Xero Accounting for Law Firms

Xero is a cloud-based accounting software that has positioned itself as “The online accounting software alternative to QuickBooks” for lawyers and other small businesses. Like QuickBooks Online, it can work well as general-purpose accounting software for law firms, although it lacks specific trust-accounting features.¹

Opening a Xero Account

Opening a Xero account is simple. You can sign up for a free trial, no credit card required, if you would like to get a sense of how Xero works without committing. Once you enter your email, Xero will kick out an email confirmation. After setting up your password, you will be up and running. One warning: Xero will email you right away with an offer to walk you through the software.

When you first launch the software, you will be able to choose what kind of business you are (there is a specific legal designation), add your organizational type (such as corporation), and your tax ID numbers.

Xero has an extensive library of how-to videos to help get you started.

The software will prompt you to add your first bank account, invoice, and bill. However, you do not actually need to add all of those things to start using the software—although if you don’t add a bank account, you will obviously be pretty limited in what you can do with Xero.

Pricing

Xero has three pricing tiers: Starter, Standard, and Premium. There are also some add-ons.

Starter

The starter tier is normally $9/month but is available right now for $6.30/month for the first six months. With the starter tier, you can basically use Xero as your accounting software, but you are severely limited if you want to generate invoices, pay bills, or reconcile more than 20 bank transactions monthly.

You can generate W-2 and 1099 forms, but you cannot do payroll or file taxes. You can have unlimited users with the starter tier, but it is tough to think of a situation where you would have multiple users if you’re on the starter plan.

Standard

Xero’s standard tier, which is likely the one most lawyers would use, adds unlimited invoicing, billing, and bank reconciliation, and will allow you to handle payroll for up to five employees, including direct deposit. You will also be able to e-file state and federal taxes. The standard tier normally costs $30/month, but it is available right now for $21/month for the first six months. As with the starter version, you can have unlimited users.

Premium

Xero’s premium tier costs $70/month typically, but is on sale for $49/month for the first six months. That gets you payroll for ten employees and the ability to deal with multiple currencies, which is likely not a thing you will run into needing often. Of course, you have unlimited users in this tier as well.

All tiers also give you access to using Xero’s iPhone and Android apps.

Add-Ons

Xero also integrates with a number of add-ons. These are other applications that play well with Xero and extend its functionality. You can connect your preferred method of receiving payments such as Paypal and Stripe. You can add time-tracking software like Harvest and connect to Squarespace if you use that for your website.

Of more interest to lawyers, however, is that you can integrate with Clio. You can use Clio to track client invoices and expenses, which are then handed off to Xero for accounting.

Importing Data

A paid Xero account will allow you to import data from QuickBooks with Xero’s conversion tool. Xero’s tool will convert U.S. QuickBooks accounts in QuickBooks 2007 or later. It will automatically convert the current and previous fiscal year—years prior to that are available for an additional fee via one of Xero’s add-ons.

You will need to prepare your QuickBooks file for the conversion process. Xero recommends, at a minimum, cleaning up your data, ensuring that a maximum of 699 accounts are in the chart of accounts, and making sure account numbers are turned on. They also suggest adding account numbers to unnumbered accounts and renumbering your sub-accounts. Save your QuickBooks file in the following formats to ensure conversion compatibility with Xero:

• QBB
• QBOE
• QBW
• QBXML

Unfortunately, Xero cannot convert payroll information, closed purchase orders and quotes, and bill reference numbers.

Xero also names some of your data differently and handles charts of accounts a bit differently than QuickBooks does.

The conversion tool runs in the background, and Xero says it takes about three hours, typically, to convert your QuickBooks files.

You can also import some data from FreshBooks if you have been using that instead of, or in addition to, QuickBooks.

You can import your contacts from non-accounting software after exporting those contacts into a CSV or TXT file. Xero has a blank CSV template it provides to make the process a bit smoother.

Using Xero

If you have imported your data from QuickBooks or other accounting software, Xero will be pre-populated with all of that data. Otherwise, Xero will first prompt you to add your bank account. This is easy, since most major US banks are included in the drop-down menu—saving you the tedium of digging out your routing number.

You can choose how far back you would like to have Xero import or choose to have it import all available transactions (the latter can take quite a while). After 30 minutes, Xero was still grinding through my personal bank account that I used for testing.

