Review of Freeagent cloud accounting software

Overview of cloud accounting market

In the old days, by which I mean about 5 years ago, if you were a small business you were very limited in your accounting software options. You could either create your own bespoke system using spread sheets or you used mass market desktop bookkeeping software, probably sage. The problem with creating your own system was that it was time consuming and unless you were both an accountant and a excel expert, bound to end up being very basic. The problem with sage was this it was expensive, inflexible and so complicated that you would often end up paying a trained bookkeeper to run it for you.

Then someone realised that there was a huge gap in the market for user friendly cloud based accounting software designed with the small business user in mind and a whole new sector was born. Unsurprisingly given the potential size of this market, there are now a number of products competing for your monthly subscription fee with Freeagent currently the market leader in the UK with around 20,000 users closely followed by Xero. Given the interest in these products amongst my clients who are very much the target audience, I’ve decided to provide an overview of the most popular software Freeagent to help people decide if it’s for them. I’d suggest after reading my review you go on the virtual tour to give you a visual feel of the software –  

Design & Features

After logging in you find yourself at the overview screen which gives you a snapshot of how the business is performing in real time. This is a nice feature, as one of the main issues small businesses historically have struggled with was the lack of good quality, timely data about how they are performing. They often won’t get an accurate idea of this until their accountant has prepared their annual accounts many months after the end of the year, which is too late for it to be of any real value.

The overview screen comprises of 6 windows dealing with the following areas – bank account, cash flow, profit and loss, tax timeline, invoicing and expenses and a menu bar. It’s clearly been designed with ease of use for non-accountants in mind; you don’t need to have a grasp of double entry bookkeeping to use it. Most new users should therefore be able to perform all of the key functions within an hour or so of starting. You do need to be a bit careful with the setup data though as putting in say the wrong year end or start date will create problems later. You can arrange the windows as you like so if you’re most interested in the bank you could have this at the top of the page. One thing to be aware of is the profit & loss report, this is a hugely simplified version of what your accountant prepares at the end of the year so for example if you have say stock, work in progress or fixed assets then your final profit and loss figure could end up being very different from the one shown here.

The menu bar along the top of the overview screen allows you to directly access the main functions that you will be using – contacts, work, bills, my money, banking, taxes and accounting. There is also a quick links drop drown menu which provides a shortcut to the most common functions.

Let’s look at the functions you are going to be using the most, work, bills, my money and banking.

Work is what we accountants would call your sales ledger, so here you can create sales invoices to send to clients and keep a track of when they are paid. You have a fairly limited choice of 8 templates for the invoice and this will then be part pre-populated for you and one complete emailed to the client, you can also setup an automated reminder if the invoice is not paid by the set time or a thank you when it is paid you can also create recurring invoices. When you have your basic client details in place this does make creating invoices very quick, and once created it will be added to your sales ledger which you can access easily and analyse by different criteria, so it’s simple to get a list of outstanding invoices for example. Your sales invoice details will also be used for vat return purposes  if you are vat registered and will flow into your summary profit and loss and tax calculations.

There is also a projects option within this function which would be useful for businesses working on larger pieces of work. It allows you to create specific projects, record and allocate costs, time and sales invoices to these projects, therefore allowing you to determine profitability by project.

Bills is your purchase ledger or in simple terms amounts you owe your suppliers, so when you receive a bill for a service or product you would go here and enter the details. You need to decide what kind of expense category it falls into from a drop down menu, and it will then guess the vat rate for you if you are vat registered. You can also, as with sales, set up recurring entries for say rent or council tax, and view total amounts outstanding at any point. Amounts owed to your suppliers will be automatically updated whenever you make a payment through the banking function.  If you are a very small business who doesn’t have much in the way of expense or pays them as soon as you get the bill you probably won’t need to use this function, but instead just record expenses as they are paid via the bank function.

My money is where you can keep a track of how much money you have taken out of the business, in the case of companies this will probably be split between dividends and salary payments, for sole traders it will just be drawings. You can also record business expenses that you have paid out on behalf of the business and would like to claim back, so for example mileage. There is a payroll option which will calculate tax and NI deduction for directors and other employees and file the necessary monthly submissions required under the new RTI scheme, provided you have registered with HMRC. This does however have its limitations, for example it can’t handle weekly or fortnightly pay cycles, benefits in kind or expenses reimbursed so it probably won’t be suitable for larger businesses. I would also add that if you are operating as a company there are some very important differences between taking money out as dividends as against salaries and you need to get your accountant to go through this with you. 

