How to get value from your accounting system for you, not the ATO
Does it ever seem like the only reason you keep accounts is because the ATO make you? How about using your accounting information to measure how your business is performing? There are a few key actions you can take to gain great insights to your business, and armed with that information to improve future performance.
Capturing data at the right time
All too often SMEs will only take up supplier bills when they are paid, maybe paying them manually via an EFT, then “cash accounting” the payment (ie recording a “spend money” transaction).
It might sound like more work to load the supplier bill to your accounting system first, but it is actually far more efficient. You can use tools such as ReceiptBank or Hubdoc (free for most Xero users) to import the supplier bill with minimal effort, then pay these by creating a payment batch. This will take no longer than paying them manually, but now you will have completed the bookkeeping on these, plus you have a real time record of your expenses in your accounts – so your financial reports are complete.
Capturing data in the right amount of detail
Again Supplier Bill automation tools will really help here – whenever you get an invoice from Telstra code it to Telephone Expense, from your landlord to Rent, for Insurance to Insurance and so on. Avoid having generic accounts such as Miscellaneous or Other – and if you have to have one, have one only and make sure it never has more than a few percent of your expenses! You want to know what you are spending your money on, and to do that you need to record it consistently.
Reporting at the right level of detail
When you first run a Profit & Loss statement (P&L) or a Balance Sheet (BS), I recommend running them at a relatively summarised level. This is super easy to do with report settings or report layouts – you want to see the big picture – how much did I have in Sales, COGS, Expenses, with each of these maybe broken down into a handful of line (for example total Employee Expenses, Total Rent and Related, Total Marketing, and so on). This will also give you Gross and Net Margin, and hopefully also those 2 figures as a percentage of sales. If a figure looks odd, or you want to drill into it, re-run the report (to screen you don’t have to print these unless you want to) at a higher level of detail.
How to Evaluate a Report
Even with the good quality information in front of you it is not always easy to tell how your business is performing. How do you gauge what is good and what is not? Is a net profit of $X “good” or “bad”, and could it be better? Is it likely to be better – or worse – next month, and what can you do to get the best result?
In our next article we’ll do a deep dive into the three ways to measure a financial report.