Xero will also prompt you to add several other items right away: Your organization’s contact information (including your logo for invoices), your chart of accounts, your contacts/clients, your suppliers, and your preferred payment services. You can also add your accountant or financial advisor. If you do not have one of those but are in the market, Xero provides a directory of financial professionals certified in the use of its software.

Although Xero will not automatically prompt you to do so, you should also go into the settings and add or adjust a number of options, such as adding your tax period dates and managing user access.

You can set up custom themes for your invoices, but be forewarned: invoicing is geared much more toward businesses that sell products than services. You’ll need to tinker a bit to remove unit prices and tax rates.

For an overview of your finances, you can take a look at Xero’s dashboard.

What you see above are some of the defaults that appear on the dashboard, but you can rearrange modules and add additional or different widgets. This version of the dashboard is set up to reflect personal finances and spending goals, for example.

If you are using Xero to manage your payroll (which requires the standard or premium tier), you will set that up, essentially, as a separate service within Xero. There is a video that walks you through the setup and shows you how to add employees.

A nice touch: Xero sets up a payroll portal for employees so they can log in and securely view their own payroll info, something that is often unavailable to employees in smaller firms unless you outsource your payroll to ADP or another big company.

Xero has a number of built-in reports you can run. These include budget summaries, overall income, income from a particular contact, bank reconciliation, aged payables and receivables, and balance sheets. Some of the built-in reports are clearly geared, again, towards people that sell products. You likely will never run the inventory items summary report. You can also create your own reports or modify Xero’s existing reports.

Security

Xero encrypts all data traveling between you and it using Transport Layer Security (TLS). TLS basically ensures no third party can eavesdrop on your data when it is in transit. Xero also encrypts your data when it is stored on its servers and when it transfers your data between its own data centers while backing up or replicating your data. Xero also offers two-factor authentication, which you should definitely enable.

Xero also places a premium on physical security, with servers housed in facilities with 24/7/365 monitoring, onsite security staff, and security audits. It keeps replicas of your data in a number of different physical locations to decrease the risk of data loss if something physically catastrophic happens to a building where the servers are.

Xero did have a small security breach in October 2015, apparently due to phishing attacks. The company affirmatively warned its customers to change passwords as soon as it learned of the issue.

Mobile Apps

Xero has put a lot of marketing and development muscle into its mobile apps. Apps are available for both Android and iOS, with the latter boasting iPhone, iPad, and Apple Watch support. Feature-wise, the apps are robust and definitely marketed to people that do a lot of business away from the office.

You can follow up on past due invoices from anywhere, which is probably key for a lot of lawyers. If you are using Xero in a solo or solo-small setting, you may find the ability to scan and upload receipts and track expenses while you are out seeing clients to be a great help.

The Apple Watch support is relatively minimal, basically it just allows you to view transactions and get notifications about deposits. The lack of features is more the fault of Apple Watch, being such a small (literally and figuratively) platform.

Backup

Xero will not let you create a full backup of your data, noting that it already has security and backup procedures in place to protect your data. That is a downside for anyone who wants to own all their data. You can download quite a few individual files, however, including your general ledger data, your chart of accounts, your contacts, your invoices and bills, balance sheets, and income statements. You could recreate most of your data if necessary, but it is a piecemeal way to go about it.

Who Should Use Xero

As a baseline, anyone in a solo-small setting that needs accounting software (which is everyone, really) could use Xero, but those people would also benefit from using the market leader, QuickBooks Online. Xero is slightly cheaper than QuickBooks Online, but not so much that price would be your key decision point. So what sort of people should choose Xero instead?

QuickBooks Online charges on a per-user base, where Xero does not. If you are in a situation where, for some reason, you have the need for a lot of people to take a look at your finances, it will be cheaper to use Xero.

If you like to test-drive a lot of add-ons and are a constant productivity tinkerer/lifehacker type, Xero will probably appeal to you. Want cool visual invoice tracking and income forecasting? Add Cushion to Xero. Many of the add-ons are probably not really useful for attorneys, though.  Chances are you will probably never need to integrate your talent and modeling software with Xero. But with its freewheeling approach to add-ons, particularly when it comes to alternative payment methods, Xero definitely does a better job making you feel like it will stay abreast of integrations.

(And for what it’s worth, at Lawyerist we switched our own books to Xero at the beginning of 2014, and we’re definitely a little happier with Xero than QuickBooks Online.)

1. Of course you can still do trust accounting manually, if you know how. ↩

Xero Accounting for Law Firms was originally published on Lawyerist.com.