Banking is the function at the heart of Freeagent. It is the primary source of input data and is where you are likely to spend the majority of your time. Freeagent has suffered in comparison to Xero and Kashflow in the past because it only offered automatic bank feed from one bank, Barclays, so that you had to manually upload bank statements from your online banking account. However it now offers this bank feeds from most of the other main UK banks, with the exception of the Co-op business account s and HSBC, via the third party bank aggregation service provider Yodlee. With the feed in place you then just need to explain individual transactions, so for example if you have a bank credit you need to identify whether it is say (a) a sales receipt, if it is you then need to allocate it to a particular invoice (b) a loan from you (c) some other source . Once you’ve done this once for a particular type of transaction then similar items in the future will be automatically identified for you. This whole process is very logical and easy to pick up and I can’t see how they could have made it any simpler to use. The data entered here feeds through to the overview screen to give you cash flow and bank balance reports as well as the profit and loss account.  The ability to allocate bank payments accurately and quickly is something that should save users a great deal of time and is one of the biggest advantages that these applications offer over desktop packages such as sage.  Obviously as with any system the accuracy of the data produced is only as good as the user’s ability to accurately allocate individual transactions so you might want to get your accountant to remotely access and check things from time to time, which again is simple to do, you can allocate user rights to your accountant in the settings menu.

Integration with other products – Freeagent allows you to connect up to a range of useful third party apps such as stipe, go cardless and basecamp, though the range is not as extensive as Xero.

Taxation – Freeagent allows you to prepare and file vat returns, including flat rate, by populating the return from your input data for sales and expenses, which is great and could save a lot of time, though accuracy does depend in particular on correct allocation of expenses to the right category. It also gives a running estimate of your personal or corporate tax though like the profit and loss this may not be very accurate as it does inevitably simplify what is a very complicated area, so probably best to take this figure as a guide only.

Pricing – Freeagent is a subscription based service, and your monthly payment depends on what business type you are, for sole traders it’s £15/month, partnerships £20 and companies £25, these amounts exclude vat so if you are not vat registered or on the flat rate scheme then the annual cost for a company is £360-00.  Xero, its main competitor has a different pricing structure based on the number of transactions but most businesses you will be paying £19/month plus vat so around £275 a year. By this comparison Freeagent does seem relatively expensive, and if you are very cost sensitive you can try Wave which is entirely free, though I’ve read mixed reports about how good it is, particularly on the support side, which is perhaps unsurprising.

So the big question is of course is £360 a year for this software good value? I would suggest this depends to a large extent on the nature of your business, if you’re a reasonable size business with a turnover of say £30,000 or more, sending out lots of sales invoices a month, have quite a few expenses, lots of transactions going through the bank and are vat registered then Freeagent will probably save you several hours a month in administration and this alone makes it worthwhile. You will also benefit from the ability to get an idea of how the business is performing in real time, and it’s likely that your end of year accountancy fees will be a bit lower, though probably not by £360! If however you’re only sending out a handful of invoices a month and your expenses are minimal then you’re probably fine using a spread sheet, or you could try Wave which is free.

Overall assessment

Freeagent is undoubtedly a very impressive application that I like a lot, it’s been designed to meet the needs of its target audience -IT literate owners of small to medium sized companies and sole traders in the business services sector. My main reservation is the cost which may put off very small businesses, and is quite a bit higher than its main competitor Xero. I would (and do)  happily recommend Freeagent for businesses in the £25,000 – £100,000 turnover bracket, if you’re lower than this you might want to try Wave as it’s free. If you’re over £100,000 or planning on heading in that direction I would suggest you have a look at Xero as well, as it’s arguably better suited to the needs of larger businesses. Both Xero and Freeagent allow you to trial the software without obligation, Freeagent for 30 days, Xero for a certain number of transactions, so give them a go, you’ve got nothing to lose except your bank reconciliation (an attempt at an accountancy joke there…sorry)