Self-directed IRAs: Risky? Smart? Or both?

James Sterngold for MarketWatch writes:  Rick Kahler can’t explain the mysteries of string theory, speak Mandarin or quote long passages from the Odyssey, but after buying and selling hundreds of properties for 30 years, he has a virtual Ph.D. in real estate.

That’s why the South Dakota native felt quite comfortable some years ago when he made what the rest of us might think of as an obscure investment, plunking down $7,500 to acquire a tax-lien certificate on a piece of property in his hometown of Rapid City. The certificate gave Kahler the right to the delinquent taxes on the property, plus interest, if the city collected them. He’d get the whole place if the owner defaulted. County records included a photo of a sturdy looking house and showed there were no other liens or mortgages.

Months later, the deed arrived in the mail, and the property was his. So he decided to drive over and check the place out. That’s when he noticed something was amiss. There was no roof or windows, not even a front door to knock on. In fact, there was no a house at all. Kahler had bought himself a vacant lot. The dwelling had burned down years before.

Kahler, now a financial adviser who manages $195 million in client funds, recounts the story with a chuckle, but this particular flop wasn’t just for any investment. He had planned to use this, actually, to help him retire. Indeed, while many Americans rely on their savings or 401(k) plans to see them through their golden years, high-end folks are falling in love with another option—something called the self-directed individual retirement account.

The idea is simple enough: Invest in anything you want, but put the investment into a special IRA, so it isn’t taxed until retirement. Suddenly, if you have enough wealth to get into alternative investing, the possibilities become almost limitless for setting up your future. If dressage horses are your thing, go ahead and invest in them. Sunflower farms? Sure. A heli-skiing business? No problem. And it doesn’t even have to be thrilling stuff. A lot of people are staking their retirements, at least in part, on everything from self-storage facilities to rental properties.

How many people are doing this isn’t exactly known because it’s not formally tracked. The Securities and Exchange Commission last year estimated that about 2% of all IRAs are self-directed, which works out to more than $100 billion. Clearly, it’s seen some crazy growth. In 2005, Millennium Trust Co., an Oak Brook, Ill., firm that is one of largest custodians of self-directed IRAs, handled about $733 million in assets; today, it administers $6.1 billion. Similarly, another big player, Pensco Trust, in San Francisco, is handling $10.3 billion in assets after acquiring another trust company to take advantage of industry expansion. Five years ago, it was $1.5 billion.

But while numbers like that are certainly impressive, some experts are expressing serious reservations about the skyrocketing growth of self-directed IRAs (we’ll call them SD-IRAs from now on—maybe it will catch on). That is because many parts of this business aren’t regulated. Indeed, critics say it’s called “self” for a reason. The accounts are administered by specialized custodians and trust banks rather than mainstream banks and brokerages. The administrators make sure you’ve got all your paperwork in order and provide annual valuations, but that’s about it: They don’t identify, recommend or vet investments. That job is solely up to the person whose name is on the account—in your case, that would be, uh, you.

One option, of course, is to hire someone with the expertise to do the due diligence when investing in alternative assets. Most of the people who successfully invest in SD-IRAs, however, seem to prefer to go it alone. Perhaps they possess specific expertise thanks to a lifelong career or hobby. Or maybe they’re tight with an entrepreneur or two, or three. Others just like learning new things and doing the homework. What these folks all have in common is that they see the do-it-yourself approach to alternative investing as a positive. It’s a chance to achieve wide diversification, be truly hands-on and exploit opportunities to earn above-average returns. It’s all about self-reliance. Ralph Waldo Emerson would love it.

As flexible as these accounts are, the law that created them back in 1974, the Employee Retirement Income Securities Act, does exclude some types of investments. The rules enforced by the Internal Revenue Service mostly are intended to prohibit self-dealing or stuffing an account with things that might be considered more than just an investment. Art and other collectibles such as antiques and stamps are no-nos. Life insurance, tangible personal property and booze—sorry, no wine cellars—are also verboten. You can buy a yacht with an SD-IRA, but only if it’s used in a legitimate charter business, and only if you keep your topsiders off it. Another important area that’s out of bounds: your family. There’s no helping the kids with a down payment on a house or cousin Joey with his scheme to open a disco carwash. You also can’t borrow from an SD-IRA or use the assets as collateral. Otherwise, feel free to get creative.

The recent growth in self-directed retirement accounts mirrors the broadening popularity of alternative investments of all kinds. Institutional investors have been using alternatives for years, of course, often putting up to a quarter of their assets in private equity, hedge funds, real estate and private partnerships. In a study last year titled “The Mainstreaming of Alternative Investments,” McKinsey & Co. noted that the trend has been catching on in retail accounts, too, leading to an expansion of 14 % a year in managed alternative assets “despite a very public flame out during the crisis” in 2008. Globally, alternative assets under management shot up to $6.5 trillion in 2011, from $2.9 trillion in 2005, the report says.

To a degree, the trend has been fueled by disappointment with Wall Street’s usual offerings. Joseph Mara, 62, a financial adviser in Palm Beach, Fla., is a case in point. He got interested in alternatives after souring on stocks and bonds. He opened his first self-directed account in 2011 for a portion of his seven-figure retirements savings. “I don’t have to tell you how disappointed we all have been with traditional assets in the past decade or so,” Mara says. His first foray involved a Las Vegas-based fantasy camp that lets would-be musicians jam with real rock ‘n’ rollers like Dave Navarro, Jon Bon Jovi and Roger Daltrey. Mara says he pored over the camp’s financial statements carefully and did his own analysis of what it would take to expand the business before agreeing to invest $200,000. He now expects his private-partnership interest in the camp to yield 12 to 15 % annually over its anticipated five-year life span. At his age, he says, he can’t tie up all of his dough in long-term deals. Yet he was so pleased with his first venture that he is now planning a second, a $100,000 investment in a private company that offers corporate training and development.

Howard Sontag, a former tax lawyer at Lazard Freres & Co. and now the chief executive of Sontag Advisory in New York, says he steers affluent clients into self-directed accounts to take advantage of the tax benefits when they invest in high-yielding alternatives such as middle-market leveraged-loan funds, which can spin off huge flows of cash—at returns of 10% or more—with minimum investments of $500,000 or so. Occasionally, wealthier clients from Wall Street firms use SD-IRAs to hold private-equity interests, which are often acquired at low valuations and can be illiquid for years.

Then there are the truly unorthodox investors, like Rajeev Kotyan, 43, a partner in the financial firm NUA Advisors, in Lexington, Mass. As a money pro, Kotyan fully understands the appeal of something like a Standard & Poor’s 500 index fund as well as the importance of portfolio diversification. Even so, he’s invested 70 % of his own retirement savings into alternative assets in an SD-IRA. He started out buying real estate, but when a friend, a farmer in California, mentioned how difficult it was to get financing for dairy cows, Kotyan had an inspiration: He’d front cash for the cows using funds from his IRA; the farmer would lease them back with an option to buy after five years. Kotyan studied animal husbandry, the milk market and how to gain title on a cow, but let his buddy handle the heifers. “I did lie awake for the first month wondering, ‘What have I gotten myself into?’” Kotyan says. But he says the arrangement worked well and the—pause for dramatic effect—moo-lah was marvelous: He ended up earning a 20 % return tax-free.

Kotyan also invested in competitive dressage horses. At first, “I didn’t even know what dressage meant,” he says. But a horse handler at a farm in New Jersey told him a story that piqued his interest: Americans were willing to pay hefty premiums for high-quality competitors from Europe. Kotyan says he went to work investigating every aspect of the sport, in which horses and their riders perform a sort of equestrian ballet. “One of my first surprises was finding out that horses have passports with photos,” he says. He teamed up with the horse handler, forming a private partnership that acquired successful dressage horses in Europe—with names like Whitney and Franziskana—and then brought them to the U.S. Elaborate measures had to be taken to prove the identity and health of the horses, including samples of blood and tissue. In essence, the two investors flipped horses, buying them in Europe, importing them and then selling them for what turned out to be big profits in 2008 and 2009. While prices for dressage horses sometimes reach several hundred thousand dollars, Kotyan and his partner limited their downside risk by keeping their acquisitions below $40,000. The venture delivered about a 35 % return for his self-directed account.

