How To Manage Your Business Using Xero Data
May 6, 2016
While running your business and making important decisions, Xero can help to answer the following questions … and more:
- Is my business actually profitable?
- How do I manage my cash flow better?
- Am I adding value to my business with my activity, or not?
Using an accounting software like Xero you will have access to the real time visibility of your finances to make the decisions needed to manage your business.
Let’s start asking ourselves what kind of data we need to manage our business.
Xero (and other accounting software) allows us to produce what we call Management Reports such as the Income Statement, the Balance Sheet, the Aged Receivables and Aged Payables.
Another important report that should be prepared by the company management is the Budget that would give us data to compare and check if the business is going as planned. This feature is sometimes forgotten but set up correctly can be a valuable tool when making strategic decisions.
These reports allow us to know how the business is performing as it progresses through the year, and therefore manage it better.
Understanding Your Profit and Loss Report
The main source of information of our operational activity is coming from the Profit and Loss report. It will let us know if we are self-sustainable and if there is a profitable result during a specific period of time after taking out, for example, cost of sales, expenses, interests, other expenses and taxes from our revenues.
Let’s try to run the Profit and Loss report in Xero at a particular date like March 2016, for one period, comparing it with the Overall Budget, and analyse what kind of data we have.
On the left side there is the monthly result compared to the budget and its variance while on the right we have the YTD results again compared to the budget and its variance.
How do we actually look at the numbers to understand how our business is going?
Each statement would be different, the main results available are the Gross Profit and the Net Profit. Let’s analyse the variance compared to the Budget, looking at what has created that variance. One useful feature Xero offers is the possibility to click on the data and see what has been driving that particular variance.
If we run the report on a monthly basis, comparing it to our budget, we will be on top of our performance and at the same time have the opportunity to pick up some errors or expenses that should have been registered (for example).
Then we need to know what our economic resources are, what our financial obligations are and what our personal portion of the business is. So we will look at the Balance Sheet which contains a clear image of our financial position at a certain point in time.
Understanding Your Balance Sheet
The structure consists of Assets, Liabilities and Equity.
If we run our Balance Sheet report on Xero, for example, for the month of March 2016 compared to one of the previous periods, we will find the structure mentioned above.
The Assets are divided in Cash or Bank Account, Current Assets and Fixed Assets.
Current Assets and Cash we have in the bank are resources that can be transferred into cash within the next 12 months while our Fixed Assets are the longer term economic resources like computer equipment and office furniture. Assets will be in the business for more than 12 months.
The same classification is valid for the Liabilities with Current Liabilities, creditors to be paid within the next 12 months and Non-Current Liabilities, bank loans, for example, which will take longer than 12 months to repay.
Then you have the Equity or so called Shareholder’s loan which represent the amount of resources owners have into the business.
All this data, by itself, can tell us a few things although when we have the information we are able to take it a step further and gain valuable insight into our business performance using financial ratios and graphs.
Understanding Your Business Performance Dashboard
In Xero there is the Business Performance Dashboard under the report section. This will give us several ratios to look at that would help us with business analysis.
We have the Gross Profit calculated as [Sales – Cost of goods sold]/Sales, which gives us the price profit or price margin. It is an indicator of how much it’s costing us to make those sales and it could also be compared with other companies in the same industry, to check what margins are they achieving.
The Net Profit on Net Sales % is showing us how efficient our business is, calculated as Earnings After Taxes/ Net Sales.
A positive result is what we are looking for in this ratio. If we would like to improve it, we have two options, we either increase our sales prices (with the risk of having less sales) or act on our costs to improve operating efficiency.
These ratios and graphs should be analysed with your accountant in the first place and choose with them which one is giving you the most important information. Through the dashboard in Xero we can have these ratios available every day.
Another two important reports that we should look at on a monthly basis are the Aged Receivable and Aged Payable reports.
Understanding Your Aged Reports
The Aged Receivable report will give us the opportunities to see who our debtors are and do some credit control if needed.
Under the report section in Xero let’s produce the Aged Receivables report and see what we need to look at.
On the left side there are all the names of our debtors while on top we have a monthly division of the amounts. Our job now is to look at all the debtors and contact them, the older ones in particular, so we can get that cash back into the business.
The Aged Payables report have a very similar structure with the creditor’s names on the left and the monthly division on the top. This is an important report that could tell us if there are any forgotten payments to fill in that could have been mistakenly registered on the P&L statement, creating an incorrect report. So take a good look to it on a monthly/quarterly basis to this report too.
In the day to day business running, we need to have information on data related to the flow of cash in and out of the business, to understand if we have a healthy Cash Flow.
Understanding Your Cash Flow and Forecasting
To keep our Cash Flow under control, prepare a Cash Flow Forecasting which could be just an excel spreadsheet containing our Opening Cash Position (bank balance) plus the Cash Inflow into the business such as debtors who will be paying us in the near future, incoming sales and loans we will receive from the bank, minus the Cash Flow Out of the business such as purchases of goods, payment of expenses, taxes, interests and any payment we are forecasting to make. This will give us the Closing Cash Position.
Forecasting the cash flow is really important to plan what your closing bank balance will be over the next coming months, comparing this data with what we have planned. Using it we will have a clear knowledge of how our cash flow is going and never be in a bad cash position. What could happen if we are though? As an immediate reaction we will stretch our suppliers and consequently create a bad name with them. It could take a very long time to gain their trust again so let’s get on with our forecasting today.
To create our forecast with Xero there are two options, we can click on this link where the Xero tutorial will show us step by step how to create a perfect forecast for our business, or look into the Add-on section in Xero.com.
Manage Your Business
We strongly recommend you run the Management reports monthly or quarterly, whatever is relevant for your business, in order to learn how Xero could help to take complete control of your finances. This in turn will help you plan and develop strategies to grow your business, and react quickly based on the information these reports present.
Recommended Monthly Actions:
1. Prepare your Budget and Cash Flow Forecasts.
2. Run the following reports:
a. Profit and Loss
b. Balance Sheet
c. Aged Receivable
d. Aged Payable
e. Statement of Cash flow (under the new report section)
3. Look for trends or lows/highs in your figures.
4. Revise your management plan based on these findings.
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This week’s post has been a team contribution. Giuliana is our Xero and bookkeeping expert and when not actually doing bookkeeping for our clients she also offers one-on-one coaching sessions. Contact Justine to learn more about what these sessions involve.