Are Cloud Based Accounting Apps Ready For Prime Time? 5 Things You Should Know / QuickBooks Online, Sage One, Xero and FreshBooks are competing for the Tier 1 small market. Intacct and NetSuite are competing for the bigger guys. What’s the difference?

Gene Marks for Forbes writes: It was just only a few years ago that when a client asked me to recommend them a cloud based accounting application I had few options to offer. And now, seemingly out of the blue, there are many. Many good ones.

QuickBooks Online, made by Intuit INTU -0.56% (my company sells QuickBooks products), was for a while only a glorified bookkeeping application but the only game in town. Now it has not only evolved as better business system, but it also finds itself competing against other, low cost online accounting applications with a growing list of features. For example there’s Sage One, from Sage (another client of mine). And Xero. And FreshBooks, Intacct and NetSuite.  For a business looking to take its accounting to the cloud there are at least these six major players providing options for you. And more up-and-comers too. But are these cloud based accounting applications ready for prime time? Should you feel comfortable taking your critical financial information and handing it over to these companies? Can these applications provide the same level of features and functionality that you’re now getting with your old-school, legacy, on-premise, but functioning accounting system? Should you make the switch?

If you’re a startup? Yes. If you’re an established company with a decent on-premise system then probably not yet. But soon. Why? Because the world of cloud based accounting applications is rapidly changing. The costs are coming down and the functionality is improving. So if you’re thinking of switching to a cloud based accounting system sometime soon then here are five things you ought to know.

1. You really don’t need to worry too much about security and uptime. Yes, they’re relatively secure and probably more secure than your own internal network (and definitely more secure than mine). The vendors either host data themselves or, like FreshBooks and Xero, use services like Rackspace. “Our service availability performance has been 99.99% since launching in 2007,” Jamie Sutherland, President of Xero U.S. told me. “Our service availability for the current calendar year is 99.998%.” Each application promises a certain amount of storage space and you can purchase more at a very low cost. You’ll have protection at the user level and most of these applications will also have further access protection against users who wish to export data or read/write in certain fields. The risk of some kid from Malaysia (or some secret military agency from China) hacking into your data and using it for nefarious purposes is always there, but that risk will never go away. All of the companies provide you with options for externally backing up your data or getting a database copy. Just be careful – like with any company offering cloud based services you’re still exposed if that company suddenly goes belly up or you have a serious billing dispute that causes them to cut off access to your data. Think about that before you sign any long term contracts.

2. There are two types of customers for cloud based accounting systems: Tier 1 (small) and Tier 2 (bigger than small). Most of the vendors I’ve talked to divide them up between those with less than 10 users and those with more than 10 users. QuickBooks Online, Sage One, Xero and FreshBooks are competing for the Tier 1 small market. Intacct and NetSuite are competing for the bigger guys.  What’s the difference? The vendors selling to the smaller market are doing so directly and are offering less features in their product (see below). Intacct and NetSuite have channel partners and accounting firms who are usually needed to implement their systems because of the complexity. And as you’ve probably guessed the cost of the Tier 2 products are more expensive than the Tier 1 products.

3. No one’s figured out migration. They may talk a good game, but none of these vendors have really come up with a seamless way to migrate data from your old system to theirs. Even if it’s their system. “It’s our biggest obstacle,” admits Sage One Product Manager Mike Savory. “Migration can be complex and expensive.” So you better watch out – if you want to get anything more than a basic list of customers and vendors into your new system you’re going to meet up with some challenges. Expensive challenges. Your most cost effective strategy will likely be to keep the detailed historical data in your old system for reference purposes and just journalize your opening general ledger into the new system.

4. The cost can be potentially higher than you think. Why? Most of the Tier 1 applications range from $20-$40 per month per user, and this usually doesn’t include payroll. A three user QuickBooks Online system therefore could cost you $1,440 per year or $4,320 over three years. However a three user, on-premise version of QuickBooks Premier has a one-time cost of $1,999. Of course there’s optional maintenance and support you can buy later. And you do need a server to stick it on. But for many established companies the annual cost of using a cloud based accounting system significantly exceeds the cost of just buying an on-premise version (or simply upgrading their existing software). Not only that, but there are less features.

5. Yes, there are less features. All of the vendors boast about their great user interface. But that’s tough to judge. The Tier 1 cloud based products offer general ledger, billing, payables, and a little project and inventory management. Most of the on-premise applications still offer a lot more. For example Sage 50, Sage’s on-premise small business accounting product, offers way more options for the typical small business than Sage One, like better reporting, dashboards, purchase and sales order management, deeper inventory controls, automation, assemblies and job costing. This is mainly due to two reasons: the cloud based products are still relatively new and are playing catch up and the vendors are targeting these products at the very smallest of companies which, for the most part, don’t require all this stuff. “This is why we’re offering “hybrid” solutions to our customers” Sage’s EVP and GM of Small Business Solutions Connie Certusi told me. “That way our customers can get the benefits of Sage 50 while taking advantage of cloud based features as they need.” Many of the cloud based providers, like Xero, offer programming interfaces to their products to help developers build connections to other products too. Intacct and NetSuite meanwhile, do provide the advanced functionality that you would expect from a full-blown cloud based ERP (Enterprise Resource Planning) system. But you’ll pay. NetSuite, for example, could cost a 5-10 user company anywhere from $5,000-$15,000 per year depending on requirements, services and modules needed.

So are cloud based accounting systems ready for prime time? Definitely for startups and for very small companies who want to keep their infrastructure at a minimum.  They’ve matured. And their vendors are placing big bets on their future. They are investing heavily in mobile functionality like workorders, T&E and quoting. They are adding features and integration to other applications, particularly customer relationship management applications. And as the cloud gets faster and more reliable I would expect to see not only their prices continue to come down but their functionality increase so that more and more larger, Tier 2 companies will have to seriously consider the benefits of migrating away from their existing in-house systems. Probably not in 2013 or even 2014. But that day is not as far away as you may think.