The fees paid to the custodians of SD-IRAs are generally much steeper than in traditional accounts. Millennium Trust charges $50 to open an account, a $300 annual fee no matter the size of the account, a $125 holding fee per asset or security and a $250 transaction fee for real-estate investments bought for the accounts, according to T. Scott McCartan, the firm’s chief executive. Not only does income from the assets remain in the account, but the expenses needed to maintain the assets—such as upkeep on rental properties, taxes and management fees—must come from the IRA too. As with any trust arrangement, investors aren’t allowed to commingle their personal funds with the trust’s funds. That’s why advisers urge that investors keep a cash cushion in their accounts, particularly when they invest in real estate.

Proponents of SD-IRAs believe they benefit society because they help lubricate entrepreneurial activity and provide more options for investors. Although corporate lobbyists might think otherwise, some experts say there’s no good reason why tax law should push retirement savings only into things like publicly traded stocks or mutual funds. That said, self-directed accounts can be an attractive vehicle for fraud because they are meant for long-term investments, and there’s a tax penalty for early withdrawal. This can make investors in these accounts more passive as well as provide cover for “a fraud promoter to perpetrate a fraud longer,” according to an investor alert issued by the SEC in 2011. What’s more, because alternative assets often involve no prospectuses and are unregistered, there is little if any oversight by regulators—until it is too late and a con artist has made off with an investor’s retirement money. Other potential problems include price gouging and, of course, illiquidity. When investors need to sell some of these assets, there may not be a ready market for them.

“By itself, the idea of a self-directed IRA is not a problem,” says Joseph Borg, director of the Alabama Securities Commission. “But you can put all sorts of junk in there. We have a lot of issues with them. One of the biggest is that people just assume that the custodian is looking out for them. The fraudsters love it.” Regulators add that con artists sometimes deliberately push people to open SD-IRAs when selling them bogus investments because of the lack of scrutiny of the whole field.

Such problems, however, haven’t deterred investors like Dick Eschleman, a 73-year-old semiretired investor in Sonoma, Calif. A decade ago, he got fed up with Wall Street and dumped all of the mutual funds in his IRA. Instead, he began using the funds to make subprime loans on prefabricated houses. The switch, Eschleman says, enabled him to turn the $200,000 he started with in the account into nearly $1 million. Eschleman says his returns now average 15 % a year—even after accounting for some loans that inevitably go bad. The activity has transformed his retirement and given him something to do that he enjoys and finds fulfilling. “When everything works out, and you check things out yourself, you can do very well,” he says. 

How features in QuickBooks Online and QuickBooks Online Accountant help professionals work with business clients (Click To View Video)

Executive Editor Darren Root, CPA, speaks with Intuit’s Woody Adams about new features in QuickBooks Online and QuickBooks Online Accountant edition. From the 2013 New York Accounting Technology Show.

7 accounting packages for Australian small businesses compared: including MYOB, QuickBooks Online, Reckon, Xero

 Daniel James , William Maher  for Business IT write: Prior to 2000, a lot of small businesses got by quite happily using paper-based accounting systems. But the introduction of the GST saw many of them switch to using accounting software, assisted by the $100 voucher from the Commonwealth Government that practically covered the cost of the most popular small business packages.

While keeping track of things on paper was still practical if your business had a modest number of transactions, the quarterly BAS added significantly to the reporting load. There was some overhead involved in making the switch from paper to computerised bookkeeping - a process that this writer went through in his own business at that time - but moving to a computer-based system meant you could extract the required numbers faster than you could transcribe them to the official form.

The Government was also keen to get small businesses onto computerised systems as it believed this would allow owners to more closely track their operations and hence improve their performance.

“GST has been a good thing for small businesses as owners now have to look at accounts quarterly rather than waiting until the end of the year,” says Debra Anderson, owner of bookkeeping and tax agent firm Legally BAS.

Not everyone likes the additional work introduced by GST.

Your accounting software can create your BAS report

Kelvin Deer, director of PT Partners Accountants and Business Advisors and the Australian Bookkeepers Network, notes that “some businesses simply don't want additional reports. That’s surprising when you consider the failure rates among small businesses - you'd think they'd want to know how they track quarter on quarter for sales, profit margins, cash flow, or whether their expenses are increasing. Working with a bookkeeper or accountant on regular reporting could bring about better outcomes.”

The computerisation of small business accounting also laid the foundation for electronic reporting to the government. Your accounting software can create your BAS report, and you don't necessarily even need to fill in a piece of paper anymore to file it with the ATO, potentially reducing the ATO’s costs (no more scanning of paper forms) and speeding processing.

Apart from the end-of-quarter and end-of-year chores, a computerised system really does make it easy to determine your exact position at any time (provided you keep up to date with data entry). Later we'll explain why this can be useful.

But it's important to go about this the right way. “The time to set up your accounting software is when you start a business. It’s the first thing you should do after getting an ABN,” says Debra Anderson.

Even if you plan to do your own bookkeeping, “make sure it's setup professionally,” she advises. “It's not a big task, and once it’s done properly you can mind your own business. But get it wrong and you'll be reporting the wrong figures in your BAS and income tax returns, as well has having an erroneous view of how your business is performing.”

If your business is not big enough to justify even a part-time accounts clerk and neither the principals nor their spouses want the job, you can engage a bookkeeping service. It may be worth seeking out one with expertise in your field of business - if you are a manufacturer, a bookkeeper that has previously only worked with medical practices may not be the best fit.

But I've done without this software for years, why change now?

There is nothing wrong with using a paper-based system or perhaps a spreadsheet to do your books. But there are some compelling reasons to consider switching to accounting software.

Here is one reason: Entering all the transactions into your system can be a headache. Some accounting packages can link to your bank account(s), and can substantially reduce the time you need to devote to this task. The software automatically matches a bank transaction it sees in your bank account with an existing item in your books, or enters a new item in your books automatically if there's not one there (using the information it finds in your bank account). These systems are not perfect, as we explain later. But if done well, it means you may never have to record a phone bill or rent payment again, and customer payments will automatically be reconciled with your invoices.

But that’s not such a big deal if you make most payments from petty cash and you have a relatively small number of customers that pay you once a month (if you’re lucky!).

Here is another reason: accounting software also comes into its own each time you need to submit a BAS. Typically, such packages have a ‘BAS report’ (the terminology may differ) that can be generated with a few clicks of the mouse - all you really need to do is specify the relevant quarter, though a sensible design would default to the most recent quarter. Then it’s just a matter of either transcribing the numbers yourself to the ATO’s form (our preference is that the report mimics the layout of the form to minimise the risk of copying a number to the wrong place), or you can even do away with paper and file it electronically via a feature called SBR (Standard Business Reporting), the Australian standard for business-to-government reporting). You will even save the cost of a stamp each quarter, and we know how much some small business people resent paying postage on mandatory reporting.

There’s nothing wrong with staying with a paper-based system if it suits your business. “We survey around 1,000 bookkeepers each year, and 13% of them still offer a manual bookkeeping system,” said Deer. “Manual can be cheap, and easy to handle if the requirements are basic.”

"But if you hand over a shoebox of records and expect your accountant to turn it into a pristine set of accounts, that could be an expensive exercise at $150 to $200 per hour,” he warns.

Some businesses get by with a set of spreadsheets. “A lot of tradies, for example, don't use packages at all. It's a lot easier for them to type the information into a spreadsheet,” says Deer. “Since many don't have any staff, they don't have to worry about payroll.”

The downside comes when they go along to their accountant at the end of a financial year, and have to pay to have that spreadsheet turned into a balance sheet and profit and loss statement.

These are some of the day-to-day advantages of using accounting software. But there can also be some long term advantages, as we'll explain.

Paper vs accounting software

Let's look at the day-to-day advantages of each approach in a little more detail.

There are still some situations where it makes sense to stick with a manual system. As business.gov.au (one of our favourite online resources for small business) points out, “While manual systems require more time spent on paperwork, they can be ideal for business owners who aren't confident using a computer and have simple affairs.”

