Yes, Xero is a good accounting system for charities

Even small charities can have big complexities when it comes to choosing and using accounting systems.

There are two issues in particular which can be hard for charities to deal with on many accounting systems. The first is VAT partial exemption. Charities may have a mix of exempt income (grants, donations) and taxable income (eg selling goods or running a cafe). This means that they cannot reclaim all of their VAT and have to do “partial exemption” calculations.

The second tricky issue is the requirement for “fund accounting“. That is, to be able to identify your income and expenditure against various restricted and unrestricted funding lines.

So I was pleasantly surprised to find out that Xero could handle these issues reasonably well.

I hadn’t had much exposure to Xero before about a year ago. While I knew that there were many good reasons it was rapidly growing in popularity I hadn’t thought about it as an accounting system for charities.

However, after six months of using it, I’m sold. (I should add, no one is paying me to say this. I’m not a Xero Platinum partner or whatever.)

So what’s so good about Xero?

Xero does the basics really really well. For example, everything can be drilled into (and back). There are various input options to save you time. For example copying previous invoices or even better, if your supplier is on Xero, you can just import the whole invoice direct. You can attach documents to almost everything – great for providing audit trails.

Reporting is pretty good – everything is customisable, and it’s a lot harder to go wrong than with some other systems.

There are also lots of compatible apps that work alongside Xero to do more specific things. I have only used Xero Expenses so far but I love it.

Charity-specific accounting issues

There’s a really helpful guide here for charities about how to use Xero.

For dealing with VAT partial exemption, you can set up as many tax codes as you like, which you can use to allocate expenditure to recoverable, irrecoverable or inattributable tax codes. You do then have to do a manual calculation but I have never come across a system where you didn’t.

And for dealing with fund accounting, Xero offers you two separate tracking categories. I tend to use one for budget holder/cost centre type reporting and the other for fund accounting. (You can also pay extra for a specific project tracking module if you need it – I haven’t so far). So you can allocate every single transaction to a specific fund, either as you post it or using Find and Recode.

Find and Recode – the killer app

The absolute best thing about Xero is “Find and Recode”, which by pure magic does exactly what it says on the tin. Both the “find” and “recode” elements are really powerful. For example, you can search by account code, user, date, absence of tracking code etc. You can then recode just about anything, including the tax code and tracking code. You can do this as effectively an edit “at source” or you can post it as a manual journal. I was really wary about this to start with (bad memories of “delete transactions” in early Sage) but it’s robust and it works, and most importantly, you can do it in bulk.

Going back to the charity example specifically. Charity book-keeping is quite demanding if you require the person inputting invoices to fully understand all of the various funds that you have, and all of the VAT consequences. Don’t get me wrong, I’ve met some awesome charity book-keepers who can handle all of this. However, imagine how much simpler this all becomes if you can just edit in bulk what someone has done.

This becomes even more important if you’re using something like Xero expenses, where you are reliant on non-finance people entering data. I could issue lots of detailed guidance to everyone to tell them which funds to use when, or I can just recode unallocated transactions as part of my month end checks and book-keeping. Quicker for me and quicker for them.

It’s also relevant to something I wrote a while back about whether you really need a new accounting system. One of the issues I’ve come across with Xero is where it hasn’t been set up properly in the first place. However, because of Find and Recode, you can reallocate everything to a new chart of accounts really quickly. So you can immediately see the benefits of your new reporting structure.

So what are the downsides to Xero?

The main issue I’ve found is that, like a lot of simple systems, it doesn’t really do “accounting periods”. So you can close a month for posting (great!) but if you receive a late invoice, you either have to reopen the period and post it with the correct date, or you have to post it with the first available date (i.e. not the date on the invoice). My workaround for this is to have a later month close when it’s a VAT quarter, but others may not like this.

Another gripe I have is that there isn’t an easy way to export lots of attachments in bulk from the system. You can export system generated documents en masse, no problem, but not the attachments. This is only an issue if you’re thinking about leaving Xero and want a back up of your documentation. I’m not at the moment but it’s possible that as we expand we might need a bigger system. So I save invoices, expense claims etc outside of the system as well as on it, which is definitely duplication, although not too much hassle.

Finally, the terminology can be a bit confusing initially for someone with an accounting background (dude, where’s the purchase ledger?).

I stand by my conviction that no accounting system is perfect, but this is pretty damn good for the money.

Photo by Michael Walter on Unsplash