As a business owner, you’ve probably spent time looking at your financial reports wondering what the numbers mean and how you can use them to better understand your business. In today’s blog, we will go over how using cloud accounting software, specifically Xero, can help translate numbers into valuable information that you can use right away.
Meet our fictional business owner Lindsay, who owns a bakery with 4 locations. She’s got lots of happy corporate and walk-in clients, and she’s worked hard to build her brand after starting it in her parents’ kitchen 5 years ago. Lindsay has big dreams of turning her business into a nationwide franchise, but to reach the success she’s dreaming about, she knows she needs to be completely aware of and in control of the business finances.
Here are four ways Xero helps her see the numbers and understand what they mean.
1. Tracking Categories
Let’s say Lindsay wants to see financial reporting based on each location. By specifying how her accounting system is classifying entries, she can begin to determine if one location is performing better than another, or if certain locations have higher expenses.
To see this info, she would begin by classifying accounting entries by location, in order to see meaningful performance data. She would create these settings under Advanced Accounting -> Tracking Categories.
Now when she starts to code these entries in her invoices or expenses relating to that region, she will be able to specify in her reporting how this appears (in this example you see sales numbers) and see how each location is performing.
When you start to code these entries in your invoices or expenses, you’ll be able to specify in your reporting and see how each region is performing.
2. Cash in/out
If Lindsay is concerned about her monthly expenses, she can look at how cash flow is being managed by using the “Total cash in and out” feature on the Xero dashboard. At a glance, she can see how her company is managing its cash flow and determine if she needs to investigate further. She is also able to drill down into a specific time range if needed (Note: This is not the same as cash flow forecasting, which projects future cash flow needs. The cash in and out feature looks forensically at the transactions that have already happened).
3. Account Watchlist
Lindsay’s bakery has lots of moving pieces, especially over 4 different locations. She needs to be able to keep an eye on certain expenses (like repairs and maintenance of her ovens and mixers). To do this, she goes into her chart of accounts (Accounting -> Chart of accounts) and highlights which accounts she would like to monitor on her dashboard. She can even go so far as to track a certain expense or sales line, like a particular supplier or how much she spends on advertising.
The Account Watchlist helps you keep a close eye on the important numbers, and adjust your business decisions on the fly!
4. Executive Summary
Using the reporting tools, Lindsay can quickly find information about how her business is doing overall with a curated list provided by Xero. You can see in the example below that it even includes month-to-month variance reporting. Set this up by going into Reports -> Executive Summary.
Views of the overall health of cash flow, profit margins, debt or surplus, and how long the business holds receivables or payables is also available on this page.
5. Budget variance
Lindsay sticks to a budget for her bakeries to make sure she has enough money to support their future growth. Budgeting is a useful tool because it helps her understand shifts in her business by highlighting the changes from year to year or month to month. First, she accessed the Budget Manager (Reports -> Budget Manager) and input her proposed budget. She started with something simple like entering what her expected sales might be for the coming year.
Next, by using the budget variance report (Accounting -> Reports -> Budget Variance),
she could start to see when she was on track or off target. This visibility helps her make informed decisions about what to adjust. For example, her budgeted sales are $29,568 but so far the company has made $22,973. That means that to reach her target she needs to make up a difference of $6,595 in sales. Perhaps she needs to adjust her marketing campaign or adjust her pricing.
Cloud accounting is powerful. Xero and Crescendo make it easy.
These are just some of the ways cloud accounting helps us make informed decisions on a timely basis without spending a lot of time inputting numbers into a spreadsheet. In fact, the other advantage of cloud accounting is that you can drill down as needed to see where those numbers actually come from. So, whether you’re developing baked goods or blockchain vending machines, there’s incredible opportunity for business insight in cloud accounting.
If you have any questions or need more information, feel free to contact us at [email protected] and we’d be happy to help you.