The ATO offers a set of blank forms that can be printed and used to keep the financial records of a small business. You can buy duplicate receipt and invoice books and other business stationery from newsagents and office suppliers.

The ATO also provides specific guides to record keeping in certain sectors, such as cafes and plastering.

If you are a taxi driver, for example, your records will probably be very simple. You collect cash and credit fares from customers, pay a rental to the taxi owner or operator (whether that is a flat amount or a share of the takings) and incur a few other expenses (like mobile phone bills, parking fees and buying a GPS). It’s hard to see why anyone would not stick with paper records in this situation, and the ATO even provides a worksheet for taxi drivers to record their takings and expenses.

Accounting software comes into its own as things get more complicated. Do you operate in an industry where it is customary to extend credit to customers? Unless you put in extra effort upfront, determining who owes you what can be a time-consuming process with a manual system.

Accounting software can also save you money. “I think a lot of small business people are ripping themselves off,” says Debra Anderson. “Every small business person pulls out their wallet and buys things on an almost daily basis. They can claim back the 10% GST and the expense is tax deductible, but only if it gets into their books.

“That’s the beauty of systems like MYOB LiveAccounts that have automatic bank feeds. Once linked to the business account or credit card, these transactions are automatically recorded. For example, I've setup a rule so that if ‘Silver Service’ appears in a transaction in my bank account, the software allocates it to taxi travel.

“We small business people are time poor, and this type of automation helps ensure the accounts are up to date and increases the likelihood of everything being captured and claimed.”

While this "bank feed" feature can save time, be aware the process cannot always be completely automated.

“Think of a café or restaurant purchasing supplies from a supermarket,” says Kelvin Deer. “A bank feed can take care of the initial data entry, but human intervention will be needed unless all the items on the invoice are either all taxable or all GST-free. Some items - salad mix, perhaps - might be GST-free while other items - say cans of soft drink - might attract GST. These items must be manually allocated from the single invoice to correctly determine any GST. Some software lets you allocate items individually, but if you receive an invoice for 20 or so items that’s a significant amount of work.”

Furthermore, some suggest bank feeds are not 100% accurate, so a manual reconciliation is still needed. Still, that’s less work than keying in each transaction.

BankLink - the service used by MYOB, among others - says it “uses sophisticated error checking systems to verify every one of the 15 million transactions we process every month… The incidence of our data feeds needing to be corrected, after data has been sent out, average less than 10 transactions per month. Our overall data accuracy is better than 99.9999 percent.” (See also this BoxFreeIT interview with BankLink CEO John Dunkerley).

Paper vs accounting software: Pros and Cons

	Paper system		Software system
Consideration	Pro	Con	Pro	Con
Cost and Simplicity	Easy and cheap in simple situations	Does not scale well as business volume and complexity increases.	Most small business accounting software is quite cheap.	Cloud services and other subscription plans lock you in to a stream of payments. Switching between programs (or services) takes effort.
Backup	Low risk of technical failure	What happens in a fire or flood?	Automated off-site backup is easy (and inherent in cloud systems)	Working life of hard disks (and possibility of data damage by malware) means a rigorous backup regime is essential
Dealing with your accountant	An accountant can always read paper records	Fees likely to be higher, as it is usually easier for an accountant to work with electronic records	If used appropriately you can get more advice and less donkeywork from your accountant for the same price. Cloud and hybrid cloud systems can give your accountant "live" access to your records	May increase fees if used inappropriately, resulting in more work for the accountant in unscrambling your mess. There is a risk that an accountant might usher you towards a package that suits their business rather than yours
Automation		Practically nil. All data entry, analysis and reporting done by hand	Plenty of scope for automation. Data may come from bank feeds, reports generated with a few clicks. BAS may be lodged electronically
Physical bulk		Can become an issue over time	Practically speaking, space required is independent of the amount of data being stored. Possibility of digitising (scanning) any original paper documents such as receipts to save space

Keeping on top of your books vs playing catch-up

To a large extent, your books act as a rear-view mirror. They tell you where you’ve been, not where you’re going. But if you stay on top of the bookkeeping, you won’t be looking so far back down the road - you’ll be a lot closer to ‘where you are’ than ‘where you’ve been’. So whatever system you use, it helps to get the data entry done promptly.

If your books are computerised, any reports you need can be generated with very little effort. Turning paper records into a profit and loss statement or even just checking whether you should have enough cash on hand to meet a large pending expense, can take a significant amount of work.

Why does any of this matter? For one thing, if you want to borrow money from a bank or other lender, they’ll expect to see your financial records, among other things (see here). If those records are already up to date it will save you making a special effort, as well as helping to project an image of a responsible operator who is in control of their business.

If you use an accountant, up to date books will also help them provide you with more accurate and timely advice. Examples include predicting cash flow peaks and troughs, and more accurately estimating your future tax liability. While a big tax bill is usually a good thing as it means you’ve made plenty of money, an accurate forecast means you can set aside just the right amount of money. Being suddenly told that you face a $50,000 tax bill in a few months can be a strain.

“It's always better to be up to date with your accounts,” says Ben Vojtisek, senior accountant at MDB Taxation & Business Advisors. “Then when you consult your accountant he or she can work with current rather than historical data.”

Rather than presenting your accountant with the proverbial shoebox full of receipts and other documents, the use of accounting software means you can provide them with a copy of the data file so they can generate the relevant set of reports, manipulate the numbers and make appropriate forecasts, assuming you’ve been using the software correctly and been promptly entering transactions. The less time the accountant takes to extract the information they need, the less it should cost you.

And if you are using a cloud-based system, you can grant your accountant access to your data so you don’t even need to provide them with a copy - the latest entries are there whenever they need it. (This capability is not exclusive to cloud systems - Kelvin Deer points out that it is possible to give your accountant the ability to remotely log into your computer to carry out necessary tasks, even if you don't use a cloud system).

“Cloud products are especially handy,” says Ben Vojtisek. “If a client keeps their books up to date on a regular basis, we can log in, print out a set of reports, work on them quickly to get a good idea of how the client is going at that point in time, and then project to the end of the financial year to advise them of their likely tax outcome.”

Another benefit can be seen when a bookkeeper phones for help tracking down an error: “We can log in and fix it without delay,” he says.

“A lot of small business owners have become comfortable with the programs they have been using for years,” he says, noting that few of his clients actually use cloud accounting systems. “They don’t realise the benefits to be had from giving their accountants immediate access to their financial information.”

Things like the new asset write-off rules (an immediate deduction is available to small businesses for mostassets costing less than $6,500 each) are further reasons why it is important to keep on top of your financial records and abreast of any changes. Your accountant or bookkeeper is your ally in this regard.

How complicated a system do you need?

If you or your spouse are going to keep the books and bookkeeping isn’t your thing, you need software that makes it as easy as possible to do the tasks you need to perform.

Having all the bells and whistles might not be necessary. If you don’t employ anyone, you don’t need a system with a payroll function. If you don’t keep stocks of goods, you don’t need inventory (and even if you do, that feature is not always necessary). If you don’t charge for the principals’ or employees’ time, you don’t need time tracking and billing, and so on.

You may find that to get a broad area of functionality that you require, you may need to buy a program that also included things you don’t need. Inventory may come in the same edition as time billing, for example, in which case you just grin and bear it.

Sometimes it is the minor features that will be particularly important for you. One example is an automatic check that an invoice includes your customer’s purchase order number. A missing order number can affect your cash flow, so this ability is worth having if any of your customers have that requirement.

If you trade strictly on a cash basis, a cashbook program is probably all you need and you’ll find it simpler than more advanced programs. In this context, a cashbook is a relatively simple program for recording expenditure and receipts. It collects the information needed to meet small business reporting obligations, but is likely to lack the broad range of management reports found in full-blown accounting software, as well as functions such as budgeting.

Just because your business has grown to become quite a bit larger than when it started, that doesn't necessarily mean you need a more complicated system. “A common question is ‘When do I leave MYOB? When I get to $10 million in turnover?’,” observes Debra Anderson. “It's got nothing to do with that, it's about the complexity of your business and the number of transactions per month."

