In order to make the kind of decisions that will enable you to grow month on month, year on year – you need to know how well your business is performing. It’s awfully hard to make a sound decision when you don’t have anything to base it on, isn’t it?
That’s why we’re always always shouting about management accounts.
Put simply: management accounts provide you with your financial information in a way that helps you. That financial information is what you’re going to base your decisions on.
It’s not designed for the shareholders, the bank or anyone outside the company. The aim is to help you make more informed decisions, control your costs and plan for the future.
You can get some of the key information you need in Xero yourself
Provided you’re a Xero user, you can find some of this information in the simple Profit and Loss report it produces.
Note: If you’re still stuck doing manual tasks, and running the daily operations is stopping you even thinking about how your business is doing – you need Xero and you can check it out here. All of those bookkeeping tasks that steal your Sunday nights can be done in a fraction of the time when you go digital.
For those already using Xero, here’s how to get the information:
- Select the Accounting option from the top menu
- Go into Reports
- There are two Profit and Loss reports available under Financial on the left hand side
- Click the star on the left next to the “New” version to turn the star blue – this means you have marked the report as a favourite
- Then click through into the Profit and Loss report
This will run a simple Profit and Loss for your current financial year. You can change the date range to whatever period you want to look at, and you can add in a comparison to a previous period as well so you can see how things have changed.
This is where you can start asking questions to help you with controlling your costs. Asking the question – why? Why are your costs higher than last month, or last year? A quick scan of the figures will indicate any trends.
You can drill down and have a look at the figures in detail
To do this simply click on a number and it will show you all the entries into that category.
What does it all mean?
The Profit and Loss lists:
- Turnover – this shows your sales income
- Cost of Sales – basically any costs of producing what you sell, including the cost of the materials and labour directly used to create your products or services
- Administrative Costs – pretty much everything else! This is the area where costs can sneak in that you aren’t really aware of.
Your cost of sales will likely change in line with how your sales change. Administrative costs are harder to control, and don’t usually depend on your sales volume. You need to make sure that your gross profit (what is left when you take your cost of sales away from your sales) is high enough to cover all your administrative costs otherwise your business will make a loss.
What should I look out for?
- Advertising and marketing costs – almost all businesses benefit from investing in the right kind of marketing, but make sure you are doing this carefully and that you know what you want to achieve. Being able to measure the impact will help you to decide if you are getting return on your investment
- Travel and entertainment – likely to be less of a problem in 2020 thanks to Coronavirus, but this is often an area where businesses spend more than they expect. Do you have to take that trip? Could you hold a meeting remotely instead of face to face?
- General expenses – ideally you should be analysing what you spend the business’s money on in more detail. Anything just pushed into general expenses makes it harder for you to work out whether your business is performing well financially. Take a bit more time to post your spend to a category that gives you better information
- Software costs – many of us are guilty of subscribing to more and more apps each of which promises to solve a thorny problem. But how many of them are you actually using? Try to get in the habit of checking what software you are paying for each month and unsubscribing for anything you no longer use
Measuring how your business is doing financially will help you grow
Making strategic decisions is an important part of running a business, and you need the right information to be able to do that. If you don’t have easy to understand data at your fingertips then you are making decisions in the dark.
If you don’t have the time or the right skill set to tackle this yourself then make sure you put the right support in place for your business. We can support you with getting the reports and making sure that you understand the information. You may want a sounding board for those decisions, and we can be that for you too. We’re here to help you get what you need.
