5 things small business owners need to know about their Xero account

24 November 2020

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Many business owners got Xero thinking it would solve their accounting problems – and for many it has. They’ve got the bookkeeping streamlined, get their compliance taken care of quicker and their accountant is happy.

But, they also expected it to fix their cashflow issues, highlight areas in their business to improve on, and given them financial insights. They then end up somewhat disappointed – the bookkeeping is easy, but the insights aren’t there. Ultimately Xero becomes another login to remember, with most of the reports being things they don’t understand.

The answer to this lies in knowing how to use Xero as a business owner – not as an accountant or bookkeeper.

In this article we’re covering the 5 things you need to know as a small business owner about your Xero account.

But first, a quick story

We often hear comments along the lines of “Xero will take care of all my accounting and taxes – it can do my GST and give me all the reporting I need. I’ll hardly need an accountant and can do my own bookkeeping”. If you just happen to be a top-flight bookkeeper then you might be onto something.

If you’re like most people though, you’ve got an internal accounts person finding their way around Xero, or you’re doing it yourself. This is where the danger lies.

No matter how accurate you are, if you don’t understand exactly where you’re putting things then you’re unlikely to get accurate reporting. If you’re getting inaccurate reporting, then the decisions you base on that reporting will be off.

Recently we had a customer who miscoded payments to some employees. Basically, they screwed it up. Because of that, their Profit & Loss Report showed them making more money that they were. It looked as if they were above budget, and that each job they did was profitable. In reality, they had one product line which was losing money, and were barely breaking even.

They trusted the reports they were getting from Xero (because Xero basically does away with the need for an accountant or bookkeeper…right?). Using those reports, they assumed that everything was okay and that no changes were needed in their business. This turned out to be very wrong.

Garbage into Xero, garbage out.

Here’s the secret – get your Xero account into tip-top shape.

When you’ve got accurate data in Xero, the reports you can pull are exceptional. You can pull out insights into your cashflow, track profitability, monitor working capital, get margin history at a glance, see trends in ratios and more. This detail is exceptional, but also overwhelming.

Most people loathe numbers. For those who don’t, they often can’t see the trend or the big picture from the numbers – their level of detail is stuck at “this number is up, that number is down”. There’s no depth to look at the correlation in sales and wages, wages and office overhead, or weather and gross profit.

Xero can work out all of that, and more. The secret lies in knowing where to go, the questions to ask, and then what to do with that information.

With this in mind, here are the 5 things you need to know.

1. Get your base data right

First of all, if you’re not already, start using Hubdoc and get your base data right.

In short, it gets rid of the paper from your wallet. From an accounting perspective, it does more than just paperwork – it gets the right expenses into the right time period, and gives a clearer picture on half of the cashflow equation (there’s accurate data on who you owe what to at any point).

For more info, checkout our dedicate Hubdoc resources here.

Then, make sure that your Profit & Loss report is setup right. A correctly setup P&L will give you clarity on the different areas of your business, what’s making money, and what’s not. It gives you the deep data from your P&L, rather than simply having a conversation with your accountant about what went up and what went down at the end of year.

Picture this: you’re a plumber doing residential renovations and new buildings. How do you know if you make more money from renovations compared to new builds? If you’re a retailer with a physical and online store, how can you know if you make more money online, or in-store? Your Profit & Loss won’t tell you unless it’s setup right.

As a business owner, identify the distinct areas in your business. Then ask yourself if you have solid data on each of these areas. Think about sales versus service, different locations, product lines, or on-site versus off-site work. The more areas you can identify, the better. Then design your P&L to fit those areas (get in touch to find out how).

2. Get visibility in a flash

Make sure your Xero dashboard is setup with Business Performance Dashboard. These show the key financial ratios for your business at glance.

Tip – the most important ratios for many are the Gross Profit %, Net Profit %, and Quick Ratio. For more on the ratios, get in touch with us and we can talk you through the specifics you need for your business.

If you’re not across these on a monthly basis (at a minimum) then you’re leaving money on the table. The quicker you spot any trend, the quicker you can respond – the Busines Performance Dashboard puts them in front of you daily so you can keep an eye on the key numbers.

For more, checkout our article here.

3. Get your security sorted

Every business owner locks their shop door at the end of each business day./ Many though leave their Xero accounts open 24/7. Make sure you lock yours down by:

  • Turning on two-factor-authentication to make your password doubly secure
  • Revoke access to anyone who no longer needs access
  • Ensure the people who do have access only have access to the information they need
  • Understand the audit checks to make sure your staff are only touching the areas they should be (for example making sure they’re not changing bank account numbers)

For more on increasing the security on your Xero account click here.

4. Choose your apps

Over 700 different apps hook into Xero. Frankly, it’s overwhelming – many business owners simply ignore them all together

The right choice can streamline your entire business operation. The wrong choice can see you spending half of your life entering data (not to mention the mess which results in your Xero account).

Statistics from Xero show that businesses actively using addons grew 30% quicker than those who don’t. So, get into them to boost your efficiency, and get tech doing the heavy lifting in your business.

To learn more about addons, click here. Or, for tips on choosing the best addon checkout this article.

5. Get your foundations in order

At the end of the day, you can’t build a house on rocky foundations. Make sure that your personal Xero knowledge is strong (so you can spot anything which doesn’t look right), and then that the setup is broadly in order.

For more, click here to find out more about our Xero Healthcheck, or get in touch to find out about Xero training.

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for more help feel free to reach out. Get in touch with Eugenie Jones