“If you really need to analyse the performance of each salesperson or every item in your inventory, then you need software that will do that for you. But I know some business owners that track everything, but only generate the most basic reports - they’re just slaves to their business systems who have made unnecessary work for themselves.”

At one extreme, Anderson has a client who is an IT consultant and typically produces one or at most two invoices per month, so whether that task takes a few extra seconds is neither here nor there.

At the other end of the spectrum is a client that provides low-cost web hosting and processes more than 11,000 transactions per month, which means an accounting system suited for this is essential. “They use a front-end system to manage the web hosting accounts but then use the bank feed functionality and PayPal integration to automatically code the income to sales without having to actually enter anything,” she says.

Sample business	Type of accounting package	Example product (Note, this isnot a recommendation, but one example of a product that might be used in this scenario)
Fencer. Pays upfront for all supplies by credit card, receives cash/cheque/card payments from all customers. Sufficient transactions per month to justify a computer-based system.	Cashbook - unless s/he wants to electronically bill customers on the spot, in which case a cloud or cloud-enabled system may be appropriate. Bank feed feature would be a significant timesaver.	MYOB LiveAccounts (we haven’t focused on cashbook programs in this article.
Freelance news photographer. All customers insist on credit, some insist order numbers are shown on invoice, some require that invoices are sent to specific publications but payment comes from the parent company. Supplies are paid for by cash, credit card or internet banking.	Middle-range small business accounting software. Doesn’t need to update software every year (no payroll, so no need for new tax tables) so a traditional perpetual software licence will probably be cheaper than a subscription or cloud arrangement.	MoneyWorks Express
Small coffee shop. All customers pay by cash or card, no need to track individual customers. Most suppliers offer terms, some items bought for cash from supermarket. No need for inventory. Enough staff (several part-timers, each working one or two shifts a week) to justify computerised payroll. Owner uses a bookkeeper but wants to keep a close eye on the figures.	Cloud or cloud-enabled middle-range small business accounting system with payroll.	QuickBooks Online plus Web Payroll
Manufacturing company with complex inventory requirements, many suppliers and customers who extend or receive credit, employees working irregular amounts of overtime	Consider specialised accounting software or ERP system	We don't cover these in this article, as these are more specialised products designed for specific industries.

Which features do you need?

Many of the programs described in this article come in different versions. As the prices increase, so do the number of features.

In some cases, extra features are available via add-on software. For example, QuickBooks Online does not include payroll, but you can subscribe to a separate cloud payroll program that integrates with it.

• Inventory allows you to keep track of the products that you buy and resell to customers. Apart from reflecting the value of stock in your books, integrating inventory with the rest of the accounting system means that the records are adjusted when you make a sale or receive a delivery. “It’s really important that inventory is fully integrated into the rest of the package,” says Anderson. “A lot of systems say they're integrated but they're really talking about an add-on module that may mean more work for the user.” An inventory function can also warn you when the stock of an item falls below the re-order level. You won’t need inventory facilities if you run a services business or only buy-in items in response to a firm customer order (say, if you are an IT consultant looking after small business clients and you purchase and install hardware or software items and present one invoice for the complete job. Or for example if you are the owner of an online store that operates exclusively by "drop-shipping" goods from the manufacturer or distributor - meaning you don't keep a stock of the goods yourself).
• POS - Retail and hospitality businesses increasingly use point of sale systems to track what is being sold with minimum effort. If your business can justify such a system, you will want it to integrate with your accounting and inventory. Seek specialist advice.
• Time tracking and billing - In a way this is the other side of the inventory coin. A service business’s product is billable hours rather than tangible goods, and so it needs a way of capturing the amount of time spent on different tasks and then billing the clients appropriately.
• Payroll - is fairly self-explanatory. If you employ people, you need to pay them. But you don’t necessarily need a special payroll function if you only have a few employees and the employment arrangements are straightforward - you can calculate the payroll manually, and then make the payments in the form of cash, cheque or bank transfer.

Unfortunately, it’s not always that as simple as ticking the boxes on a broad feature checklist. Pam Madytianos, director of bookkeeping service provider Bookkeepers4U.com.au and accounting and ERP consultancy 2 Peas, points out that it’s easy to become overwhelmed by choosing a package that is more complicated than you need, and that it’s possible to pay more for a less capable product. Many of her clients are now paying a monthly rental for their cloud-based software, moving away from the older arrangement of buying software outright. In many cases they add other software options to their cloud based accounting software, she says, paying additional monthly fees.

It’s important to consider what will happen as your business grows, either in terms of the features required, the number of transactions or the number of users of the software. Look for a system that can accommodate your current and likely future needs, whether that’s by:

• including those capabilities from the start
• letting you upgrade to a more capable version of the same software
• letting you pay for add-ons

Don’t rely on a ‘checklist’ approach to these features, warns Debra Anderson. Instead you should dig deeper and check that the program can really cater for your business. “MYOB LiveAccounts includes payroll, but only at a very basic level so it is not suitable for complicated construction businesses, for example. For that they should be looking at packages such as MYOB AccountRight Plus,” she says.

Rather than going for one of the general-purpose accounting packages, it may be better to look for one developed specifically for your industry, says Kelvin Deer. Examples include software for manufacturing, retail, restaurant and catering, and construction. “I have a client that manufactures forklift components,” he says. “They have 4,000 stock lines, so they’ve worked with a software developer to evolve its software to cater for that many lines.”

“And where a property developer’s needs are almost always met by generic software, a company in the construction industry has far more specialised needs and therefore may require more specialised software.”

Scared of the cloud?

Some small business owners are uncomfortable with the idea of cloud-based accounting products, where your financial records are kept on an Internet server, rather than the computer on your desk.

There are several advantages to this approach:

• You don't have to be at your desk at work to login and view your records. You can access them at home or when travelling too. This means you can even record transactions into the system at job sites, meaning less work keying them in later back at the office.
• You can let your bookkeeper or accountant login and see your records too, instead of having to send them USB keys or discs.
• Most cloud products don't require you to install software on your computer - you access everything through a web browser. It also means you always have the most up to date version.
• If your data is sitting in a data centre, in will in theory be backed up and protected.

From what we hear from various people in the accounting software industry and from software users, one concern seems to be about security, even though the same people who don't like the idea of using cloud accounting products are probably using other cloud-based services like Gmail and Internet banking.

One way of looking at this is to ask yourself who is better placed to keep your data secure - you, or an accounting software provider that can afford to employ or engage experts? Having your data in the cloud means it should at the very least be in a data centre monitored by professional IT staff, rather than on a computer you own, with all the risk of that computer failing.

That is not to say that cloud services can't "go down". We've seen occasional complaints online about problems connecting to accounting services - though we stress we haven't heard of widespread problems in this regard.

Of course it goes without saying that if you need to make sure you select a strong password that you don’t use anywhere else. And it is essential to keep your antivirus software up to date to minimise the risk of being infected by password-stealing malware.

Also keep in mind that not all cloud products are alike. Pam Madytianos - who works with MYOB and Xero - points out that someone could have an initial bad experience with a cloud system which might colour their view of cloud computing in general. “So it’s important to take advice from someone familiar with more than one cloud product,” she says.

Security and the way bank data is collected

However, there are drawbacks. Matthew Addison, executive director of the Institute of Certified bookkeepersrecently warned of a security weakness in the way some systems collect bank data. The problem, he said, was where the program uses the US-based Yodlee service to collect the data, as that requires the user’s Internet banking username and password. Anyone gaining fraudulent access to those credentials could easily drain the bank account, and if you disclose your password your bank is unlikely to absorb any losses.

While MYOB uses the BankLink service to access transaction data without requiring Internet banking credentials, according to the above report Saasu and Xero both use Yodlee, although Xero does have direct access to the top seven banks in Australia. Similarly, Reckon’s BankData service takes direct feeds from Commonwealth Bank, Westpac, NAB, ANZ, St George, Bank of Melbourne and BankSA, and uses Yodlee for other banks.

Get good advice

Debra Anderson warns about bookkeepers and accountants pushing you into using a particular piece of software that might not necessarily be the best choice for your situation. While it may be that they have expertise with that product, there also may be commercial considerations. Xero, for example, pays accountants a commission on the subscriptions paid by their clients, and provides them with free practice management software if they have enough subscribers.

