Xero Accounting Software – From Xero to Hero?
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In an article last year titled “AI Puts the Smac Down on Accounting and Auditors“, we talked about how the domain of accounting is ripe to be disrupted by artificial intelligence (AI). There’s a reason that accountants have been labeled “bean counters” which is a tribute to an obsession with numbers but also hints at a job that doesn’t allow for a lot of creativity. That’s why when we refer to “creative accounting”, it’s usually a wink-wink, nudge-nudge sort of thing. The idea is that when you get creative in accounting, you’re playing by the rules but still taking advantage of some loophole. So going forward, we can let AI count all the beans and accountants can move on to “bigger and better things” like… creative accounting.
One of the companies we talked about in our previous article was Xero, a publicly traded company located in New Zealand. We decided to write more about Xero for three reasons:
- To see how Xero’s business is performing from an investor’s perspective
- To see how AI is being used in the Xero accounting software
- Because Xero said they’d give us $$$ to write about them (bills don’t pay themselves around here)
Let’s start with a closer look at Xero the company.
About Xero
Founded in 2006, New Zealand company Xero (ASX:XRO) took in funding from the likes of Peter Thiel to develop cloud based accounting software for small and medium sized businesses with the idea that traditional desktop accounting software (like Quickbooks) had become outdated. Things went pretty well for Xero, as they went public on the Australian Securities Exchange in 2012 (under the ticker XRO) giving them a present day market cap of $1.78 billion and 862,000 subscribers. Since that IPO, shares have risen +278% so well done and that. All that share price growth probably has something to do with subscriber growth which looks like this:
Note that the above reflects “net subscriber addition”. You’d expect to see a chart with the above growth trajectory showing total subscriber base but this is showing new subscribers every year! Couple that growth with a 75% margin and you have a business that will be printing cash if everything goes well. While Xero is losing money at the moment, they expect to reach profitability with the cash they have on hand presently.
Xero and Artificial Intelligence
This is where we started getting a bit skeptical. What can AI do that traditional algorithms can’t? Accounting isn’t exactly rocket science. Despite our trepidation, the leadership over at Xero assures the media that in fact, AI is ripe to disrupt the world of accounting and that we’re only a year or two away from that. A cursory search for AI on the Xero corporate website shows no less than 17 different Xero blog articles talking about the use of AI in accounting. In one article posted a month ago, Xero talks about how they migrated over to Amazon Web Services (AWS) which means the Xero cloud accounting software now resides on Amazon’s cloud servers. This provides added security and more importantly positions Xero to begin testing and implementing their AI tools they call “helpers”. According to an article by Bit.com, the 3 tools are as follows:
- Hey Xero – A chatbot that acts like Apple Siri. You ask it questions like “how much did I spend on Facebook advertising in March” and it tells you. We’re not fans of chatbot technology but this application sounds pretty useful.
- Reduced Transaction Coding – The only thing you really need to do with Xero after it auto-connects to your bank and credit card accounts is reconcile the transaction. This AI application learns quickly so soon, 9 out of 10 transactions are automatically reconciled. This frees you up to do more “creative accounting”.
- Live Contacts – Automatically updates supplier and customer information using what we’d assume is intelligent screen scraping of unstructured data.
One of the reasons we signed up for Xero is to check out their AI capabilities when they’re finally put into production, which is a good segue into our next topic.
Our Experience with Xero Accounting Software
We actually started using Xero’s accounting software last year when we got tired of storing everything in spreadsheets. It’s not like we have a ton of accounting happening here at Nanalyze, but we do things like pay our writers, advertise on social media, buy computer hardware, and of course do some traveling to see what everyone’s getting up to. The experience of onboarding with Xero was pretty painless. You sign up for a free trial and then start using the Xero accounting software tools right away. Xero automatically connects to your bank accounts and downloads all your transactions which you then assign to various accounts like “Cost of Goods Sold” or “Owners Contribution”. You’ll get some emails from an account rep offering you coupons to convert to a paid subscription. You’ll probably convert like we did because now that all your data is in there and reconciled, it just makes sense to.
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Why the big drop off in 2014? Anything to do with them “losing money at the moment”?
Thanks for the comment James.
When you look at the share price performance, it doesn’t scream out “exciting SaaS accounting firm with explosive growth on the cusp of an Ai awakening”. The market has a way of pricing everything in so there’s clearly something that became concerning in 2014. Let’s see if they can do what they say and achieve profitability with the cash they have on hand.
Enjoyed the post. I have a few thoughts. Disclaimer: I’m a product manager at FreshBooks.
Agreed, AI & machine learning technologies will be transformational for accounting and finance over the next few years. That said, the terms AI & machine learning are used too loosely and are regularly conflated with something that is programmed. The examples provided in this article leave some room for interpretation between programmable software versus software using algorithms to improve its performance over time as it obtains more data.
Even on the cusp of an AI revolution, Freshbooks focus remains on the customer and helping them make progress in their lives. We’re particularly excited about the potential of machine learning to enrich our customer’s experience by simplifying how they do accounting. But the technology should operate behind the scenes, evolving to understand the customer better over time.
Thank you for the comment Justin.
We were just having this conversation. If your “AI algorithms” are not accomplishing more than what “traditional algorithms” accomplish then don’t even bother saying you use AI. Since Xero doesn’t have their AI features in production yet, we’re in no place to make a judgement call here, but we are skeptical (as the first sentence of that paragraph stated). Just like the whole chatbot craze. From what we’ve seen so far, rubbish.
Looks like your company is tearing it up in subscription numbers. From what we read, this has become an ultra competitive space so it’s good to see you’re staying on top of things!
Enjoyed the post. I have a few thoughts. Disclaimer: I’m a product manager at FreshBooks.
Agreed, AI & machine learning technologies will be transformational for accounting and finance over the next few years. That said, the terms AI & machine learning are used too loosely and are regularly conflated with something that is programmed. The examples provided in this article leave some room for interpretation between programmable software versus software using algorithms to improve its performance over time as it obtains more data.
Even on the cusp of an AI revolution, Freshbooks focus remains on the customer and helping them make progress in their lives. We’re particularly excited about the potential of machine learning to enrich our customer’s experience by simplifying how they do accounting. But the technology should operate behind the scenes, evolving to understand the customer better over time.
I have bought Xero stock in 2015 and 2016 – long before this article appeared. Obviously it was a great investment.
In hindsight there are dozens of obviously great investments. An investment is great when you sell it for a return that exceeds whatever benchmark you’re using and you don’t kick yourself for not accomplishing what no man can – selling at the top. That’s why we hired a Romanian fortune teller on Fiver who helps us call tops more successfully.