The shift in recent years in software has been from a product to a service; one-time license to a monthly subscription. Software companies learned that if you sell software as a product to a client, they will use it until they absolutely cannot use it anymore thereby limiting the revenue of that license.
With the advent of the “cloud”, the subscription model of accounting has given software companies the ability to host, allow and limit access to the software and data. A subscription is paid at a recurring timeframe either monthly or annually. The change made more business sense for the vendors and convenience to the users. Users have become more prone to pay at regular intervals to use the software.
This switch has not gone unnoticed.
Some consumers are wary to switch from an old license of their accounting software to a monthly subscription however out of date the software or insecure the data may be. This decision is primarily based on cost to the user over time. While there are many considerations when selecting a software, the question of cost cannot be ignored when comparing cloud-based software to desktop applications.
The question, “Is cloud accounting more expensive?,” is very broad and is about like asking if the color purple is inherently good. With so many software companies and packages there is no definitive way to answer this question. However, some software companies offer both a local/desktop version and a cloud version of their software. For the sake of comparison, let’s analyze the desktop version and cloud version of one of the most popular small business accounting products, QuickBooks.
QuickBooks Dominating Market Share
QuickBooks, owned by Intuit, maintains an 84.82% market share of the Accounting Technologies segment in the United States according to Datanyze, as of February of 2019. They are a powerhouse of small business accounting as reflected by their market share.
Intuit offered only QuickBooks desktop for years as they built their business. In 2001, Intuit moved into the cloud by offering QuickBooks Online. Today both products are offered, sold, supported and used by clients worldwide and provide us with a view into Intuit’s perspective of the benefits and pricing of both methods of software delivery. For this comparison, I’ll refer to them as QuickBooks Desktop (QBD) and QuickBooks Online (QBO).
The Cost of QBO vs. QBD
The question of this post is whether cloud accounting (QBO) is more expensive than desktop (QBD). As of February of 2019, three licenses of QBD (Pro) can be purchased without a discount for $299. These licenses are installed on a network server and the software file is accessed on a network drive. The QBO version most similar to desktop’s Pro is QBO Essentials, regularly priced at $35/month or $420/year. This includes 5 users who can log in from anywhere.
While the cloud version features don’t compare perfectly, Intuit has priced QBO significantly higher than desktop and desktop will lower your annual spend for accounting software, $299 for QBD vs. $420 for the year of QBO. For every year that desktop license remains unchanged, you can save another $420 assuming no price increases, additional support or discounts.
Below is a graphic comparing desktop to QBO.
There you have it. With a sample size of one, we find that cloud delivered software is more expensive than the corresponding desktop version. (I trust you find the ridiculousness of a sample size of one for a question as broad as this!)
But growth in QBO is exploding! QuickBooks Online grew revenue 40% in 2018. And not just QBO, another small business accounting software giant, Xero, grew by 38% in 2018. The better question might be, why would a customer purchase cloud-based software rather than the less expensive desktop version?
What you will notice from the graphic is that as similar as the software is on both desktop and in the cloud, inherent differences remain. For example, one of the most prominent distinctions is the access. Cloud-based software can be accessed from anywhere.
Here are three additional resources you can save by moving to the cloud:
1. Time
How much is your time worth? Due to the transactional level work being automated by the accounting software when moved to the cloud, there is often a savings in time. Automatic bank feeds, 24/7 availability of accounting software from any device and not sending or restoring backup copies saves time.
Have you ever overwritten the accountant’s changes when sending your CPA an accountant’s copy? These irregular time wasters and the normal ones like backing up the accounting files and downloading updates add up to significant time “leakage”. The time it takes to reconcile the bank accounts each month can be dramatically reduced by bank feeds. The software is fundamentally different and faster, allowing you more time.
2. Stress
If you are responsible for accounting records you spend time creating a disaster recovery and backup plans. Many smaller companies not comfortable with online backup will send backup hard drives home at night with employees to reduce the risk of accidents after hours at the office.
In addition to accidental disasters, what about hackers gaining access to accounting records through your company network? How secure are your records? With 60% of small businesses failing within 6 months of a data breach you probably spend time worrying about this. Moving the software online can reduce this worry. After all, the ability and incentive of a billion company to secure data will far outweigh what the average small enterprise could normally afford.
3. Money
Now wait a second, didn’t we already discover in our example that cloud accounting (QBO vs. QBD) is more expensive? Yes, one year of QBO is more expensive than desktop.
But now that you are simply logging into software there are expenses you just don’t need. A server to store the local copy of the software is no longer required. With the server may go the pricy hourly rate of an IT professional, server lease, backup subscription and/or managed service plan. These are hard costs many businesses are paying for that will be reduced or eliminated by transferring to the cloud.
The hardware costs may be reduced but also the additional software expenses may as well. Businesses use their accounting system to do more than just record financial transactions. There is inventory to be tracked, timecards, bills to be paid, sales tax, payroll among many others. While it makes sense to integrate this, many companies are using multiple, unrelated software packages to accomplish the tasks of managing their back office.
Many cloud accounting software suites have taken a page from the collaborative programming of open APIs model made famous by the iPhone to integrate software apps into their platform. Clients can potentially save money with efficiencies with duplicate entry and system integrations between software and may reduce the demands on staff. QBO for example boasts 600 approved software applications that “plug” into QBO to make recording transactions easier and less painful saving time and potentially money.
Begin the with end in mind
There are many reasons businesses switch from a desktop version to a cloud delivered solution. Like every single business decision, it should be first discovered by answering the question, “Where do you want to go?”
Cost is only part of the equation.
Software is a tool and an infrastructure investment that enables a business to accomplish a specific task. If your business model requires sitting in the office everyday with co-workers regardless of weather, family emergencies, travel plans or any other reasons then a local version of accounting software might be perfect for you.
However, if you happen to have an independent streak, an unquenched wanderlust and you want the freedom of connecting to and managing your business anywhere in the world there is internet, you need to strongly consider cloud-based software. Local software licenses will act like a leash keeping you tethered to home and stopping you from pursuing your adventure plans.
Did you want to keep tabs on your business from an RV outside a National Park, escape the winter blues surfing in Costa Rica or spend an extra week serving patients who could never pay market rate for your services? Set up your business to produce the results you want; begin with the end in mind.
Cloud accounting is a trend that will continue to accelerate as long as the world becomes more connected. It makes sense for many businesses to use cloud accounting but it makes the most sense for adventurous entrepreneurs.
Like all other decisions in life, this decision should be made by measuring more than merely dollars and cents.