“The accounting software industry has always been about matching software with the needs of the accountant instead of matching it with the needs of client, and that needs to change,” she says.

Pam Madytianos agrees: “Xero is an innovative accounting product that suits many small businesses. But we have seen situations where Xero has been recommended when it hasn’t necessarily been the best choice for that particular business. Accountants and bookkeepers have an incentive to recommend the software, as the more clients an accountant or bookkeeper has using Xero, the bigger their commission and the more prominence they receive on the Xero website.”

While Anderson receives commissions from MYOB (but no free practice software), she says she doesn’t try to convert all potential clients: “If their needs go beyond tax returns or what MYOB can offer, I refer them to another bookkeeper or an accountant who can help with the product they are using.” And we stress that no doubt there are Xero specialists who take the same helpful approach.

Kelvin Deer also notes the tendency for bookkeepers to be aligned with one of the major software companies, but says the emergence of cloud-based systems means a growing number of bookkeepers are looking at a variety of software options in order to meet the needs of different types of client.

He also says that as bookkeepers are in frequent contact with their clients (perhaps on a monthly basis for data entry, or a weekly basis for payroll) they are starting to assist small business with regular reporting such as cash flow and quarterly analysis. In that situation, a bookkeeper that already has some experience in the client’s specific industry may be a better option than a generalist.

Now, let's take a look at the different products! Click for the next page…

MYOB, Reckon, QuickBooks Online, MoneyWorks, Xero, Saasu reviewed

After talking to bookkeepers and accountants we decided against trying to pick a ‘winner.’ In practice, there is no one ‘best’ piece of small business accounting software, as different packages will suit different businesses. A business that provides services is unlikely to need an inventory module, a retailer probably won’t need time tracking and billing facilities and a payroll capability becomes more important as the number of employees rises.

• For this roundup we picked versions that would suit a relatively simple business - a photographer that provides services and products, but does not require inventory, and extends credit to at least some customers.
• Your requirements might be different. If you like the sound of a particular product we've looked at, but it lacks something essential for your business (for example, multi-currency support), check to see if there is another version under that brand that suits you. Several of the products reviewed here come in multiple versions.
• What did we learn, examining these products? We found good and not so good points about every single one of them. As we approached the end of this project we found ourselves wishing someone would learn from the mistakes made by other developers and produce a really good and comprehensive small business accounting system without the shortcomings and irritations we encountered while examining these seven products.

The lesson? Think about the way your business works and don't assume these products will all accommodate every single thing your business needs. If nothing else, these reviews illustrate that.

There are plenty of names in the market that we have not included such as NetSuite, Arrow, Sybiz and so on. What we have done is picked a selection of generally well-known packages with the aim of helping you understand the key features to look for, and how the various products compare.

There are two notable exclusions from our coverage. The 2013 version of Reckon’s Hosted product was not available when we began testing, and there seemed no point in reviewing a version that would be obsolete by the time this article was published. Reckon One, the company’s new cloud accounting system, was unveiled after this article was written and was not yet publicly available when this article was published. You can read about it here. We will no doubt follow up this article with coverage on the BIT site about this product.

Some tests we gave each product

To show how various accounting products work differently, we gave each of them a test: we picked several very specific tasks and checked to see how well each product handled each task. While your business might have no need for these particular features, the point here is to illustrate that the products all work differently.

Task 1 - Invoicing
The first thing we looked for regarded invoices. If our photographer did mostly consumer work (weddings, portraits, for example) then invoicing would not be a big deal. But we are assuming that this firm does commercial work (photos for catalogues, annual reports and magazines), and we know from experience that larger companies sometimes have hard and fast rules about what they consider a valid invoice. It's relatively common to require a purchase order number and although that’s a standard field on most invoice templates, it makes life easier for our photographer if the software ‘knows’ that invoices sent to certain customers mustshow a purchase order number. We looked to see if each product did this.

Another situation we see reasonably often is where invoices must be sent to the department, branch or business unit that ordered the goods or services, but the actual payment is made centrally. If you work for more than one section of such an organisation then your bookkeeping chores will be noticeably more laborious unless your accounting software explicitly deals with this situation.

Task 2 - BAS report
The introduction of the GST spurred the adoption of computerised accounting among small businesses that were previously happy with paper systems. If you prepare and submit your own BAS forms, you need the software to generate a BAS report, and our preference is for one that generates a report that mimics the actual form. This practically eliminates the risk of copying numbers into the wrong fields. If you’re less visual, a report using the item labels (“G1”, “W1” etc.) will do the job. Even if you use a professional to prepare and submit your BAS, a BAS report is still useful so you have an idea of the amount of GST you will have to remit.

Task 3 - Bank feeds
Much of the labour in bookkeeping is in data entry and in some situations that can be significantly reduced by bank feeds, which automatically transfer bank transactions into the accounting system. If you pay all of your expenses from your cheque account or credit card, all you’ll need to do manually is assign the expense to the correct account - and if all of your purchases from a particular supplier fall into the same category, even that may be automated - for example, the software can automatically file any payment to Telstra under "phone bill"). Bank feeds are less valuable if most of your expenditure is on credit terms and you want to enter bills as they are received so you can get a picture of your future liabilities.

Task 4 - receiving payments
If your customers routinely make one payment to cover multiple invoices (for example, they require a separate invoice for every purchase or service performed, but only pay you once a month), life is a lot easier if the software intelligently applies the payments to invoices. There’s more work if you have to allocate them manually or if it blindly allocates on an ‘oldest first’ basis. We looked to see how each product handled this.

Now, let's look at each product. First, the desktop accounting software...

MoneyWorks Express

We think MoneyWorks deserves consideration by businesses with customers that make particular demands about the information shown on invoices (for example, order numbers), and it is also the only desktop product we tested that works on OS X as well as Windows.

We found MoneyWorks Express generally straightforward to use, although the proliferation of windows can be confusing and some activities take more clicks than we’re accustomed. For example, to create a new invoice from the Navigator (home) window, you click the Sales Invoices button which opens a separate window, where you click the New button to actually create the invoice. While that could be improved, it may be a price worth paying.

Unusually, a comprehensive manual (not just onscreen help) is provided, which we found useful for tasks such as importing data (for example, a customer list), or customising invoices or other forms, or creating them from scratch.

Will MoneyWorks Express make your life easier? Let's look at some of the special tasks we tested it on.

One is to do with purchase orders. Some customers - notably large organisations - will only pay invoices if they bear the customer’s order number. While accounting products typically make provision for order numbers, MoneyWorks is unusual in that can be set to require a purchase order number when creating invoices for particular customers.

One feature that will be appreciated by some users is ‘head office billing’ which simplifies processing when a customer’s multiple branches or departments must be invoiced separately but payments are made centrally, often with invoices from more than one branch covered by a single payment. Without this feature - and it is lacking from most of the other products we tested - users must manually split such payments and that means extra work when receiving the payment and again when reconciling the bank account.

This product's other strengths in invoicing include provision for customer and prompt payment discounts, automatic credit hold if unpaid invoices exceed a limit, and recurring transactions (the latter being particularly useful for subscription-style businesses or service businesses on retainer, among others).

Most of the main accounting functions are included (some, such as quoting, are only present in more expensive versions of the software), though payroll is absent across the range.

There’s no provision for bank feeds (a feature that can be a big timesaver), but at least bank statements can be imported.

Unlike the other desktop packages reviewed here, the MoneyWorks family is available for OS X as well as Windows (MYOB has a different product for Mac, as opposed to a Mac version of its Windows software).

The Gold edition is required if you need inventory, time sheets or multi-user operation, while the Datacentre edition allows for multi-company use and provides for integration with web-based systems including mobile apps.

MoneyWorks Express is a feature-rich accounting system, and a more streamlined user interface plus bank feeds would make it an even stronger contender.

MYOB AccountRight Basics

One of MYOB’s big advantages is that its products are so well known among bookkeeping and accountancy practitioners as well as potential employees. You don’t have to look far to find someone with MYOB expertise or experience, though we are not completely convinced that AccountRight deserves its popularity.

