Outgrown Xero? The signs it’s time to upgrade to a cloud ERP

Thu, 22nd Feb 2024

Business expansion in early-stage companies is typically motivated by the pursuit of increased profits. This may involve introducing strategies such as addressing competitive pressures, leveraging existing success for growth, or venturing into international markets to access new customer segments.

What's common to these drivers is the need for business systems that can support and scale alongside these evolving demands.

In an effort to delay investment in more powerful systems, businesses often try to squeeze as much performance out of existing systems. But while accounting systems like Xero are well-suited to the needs of early-stage or single-entity businesses. as your business expands, sooner or later you will need encounter issues too big to ignore.

When this becomes apparent, transitioning to a scalable, flexible cloud ERP is the next logical step, allowing you to adapt to growth and complexity without the fear of stressing or breaking your systems.

So how can you know if, and when, it's time to transition to a cloud ERP?

1. Advanced accounting capabilities

As your small business grows, so does your business model and processes. You might have more products and complex inventory needs, more employees, more channels, more customers and customer types too.  

At some point, Xero's basic accounting capabilities will be unable to deliver the functionality required.

You might require deeper insights into cash flow forecasting, revenue recognition, or global compliance. Or maybe you need support for multiple forms of depreciation, budget roll-ups, total organisational budgets and subscription billing. These are all are all examples of where Xero's accounting software falls short. 

2. Too many third-party tools

It's common for growing businesses to find themselves juggling multiple third-party tools to fill the gaps left by Xero. Adding a CRM integration, inventory management tool or project management application will allow you to meet your changing functional requirements in the short term. But over time it adds to system complexity and operational overhead, creating data inefficiencies, inconsistencies and mismatches that makes your tech stack difficult to maintain and keep stable. 

For example, you might start to lose track of the specific roles and integration points of each tool within your ecosystem, leading to redundant applications and unnecessarily high costs. A fragmented tech stack like this will force you to adapt your model to the technology limitations or build complicated process exceptions, limiting your ability to adapt and grow.

3. Multi-entity limitations

For many small businesses, growth opportunities lie in new markets. To unlock these opportunities, whether through opening new locations, establishing a foreign presence, selling to intermediaries or directly to customers via channels like ecommerce, businesses need to understand, support and comply with the unique needs and requirements of each market.  

An obvious first hurdle is that Xero is designed to manage single-entity businesses - multiple legal entities require a separate Xero subscription for each. This leads to several issues. Xero does not natively support consolidated reporting for multiple entities meaning financial consolidation will have to be completed manually. Managing multiple Xero accounts means logging in and out of different entities to process transactions or extract reports. Each additional Xero subscription incurs extra costs, which can quickly add up.

There are other challenges that crop up including managing different currencies to abiding by foreign regulations, neither of which are well supported by Xero.

4. Transaction limits

Xero imposes a daily API call limit of 5,000 requests per day, which is a threshold that businesses might not typically encounter in the early stages of operation. However, as transaction volumes grow – or surge during peak sales periods like Black Friday - the risk of hitting this limit increases.
Note that each sales transaction in Xero can require multiple API calls for various processes, including:

Verifying item availability
Processing payments
Updating inventory levels
Creating shipping orders

So, a single transaction might trigger a series of API calls, potentially half a dozen or more, putting you at risk of exceeding the daily limit.

If this happens, you might start to experience system slowdowns, crashes, or freezes, especially during times when operational efficiency is critical. This includes lags in processing transactions that could delay order fulfilment and lead to inaccurate stock levels.

5. Headcount increases

Xero's payroll system is designed for small to medium-sized businesses, up to around 50 employees. Beyond this number, you may start to notice a decline in processing speed and efficiency.

If your projected growth indicates that your headcount will increase beyond 200, you will have to make a decision. Either start a new instance of Xero for additional employees, which can complicate payroll operations as you'll need to manage multiple accounts or transition to a more scalable payroll solution sooner rather than later.

Get into the nitty gritty with these additional resources:

Where to from Xero?

It's essential to assess how the limitations of Xero align with your long-term business objectives and growth trajectory. When the features and capabilities of Xero can no longer support your strategic plans, or they necessitate a strategic shift in the way you run your business, it's time to evaluate the benefits of migrating to a more growth-supportive cloud ERP system.

If you've outgrown Xero, Annexa can help

At Annexa, we specialise in guiding businesses through the transition to more comprehensive systems like NetSuite. For a detailed discussion on how to navigate this transition smoothly, get in touch with us at Annexa.

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