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Three Common Mistakes With Setting Up Xero Files
Xero is a wonderful tool that has completely disrupted the bookkeeping and accounting industry and revolutionised the way Small Business owners keep their accounting records.
Unfortunately, many files have been set up incorrectly leaving the Small Business owner with reports that are meaningless for managing their business.
There are three common mistakes I regularly see when I’m reviewing Xero files for business owners who want useful management reports:
Mistake #1. Generic headings (or account codes in accounting-speak).
Traditionally, accounting records were set up with an alphabetical list of overhead expenses in generic categories like advertising, subscriptions, staff training. Whilst these are good categories, what they hide behind them is mass of useful information for the business owner.
One of my clients, Katie, has a product business that regularly advertises. She uses Google AdWords, Facebook ads, boosted Facebook posts, sponsorship of events, promotional giveaways and so on. So, whilst the total of advertising is correct, it’s not providing Katie the information she needs in a format that is useful to her.
Katie understands the need to determine her return on advertising spend across the different platforms so that she can evaluate how each advertising platform is performing and make informed decisions about her future advertising spend.
Similarly, there are other costs, like subscriptions and training costs where it is key to identify what is being paid each month.
Mistake # 2. Incorrect cost of sales allocations.
In product-based businesses, the cost of sales figure usually includes the purchase price of the products together with freight costs, import duties and packaging materials.
But consider what you are selling if you are in a service-based business. You are selling time, time that costs the business money in the form of wages, superannuation, contractor or consulting fees. I believe the cost of sales figure in a service-based business should accurately reflect the cost of providing the time that is being sold.
The most accurate way to record this is for the team to keep time records which will allow their costs to be allocated between time spent on delivering the services and time spent on admin, sales and other overhead related activities.
Mistake # 3. Not allocating income and expenses across different divisions or products.
Xero has a lovely feature called Tracking Categories. This feature allows you to identify two different types of tracking that you can do for the business and then within each you have unlimited options.
Let’s look at Katie’s business again and how she is using this feature to give her useful information. She wanted to know how much of her sales were coming from different states in Australia and how much from overseas customers. She also wanted a particular split of the product sales by the different types of products.
We set up the two tracking categories for her. One that has options for the states and overseas and the other with the different product sales types. Now with the press of a button, Katie is able to see how many of different product types she is selling in each state and overseas, she can see what percentage of her revenue is coming from the different product types, what percentage from each state and so on.
Now she has useful data that can inform her decision-making for the future, her buying decisions, her focus areas for advertising, and the list goes on.
Accounting records should be set up to provide you, the business owner, with useful information to help you manage your business and make decisions for the future. Is your Xero file set up to give you this type of detailed information? If not, I highly recommend reviewing the Xero setup and making the changes. The information is there, buried in the Xero file, just waiting for you to use it.
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