For nearly two decades, the marketplace for low-end accounting software has been a sleepy little niche largely ceded to two players -- Intuit and Sage. That's no longer the case, as a slew of new entrants is re-energizing low-end accounting and bringing some needed innovations.
The new companies entering the market are able to do this for two reasons. First, increasing churn at the low end of the market has created opportunities for new entrants. Second, the advent of cloud-based "Software as a Service" has altered the traditional cost of software development and distribution -- requiring less capital to fund a new entrant.
That's no guarantee of success. In fact, this software category is littered with the shells of low-end accounting products that were snapped up as part of consolidation or simply ceased to exist. Peachtree Simply Accounting, DacEasy, and Microsoft Money are just three that come to mind.
The low-end accounting marketplace is and will always be one of the toughest markets to serve.
There is no single factor that makes it tough, but some of the challenges can be seen in the fundamentals of small business:
The companies are smaller than you think. While the Small Business Administration includes in the definition any company of up to 500 employees, these are a tiny percentage of the overall market. Of the 27.9 million small businesses that existed as of 2010, 78 percent were sole-practitioner-run with no other employees. More than half of these are home-based businesses. These businesses are more likely to use a minimal amount of accounting software and services.
Small businesses are more likely to be under-funded. This means that the available financial resources, particularly in the early years, are more likely to be used for development, office equipment and travel -- not for accounting services.
The churn rate is brutal. Every single day in the United States, nearly 1,500 new businesses are created -- and about the same number close. Roughly half of all new firms fail within five years, according to the SBA, and 70 percent fail within 10 years.
Small-business owners may have little interest in accounting. Unless, that is, the small business is engaged in bookkeeping or accounting services. While professional services tend to dominate this market, the owner/proprietor may have no experience in or aptitude for a regular routine of entry and reconciliation -- even with the assistance of accounting software.
New entries to accounting for this market can face two other obstacles as well. They are likely to be ravaged by competition from older, better-financed software firms with strong brand recognition and an established sales channel. And they will be limited if their product is a checkbook-based, single-entry accounting system, as opposed to the more common double-entry bookkeep- ing systems.
At the same time, however, small-business software can never be easy enough or inexpensive enough to suit their customers. While Intuit holds a commanding market share, Sage has two strong contenders of its own. And if those two competitors hold a combined 80 percent market share (and it could be less), that would still leave more millions of customers up for grabs -- no small potential market for an accounting software firm, particularly one that is cloud-based.
Nor is market share a reliable indicator of the strength of the software company or its profitability - key indicators of how well the company can maintain and re-invest in its products. In any given market, there is room for a market leader and one or two prime competitors. Everyone else, if they wish to survive, must find a clearly defined niche in the marketplace. But those niche players can be every bit as profitable, in relative terms, as the market leader. They can be smaller, more nimble, and more responsive to their customers.
It is impossible to cover the full range of participants in the low-end accounting market, with new entrants emerging and others staying below the threshold for visibility. Of the dozen or so current competitors, we have chosen the six we consider as important from an accounting standpoint.
The criteria were simple: In addition to the standard modules for general ledger/checkbook, accounts payable, accounts receivable, and payroll, the program should provide for bank reconciliation, trial balance and invoicing.
Acclivity was created in 2005 when two members of the former MYOB management team acquired that company's U.S. operations. Its flagship product, AccountEdge, is a double-entry accounting system available for the desktop, the cloud or mobile applications, for both Windows and the Mac.
Claiming more than 100,000 users worldwide, the accounting solution provides for banking, sales, general ledger, credit card processing, payroll, time and billing, inventory, and purchases. A free version of the software is offered to accountants. Added in 2013 were capabilities for document management, direct electronic import of bank statements, and redesigned financial statements that include a balance sheet and P&L statement.
New for 2014 are features for departmental accounting, greater customization features, updates to AccountEdge Mobile, enhancements for recurring payments by customers, and improved jobs reporting. Available soon is a competitively priced cloud-based version.
Accounting by Wave
Wave Accounting Inc.
Wave is a suite of cloud-based, double-entry, small-business software products published by Wave Accounting Inc. Wave is primarily aimed at freelancers, contractors, entrepreneurs, and owners of companies with nine employees or less. They claim 500,000 users worldwide. While the core modules are free, it is an ad-supported solution.
Modules include Accounting by Wave -- a free program featuring unlimited double-entry accounting that includes free unlimited bank connections, multiple businesses, unlimited collaborators and more; Invoicing by Wave, which sends unlimited customizable invoices to an unlimited number of clients; Personal Finance, including bank connections, investment tracking and collaborators; Receipts by Wave, a free unlimited program to scan receipts into the Accounting module; Payments by Wave, a credit card processing service that is a companion to Invoicing by Wave; and Payroll by Wave, a per-employee payroll program with a $5 per month overhead fee.
The company also offers a referral service for accountants that is called the Wave Pro Network.
In the U.S., a full payroll tax service (optional) is available for $20 per month, for the following states: New York, California, Florida, Texas, Illinois, Pennsylvania, Ohio, Georgia, New Jersey, Alaska, South Dakota, Washington and Nevada.
New features added in the past year include complete integration of all modules; receipt scanning; credit card payments; mobile apps for iOS and Android; and extensive feature improvements including recurring invoicing and better customization of the chart of accounts.