As with MoneyWorks, AccountRight’s use of multiple windows seems to us to be confusing and messy. We particularly disliked the way the default size of new windows is often too small for the contents, even though there’s room in the screen for an appropriately sized window. The design seems stuck in an era when PC screens were much smaller, although there is a preference setting that allows the program to remember window size and position once you have adjusted it to your taste.

So how useful was MYOB AccountRight Basics in practice? We found that various aspects of the program seem to make operation more difficult than it needs to be. Let's look at our special task list for some examples.

First up is invoicing. While the program notably supports volume and early payment discounts and makes provision for credit limits and monthly charges for late payments, it will not force the entry of a purchase order number when creating an invoice. Disappointing, but common with most of the products we examined.

Another quibble we had with invoicing is that the quantity field unusually defaults to 0, not 1. While that does reduce the risk of errors by making the user explicitly enter the quantity, we found it quickly becomes irritating if you most often sell in single units (for example, a monthly subscription or an agreed price for a job). We see this as a shortcoming unless you have trouble remembering to enter quantities - 0 units is more obviously wrong than one unit.

Let's look at how AccountRight handles our multiple-payments test. When receiving a single payment for multiple invoices, you get a choice between having the payments allocated by ‘oldest first’, or manually allocating the payment to particular invoices. If you have customers that habitually pay invoices out of sequence and without quoting your invoice numbers, this task would be less tedious if the program determined the oldest open invoices that add up to the amount received, as they are the most likely candidates. Blindly allocating to the oldest invoices without considering their values often results in a part payment an invoice, which is unlikely to be your customer’s intention.

Sub-customers are laboriously handled through a dummy account and transfers rather than MoneyWorks’ more efficient ‘head office billing’ approach.

The BAS report is a facsimile of the ATO form, which is good in our opinion. There is a useful selection of other reports, but section headings were sometimes followed by a page break rather than keeping heading and data together (a workaround is to start every section on a new page, but that wastes paper), and reports are generated relatively slowly (MYOB is working on improvements in this regard) even though the sample file was quite small. Indeed, AccountRight seemed generally sluggish compared with the other desktop software we tested.

On the positive side, we liked the integration with Microsoft Office (for example, for sending form letters or to sync contacts with Outlook), along with the ability to import and export various types of data. And although the software runs on your own computer, data can be automatically copied to the cloud so your colleagues and accountant or bookkeeper can simultaneously access live data.

Almost all of the major features we expect are included in AccountRight, though some (notably inventory and time recording and billing) are only present in the more expensive versions. Also, the payroll capability in AccountRight Basics is, well, basic, and some businesses will need to consider AccountRight Plus for that reason.

AccountRight is also available in Standard ($39 per month; adds inventory) and Plus ($65; adds time billing and detailed payroll) editions.

We know MYOB’s software is widely used, but basic tasks such as generating invoices and receiving payments seemed relatively fiddly, and we would welcome more responsive operation.

Reckon Accounts EasyStart

As it only does cash as opposed to accruals accounting, Reckon Accounts EasyStart is one of the most limited programs we have looked at here. It is more than a cashbook program as it does handle invoicing, though we found some invoice-related features irritating.

On the positive side, we found the interface to be usefully arranged. The program uses a single window with browser-style Forward and Back buttons plus a pop-up menu to the right of the Forward button to take you straight to any of the open views. We find this approach more productive than having windows splattered across the screen, as long as you don’t need to compare or copy and paste information from one to another. Conveniently, when you return to a view (perhaps a filtered list of invoices) it is as you left it, so there is no need to re-enter the criteria or other data.

Operation is generally snappy and we rarely had to wait for the program to catch up. And producing a batch of invoices is quick and easy once the customers and items have been set up.

So how cleverly did this product deal with our special tests?

Let's look at invoicing. We quickly noticed some unusual things. The first two columns of the invoice entry form are Tax and Tax Amount. It makes more sense for these to be on the right of the form, as you normally start by entering the item or quantity. The column order can be changed, but we found that task fiddly, especially for the printed versions of forms where we were unable to get the headings of newly added columns to match the style of the predefined ones.

Another frustration was that it is not possible to turn off the beep that sounds after certain operations, such as creating an invoice.

Also there is no mechanism to force the entry of purchase order numbers if required by customers. Sub-customers are handled through a tedious workaround involving a contra bank account and journal entries (much like AccountRight Basics).

Uniquely there’s no BAS report in this particular version (the assumption is that users will leave that to their accountant or bookkeeper, but to our mind this is a core feature of small business accounting software), but if you need either of the latter two features, the more advanced versions of Reckon Accounts include online BAS lodgement via SBR (Standard Business Reporting).

There are also some other things missing that we found in competing products - inventory, payroll and even bank feeds or bank statement importing - though we stress that some are available in the more expensive versions. Reckon Accounts is also available in Accounting (adds accruals accounting, inventory, SBR lodgement, Microsoft Office integration, and more), Plus (adds payroll), Pro (adds multi-user, multi-currency, job costing and more), and Premier (adds multiple price levels, enhanced reporting, and is available in six industry-specific versions).

We generally like the way programs in the Reckon Accounts range work, but we are concerned that EasyStart may have been over-simplified and that for one reason or another (if only to avoid that infernal beeping!) most businesses will need to select one of the more expensive packages in the Reckon range.

Next, the cloud accounting products. Click here for the next page..

 MYOB LiveAccounts

MYOB LiveAccounts goes a long way towards making small business accounting straightforward and convenient, though it does have some shortcomings.

At the risk of stating the obvious, you need to take particular care with the initial setup of LiveAccounts: if you slip up (for example, mistakenly choosing ‘selling services’ instead of ‘selling services and goods’), setting things right seemed more time consuming to us than with any of the other programs we looked at.

The user interface here is generally easy on the eye. Invoices and other forms have a cleaner and more contemporary look than is typical.

On the other hand, while we understand why MYOB uses account and item numbers ‘under the bonnet’ we believe exposing them to ordinary users does not provide any useful information and just acts as visual clutter. After all, this product is supposed to be “purpose built for people new to accounting or accounting software” so why would they care about account numbers?

When it comes to performing our special test tasks, LiveAccounts seemed a mixed bag. Like the other products reviewed here it has its good and bad points.

Let's look at contacts and items. These can be imported, but it is up to the user to massage the data into the format required by LiveAccounts before uploading, which can be an issue for less technically savvy users unless the data is already in an acceptable format.

We liked the provision of ‘how to pay’ instructions on invoices, with bank details for direct deposits and/or a mailing address and payment slip. Cashflow is one of the most important considerations when running a business, and the easier you make it for your customers, the less excuse they have for not paying on time.

LiveAccounts doesn’t automatically allocate payments to invoices when you are manually entering them, but bank feed processing will normally take care of it unless one payment covers multiple invoices.

Another quibble of ours: if you need to create subcustomers (aka head office billing), neither LiveAccounts nor its desktop sibling is the product for you.

When it comes to BAS, we are happier. Unlike Reckon Accounts EasyStart, LiveAccounts can generate a GST report. While it is not a facsimile of the ATO form, it does show the item labels to aid accurate transcription.

Another observation: LiveAccounts encourages you to enter bills as they arrive so you’ll have a better view of your position and then pay them when they fall due. Something similar is available in most of the other programs, but the feature is particularly ‘in your face’ here. One note: we did find it somewhat confusing that to enter a purchase paid for in cash on the spot (such as buying coffee for a client while discussing business at a cafe), you do it under Banking rather than Expenses.

We also found LiveAccounts’ payroll to be well featured for an entry-level program, with provision for overtime, penalty rates, leave, superannuation and more. However the system lacks other major features including quoting [UPDATE: MYOB has contacted us to tell us this is coming soon], inventory, and time recording and billing. As we explain below, you can find these things in other MYOB products, such as AccountRight.

Unlike Saasu and Xero, LiveAccounts does not exploit the potential to connect with cloud applications like a web store or a cloud-based POS system.

