridd admits adoption has been slower. Internally, leadership changes in the U.S. operation caused a reset; externally, Intuit has a stronghold over the market with its QuickBooks Online product. Optimistically, Ridd believes Xero is a strong challenger brand, “ There’s never been a credible number two in accounting in the U.S. until Xero . There are many disenfranchised Quickbooks customers out there.  We just have to get the execution right, ” said Ridd.

Product centric success

A large part of Xero’s success has been its philosophy on product design. For many small business owners who dread balancing the accounts, Xero has simplified accounting. It has even gamified the process of doing bank reconciliations. The Xero Touch mobile app is increasingly becoming a cornerstone offering, with more customers, especially tradesman, wanting to do things like sending invoices, recording expenses or simply track their profit and loss statements.

With Xero powering accounting for hundreds of thousands of small businesses across Australia and New Zealand who are the backbone of the economy, Ridd knows the stakes are high. “I tell my staff that we’re having a material impact on the GDP of a country, so the price of failure is scary. We’ve made investments into the company to sleep well at night but our competition have not made those investments,” Said Ridd.