Less Accounting is a simplified, cloud-based system aimed at companies with fewer than 20 employees and less than $10 million in revenues. The company began work on the software in 2007, and now boasts thousands of users.
Though the system has been offered for six years, it underwent a major relaunch in April of 2013. Current features include accounting, invoicing, expense tracking, proposal creation templates, a customer relationship management system, bookkeeping reports, and a log for business mileage use of vehicles. It has the ability to import data from hundreds of U.S. banks (and some overseas banks), plus the ability to import QIF and QFX files.
In addition to banks and credit card companies, Less Accounting integrates with a number of third-party applications for payments, CRM, project management and e-commerce.
New for 2013 are an enhanced ability to track invoices; integration with the WePay payment system in addition to PayPal; the ability to copy previous invoices for retainer customers; and enhancements to tips throughout the system that provide guidance and information.
Less Accounting has carved out a niche for itself based on simplified cloud-based accounting and strong customer service. It is not unfriendly to accountants, and offers the ability for them to download data from the system to prepare more formal accounting and tax documents.
Intuit launched QuickBooks Online as a cloud-based platform designed to expand beyond accounting into diverse areas of business management. It is now an open platform that includes Intuit's robust small-business tools such as third-party apps, payroll and payments.
QuickBooks Online is a fast, scalable and customizable platform that provides a unique "mobile-first" philosophy to make the applications accessible from anywhere. Data is available in real-time in more than 100 countries and in 10 different languages. Real-time data updating also allows for instant collaboration between accountants and clients. And QBO allows large-scale app integration and access to Intuit's Apps.com, a diverse small-business apps marketplace.
QBO allows businesses to create and track invoices; connect to banks and credit card companies to reconcile transactions; accept credit cards for payments; turn payroll services on and off; and utilize a wide range of small-business applications through the Apps.Com site.
It is offered in three versions: Simple Start, which offers invoicing, transaction downloading and mobile support; Essentials, which adds multi-user capabilities and bill payment; and QuickBooks Online Plus, which has all of the features of Essentials but adds inventory tracking and the ability to prepare and print 1099 tax statements.
QuickBooks lays claim to an existing base of 4 million QuickBooks users, with an estimated 215,000 users of the QBO system.
Sage North America
Sage North America introduced Sage One in May of 2012 as an integrated but simple, cloud-based business management solution. Its goal was to combine accounting with online collaboration, financial management tools, and project management.
Since its launch, Sage has implemented a number of enhancements that include bank account integration; credit card processing; contact import; and the ability to create quotes and estimates. A major recent update include Projects and Tasks management; the ability for collaborators to track time, share files and post messages for their team; and a seamless process for signing up for a merchant account.
Also recently introducted is an Accountant Access feature, to solve the problem of real-time data access to client accounts. This allows accountants to log into all client accounts that have been linked with them from a single interface. Collaborating on financials in real time allows clients to undertake the day-to-day transactions such as invoicing and entering expenses while the accountant manages the accounting tasks.
Sage One joins other small-business accounting solutions from the U.K.-based company that include Sage DacEasy and Sage 50 (formerly Peachtree Simply Accounting).
Xero is a cloud-based accounting software platform for small and midsized businesses that has launched a direct challenge to QuickBooks Online, claiming more than 211,000 paying customers, 300+ integrated applications and the recommendation of accountants worldwide.
The software is offered at no cost to accountants and bookkeepers, with fees for Xero's three editions based on the needs of each client company.
It works in real time, is available on any device at any time via online access, and includes a professional toolset featuring reporting and practice management software for a simplified practice. Xero also supports an expertise-based, value-pricing model for accountants that replaces tradition time-based billing.
Xero releases new updates every three weeks. Features added recently are online invoicing, integration with payment services, direct bank feeds with City National Bank, a built-in calculator for invoices, bills, AR, AP and journal entries, and a new iOS mobile app. One of the company's biggest recent initiatives was to roll out a payroll service that is currently available in six states -- California, Florida, New Jersey, New York, Utah and Virginia -- with plans to add more states soon.
WHERE THINGS GO FROM HERE
A little chaos is generally good for the accounting software markets. In the wake of the recent growth in competition, sleepy giants will be awakened, innovation will thrive, prices will drop, and small businesses will be able to get more services for their limited capital assets.
But it is difficult to believe that, even with the ascension of cloud-based services, any of the competitors will be able to unseat Intuit from its position as market leader.
It could happen, of course, just as it happened to Lotus 1-2-3 and WordPerfect. But it is unlikely. Nor is it likely that the new companies will unseat Sage from its leading position as Intuit's primary challenger.
But perhaps they don't need to. After all, one need only compare the total claimed customer bases to the number of small businesses in the U.S., and there are still some 25 million potential customers going unserved. And that does not begin to consider the unserved small businesses of Europe, Asia and elsewhere.
The market for low-end accounting packages has been rocked out of its complacency by new, upstart firms aimed at serving people who don't like accounting but have to have it.
The next step will need to be innovation that enables small companies to deal with the ever-growing complexity of tax laws and regulations at the local, state and federal levels.
Accounting by Wave
Wave Accounting Inc.
Sage North America
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