An advantage of cloud software is that you can use it almost anywhere and on practically any device - though here, we noticed that while two people can login at the same time, we discovered that they need to have separate accounts - a minor thing, but adds to the level of fiddling. Also, when we tried using LiveAccounts on a mobile phone we were disappointed to see the normal site, which was very awkward to use on the small screen though probably acceptable on a 10in tablet.

Certain versions of the more advanced MYOB AccountRight software (see above) include features missing from LiveAccounts such as inventory and time recording and billing. If you are set on using cloud software though, keep in mind that AccountRight lets you access your accounts over the Internet (say, at work as well as from home on a laptop) but you need to install the software on each computer - you can't just log on with any computer that has a web browser. There's no phone or tablet app either, but we are told a mobile app for AccountRight Live is in the works.

With a strengthening of its invoicing features and some user interface improvements (especially in terms of mobile support) LiveAccounts would be even more deserving of attention from businesses that need the particular set of functionality that it delivers.

Intuit QuickBooks Online Simple Start

QuickBooks Online is a well-featured cloud accounting system, but we found some rough edges.

QuickBooks Online’s user interface is generally unremarkable, though we did encounter some quirks. For some reason clicking links in popup windows used for help and other functions sometimes had no effect. When that happened the best course of action seemed to be to close the window and start again.

We like the fact that if you're using a smartphone to access QuickBooks Online you automatically get a version designed for small screens. This makes it easy to use your phone for on-the-spot invoicing after you've performed a service or delivered goods, for instance. This works even if you’re still logged in back at the office.

If you decide to give QuickBooks Online a trial, be sure to work through the ‘Customise’ questionnaire (otherwise you won’t be able to enter invoice lines such as “3 hours at $100 per hour” or “10 widgets at 40c”) and also go through the GST setup process. That may seem obvious in retrospect, but neither is included in the QuickBooks Online "to-do" list, even although “Add your employee information” is. We feel this shows that new users may benefit from professional assistance setting up QuickBooks Online Simple Start - even more so than they might with the other products we've looked at. This is despite QuickBooks Online including a generally useful Getting Started guide that can be downloaded as a PDF file.

QuickBooks Online seems reasonably smart in operation. Let's look at our test tasks.

One good point is that your existing contact lists can be imported from Excel (and many programs can export data as an Excel file), Outlook, Gmail or Yahoo! Mail, making it in this regard one of the most flexible packages we reviewed.

Other strengths include provision for ‘subcustomers’ (QuickBooks’ equivalent of MoneyWorks’ head office billing) and the way payments are automatically allocated to the customer’s open invoices according to the amount received. This is a timesaver (doubly so when used in conjunction with bank feeds) when a customer pays multiple invoices without providing a detailed payment advice.

On the other hand, Quickbooks Online did fall down in another of our pet criteria: BAS reports. The BAS report is just a report, not a facsimile. We find the latter reduces the risk of making errors when transcribing numbers to the ATO form.

The accounting features are relatively comprehensive apart from the omission of payroll and time recording and billing. Quoting is disabled by default, but once activated works smoothly. If the customer proceeds with the work or purchase, quoted items are easily added to an invoice. This could be useful for trade businesses such as fencers.

The main limitations of Simple Start ($15 per month) are that it only does cash accounting not accruals, and you can only enter bills as you pay them. Essentials ($25) adds two more users, more reports, a graphical company snapshot, repeating items (for example, invoice each month), bill management (so you can see what payments are ahead), and multiple currencies. Plus ($35) includes five users, even more reports, inventory tracking, automatic expense recharging, month/quarter/year budgeting, and multiple locations. So to some extent you need only pay for the features you need, like most of the other products we looked at.

Payroll is not a feature of QuickBooks Online, but is available as an add-on from WebPayroll or KeyPay. Similarly, more advanced inventory functionality is available from SOS Inventory.

Again, we suspect that the Simple Start version is a little too simple for many small businesses, but QuickBooks Online overall has a decent feature set (though be aware that you have to go elsewhere for payroll), and we especially liked the mobile version of the site.

Saasu

We found Saasu relatively weak in some fundamental areas - notably invoicing - but it does have its good points.

Our overall impression here is that the user interface has not been fully thought through. Things start out well, but in our opinion there is a lack of polish. For example, we like the way a purchase and the corresponding payment can be entered in one go and on the same screen if desired, but we were surprised to see error messages such as “You have entered an invalid number” that did not identify the field in which the error was detected. And while the Contacts section includes fields to store a contact’s Twitter and LinkedIn pages and then open them in a browser, unlike Xero Saasu does not provide click-to-call capability from the Skype ID field.

In our opinion, the way Saasu works results in more effort on the user’s part than should be necessary. For example, its invoicing capabilities are from our point of view the weakest of all the products tested here. The system will only remember things you sell (for example, 'on site consultation at $150 per hour’ or ‘three-rail PVC ranch fencing at $40 per metre’) as part of the inventory functionality, which is only included with the Medium (second most expensive) plan, along with payroll and multicurrency support. Otherwise, the closest alternative is to duplicate an existing and generally similar invoice. That is probably ok if you supply much the same products and services to the same customers each month (there is provision for recurring sales and purchases), but we’re not impressed.

Nor is there a way to require the entry of a purchase order number when generating an invoice, or to automatically make sales to export customers GST-free (the closest workaround suggested by Saasu is to have separate income accounts for GST-free and GST-liable sales).

On the positive side, there are some useful time-saving features. Arbitrary files (for example, scanned receipts or PDF invoices) can be attached to transactions, keeping related information together and reducing the amount of paper that must be retained.

Another useful feature is that contacts and other items such as purchases can be tagged (marked with an arbitrary label), and then these tags can be used to isolate a particular subset of records from longer lists. This could be used to get a list of expenses associated with a certain project, for instance.

In our opinion, Saasu fell behind some of the other products when it came to our test involving reports. The BAS report displays item labels rather than being a facsimile of the ATO form, and while there is a reasonable selection of other reports we did not have much success with them. For example, we saw blank sales and purchases reports even though there were transactions of both types in the system within the relevant time periods. That may be an example of PBCAK (‘problem between chair and keyboard’ - ie. we were doing something wrong), but if that was the case we suggest that says something about the useability of this aspect of Saasu.

Saasu has most of the accounting bases covered, though like the other cloud products we looked at, it lacks time recording and billing. We find that surprising, as cloud software makes it relatively easy to collect activity data from workers’ smartphones, tablets or computers. And if your workforce is generally on a casual or part-time footing, you may find it necessary to move up to the most expensive plan just to get round the limit on the number of employees even though your FTE (full time equivalent) headcount is well under it.

Saasu provides some interesting and potentially very useful integrations with other products and services, including PayPal, eBay, Magento (e-commerce), SprintPOS and Amicus POS. Saasu and Xero are the standouts in this regard.

The Extra Small ($9 per month) plan is limited to 50 transactions per month. Small ($20) boosts that to 200 transactions, plus three bank feeds rather than one. Then there is Medium ($35; described above) and Large ($60), which expands payroll to more than 25 employees and adds advanced inventory reports, consolidated profit and loss reports, and a KPI custom report builder.

Saasu didn’t especially impress us from the perspective of our hypothetical photographer, but it does have its raving fans (such as online retailer Shoes of Prey) and we suggest that underlines the importance of picking accounting software that suits the requirements of your particular business rather than following a generic recommendation.

Xero

Xero had us flip-flopping between “wow!” and “huh?”

Let’s start with the good stuff: it feels like a modern piece of software that was designed with the cloud in mind. A prime example is the Xero Network, which allows Xero users to send invoices and to each other within the system. Your invoice becomes a bill in your customer’s accounts, or vice versa. This speeds things up and eliminates data entry. If your customer doesn’t use Xero, you can email an invoice as attachment or a web link, and in both cases there’s a link for paying via PayPal. Furthermore, such customers can set up a login so they can see all their outstanding bills from Xero users.

In some respects, Xero works in a pretty smart way and actively takes advantage of the fact that you are working online. We particularly like the way that when you enter a customer’s address, Xero uses the White Pages TotalCheck address service to confirm its validity and automatically parse it into separate fields such as street, state and postcode. If you’re a Skype user, Xero provides click-to-call when you need to phone or Skype a contact. This could be very useful if you use Skype a lot.

We also like the way Xero allows files to be attached to records, for instance to keep scanned receipts with expenses claims. Very few of these features are found in the other programs. Like Saasu, Xero provides good support for mobile devices.

If you have some overseas customers you can set their default GST rate to ‘GST Free Export’, overriding the normal rate applied to domestic customers. That’s much better than the hoops that Saasu and some of the other programs we reviewed put you though.

As for usability, some routine tasks seemed surprisingly cumbersome. It takes five clicks to get from the ‘dashboard’ (home screen) to entering a payment, compared with two in MYOB. Yet you can get an aged receivables report in two clicks from almost anywhere. Which of these do you do more often?

Onto our payment test: receiving a payment involves opening the corresponding invoice and entering the payment details. This is clumsy if your customers routinely make single payments covering multiple invoices. And there’s no sub-customer support, though it may be added in the future.

Also, we have mixed feelings about the way Xero separates the entry, approval and payment of bills. It makes sense if a junior employee performs data entry, but if you’re a sole trader it just slows you down.

Most of the accounting functions we expect are included, with time tracking and billing as the main exception. But Xero provides integration with various third-party products and services, including Harvest (time tracking and billing), Vend (POS), and Debtor Daddy (invoice chasing).

The difference between the three Xero plans is more about the number of transactions allowed per month than features, though the Large plan does add multi-currency support and automated superannuation payments.

Overall, Xero is one of the stronger offerings in terms of the invoicing features we like to see. It also takes good advantage of other cloud-based services. However, there are some user interface issues that in our opinion make routine operations more time-consuming than necessary.

Feature matrix: comparing the features of the products we looked at

Y=Yes, y=Yes, but only in more expensive version(s) than we tested
Primary source: vendors' materials

	Product	Moneyworks Express	MYOB AccountRight Basics	MYOB LiveAccounts	QuickBooks Online Simple Start	Reckon Accounts EasyStart 2013	Saasu	Xero
Feature	Subfeature
Quoting		y	Y	N [UPDATE: MYOB says this is coming soon]	Y	y	Y	Y (via a manual process)
Invoicing		Y	Y	Y	Y	Y	Y	Y
Purchases		Y	Y	Y	Y	Y	Y	Y
Inventory		y	y	N	y	y	y	N (Xero's 'Inventory' function is a list of items sold or purchased; it does not track quantities in stock, etc)
Bank statement import		Y	N	Y [CORRECTON: This was previously marked incorrectly as N]	N	y	Y	Y
Bank feed		N	Y	Y	Y	N	Y	Y
Multi-currency		y	y	N	y	y	y	Y
Payroll		N	Y (basic only; more advanced in Plus version)	Y	N	y	y	Y
Time recording and billing		y	y	N	N	y	N	N
Contacts		Y	Y	Y	Y	Y	Y	Y
Budgets		Y	Y	N	y	y	Y	Y
Reports
	Balance sheet	Y	Y	Y	Y	Y	Y	Y
	Profit and loss	Y	Y	Y	Y	Y	Y	Y
	BAS	Y	Y	Y	Y	N (tax liability report is not mapped to BAS fields, but the information is there)	Y	Y
	Sales	Y	Y	Y	Y	Y	Y	Y
	Purchases	Y	Y (but only as a customisation of the account transaction report)	Y	Y	Y	Y	Y
SBR lodgement		N	N	N	N	y	N	N
Mobile access		y	N	Y (but not mobile-specific)	Y (mobile-specific version delivered automatically)	N	Y	Y (via mobile-specific site or iOS/Android app)
Tagging		Y	N	N [UPDATE: MYOB tell us you can create notes against a bank transaction, which can then be searched, sorted.]	N	N	Y	N
Integration with other services/programs		Y	Y	N	Y	y	Y	Y
Multi-user		y	Y	N	Y	y	Y	Y
Data import and/or export		Y	Y	Y	Y	y	Y	Y

CORRECTIONS AND UPDATES:

The feature table above originally marked MYOB LiveAccounts as not having a Bank Statement Import feature. This is incorrect - MYOB tells us LiveAccounts does have Bank Statement Import. We apologise for the error - this has been corrected.

MYOB also tells us that Quoting is coming soon for MYOB LiveAccounts and that in terms of Tagging, you can create notes against a bank transaction in LiveAccounts. The table has been updated with this information. MYOB also points out that both AccountRight and LiveAccounts support taxable payments for the building industry.

Used any of the products above? Add your opinion in the comments area below.

Showing 5 comments

• nathsgames

  HI, Quite a good article and some good advice. I feel the review came up short though. I would have preferred a more in depth review of medium sized business, comparing AccountRight Plus with ReckonAccounts Plus for example. Then you could compare Payroll, BAS, Lodging BAS via SBR (which Reckon can do but not MYOB), entering Timesheets (which is infinitely easier in ReckonAccounts as it allows for entry in time format), ordering and other tasks.

  It's also a shame that you didn't consider ReckonAccounts Hosted for Cloud comparison as it can do all of the above and more, and infinitely more than Xero - and for less money.

  Regards

  Nathan Elcoate
  Director
  Axis IT Consulting Pty Ltd

  • Like

  • 6 hours ago
• William Maher

  Hi Nathan, thanks for the good feedback. Yes, you nailed one of the important things about these products, that there is a range for different types and sizes of businesses. Here at BIT our focus is on practical advice that helps small business people get their head around technology, so that played a part in deciding what products to look at. Ideally, we'd review every package under the sun, but for the purposes of comparison we've picked these as they are geared towards our very small business operators.

  You are right, there are some great options out there for larger businesses, which we've mentioned in the article. We'll aim to follow up this article with another, giving an overview of the broad range available - hopefully that will be useful to you too.

  Thanks very much for the feedback Nathan.

  • Like

  • 5 hours ago
  • in reply to nathsgames
• Daniel James

  Hi Nathan,

  We originally intended to include Reckon Accounts Hosted, but as I explained in the article the new version was scheduled for release after we did the testing.

  That's often a problem with multi-product reviews: if you wait just a little longer a vendor will release a new product (eg http://www.bit.com.au/News/344..., a new version (eg, Reckon Accounts Hosted 2013) or new features (eg http://www.bit.com.au/News/344.... If you don't draw a line somewhere, the article never gets done.

  We were also conscious of the approaching end of the financial year, which is a relatively convenient time to switch from one system to another, and we wanted to give readers time to consider which features are important to their business and take advantage of the free trials before we roll into 2013/14.

  • Like

  • 5 hours ago
• @HeatherSmithAu

  Daniel & William - it must have taken you ages to write this article - congrats for persevering with it! I am sure a lot of people will find it useful. I have just written Xero for Dummies, and also wrote Learn MYOB in 7 Days last year, so am constantly comparing products. You have actually mentioned products I have never heard off!

  I never say the solution to your small business accounting needs is X without understanding the business.

  I do how ever say to anyone who cares to listen - understand what support is out there. Before you commit, 'raise' an issue and see what the response is like. There is no point using the best accounting software in the world if you can't get help when you have queries.

  Also you need to ask your TAX ACCOUNTANT what they are happy with and will they work with what you have chosen. (and also ask if you are prepared to move accountants)

  I am happy to be corrected but there seems to be a lot of confusing movement in the Intuit / Reckon world, and I recently asked to be pointed in the direction of a list of consultants - and was advised they currently don't have one. For the last decade I have struggled to get support for Intuit / Reckon products. I agree they seem to be very good, and have great reporting features - but when something goes wrong - I pull my hair out.

  I run my high transactional volume business through Xero and I especially love the API technology that allows me to link to other solutions seamlessly.

  I run my other business through MYOB AccountRight v19.7.

  Heather

  http://www.heathersmithsmallbu...

  • Like

  • 4 hours ago
• William Maher

  Hi Heather, thanks for the feedback. Yes, that was a key message from some of the bookkeepers we spoke to that are quoted in the article - each business is different so there is no one-size-fits-all, which is something we've stressed in the article. Your point about support is a good one.

  
  

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