5 things to absolutely get right with your Xero file
5 things to absolutely get right with your Xero file
By Stephanie Oley
On the surface, Xero looks easy for any tech-savvy business owner to master. Its dashboard, language and navigation are practically unrivalled for ease of use. No wonder this cloud-based accounting platform is such a global smash success, enjoying an average 36.4 per cent year-on-year subscription growth in the decade to 2022.
However, many DIY users don’t use Xero to its full potential – and this can impact on their bottom line.
For example, when you fully understand your critical numbers, you can see whether you have the right margins and are running a profitable business. Xero can also help ensure that you’re paying your wages, GST, taxes or super correctly, to avoid attracting attention from tax authorities or incurring any penalties.
If you learned Xero in passing from someone unqualified, or you taught yourself, then perhaps it’s time to gain a few extra skills.
A streamlined Xero file will help you understand your business numbers more deeply, whether it’s everyday cashflow or long-term profitability. You’ll understand what supplier payments to prioritise, and which to leave for later. You’ll also save a truckload of time with Xero’s automations and integrations.
Stop being a Xero cowboy, and see which of the following five Xero bookkeeping foundations you need to manage better in your file.
1. Opening balances cross-checked
Like most business owners, you probably start each day by checking your calendar, inventory or appointments. Why not include a check of your bank balances in that daily ritual?
When your balance in Xero matches that of your bank account, you know you can trust the figures you see. You have full clarity of what’s coming in, what’s going out and what will be left over. You would be surprised to know how many business owners lack clear insight as a result of having an unclear file.
Correct file setup is critical here. Make sure your financial settings match your business requirements, so that you can provide consistent, correct reporting for GST, PAYG withholding tax, super and any fringe benefit taxes, using your unique frequency or terms.
Your Xero file settings should also match those of your ATO registrations, reporting either on a cash or accrual basis – not a careless blend of the two.
2. Accurate chart of accounts
The chart of accounts refers to the way your business activities are coded, and is the backbone of good financial reporting.
By coding your activities correctly, you’ll gain valuable insights into core revenue sources, profitable income streams, overheads and more.
For example, without correct coding, a business would not understand the main drivers of their cost of goods sold (COGS) – such as subcontractors, raw materials and general expenses. This in turn would cloud the business’ understanding of their general financial position, or ways to reduce expenses.
Once the chart of accounts is set up, the weekly reconciliations can occur on auto-pilot by setting bank rules and bullet-proofing your data input. You’ll hardly ever need to review it, unless any major revenue streams or overheads change.
3. Automated bills and invoicing
Automation can save businesses hours of manual input time each week, which is why Xero is compatible with a growing number of apps that achieve different tasks.
For example, automate your supplier payments using the Lightyear accounts payable app. Upload pesky paper receipts from your phone using Hubdoc. Or, manage a range of receipts and invoices using Dext.
Xero also has a range of inbuilt automations, such as batch payments for multiple suppliers, invoice due reminders, business snapshot reports and tax estimates. It even has a tracking function letting you see how a business service or location is performing.
Apart from saving you the hassle of repetitive and mundane tasks, these automations will free up your time to look at the big picture of your business. Note that for the automation to be effective, your file needs to be setup correctly. See Step 1 above.
4. Bank feed and reconciliation
If you’ve followed the steps so far, you’re already saving noticeable amounts of time. You’ll have a clearer picture of where your revenue is coming from, along with any larger costs impacting on profitability.
Adopt the discipline of checking your bank feed regularly each week, reconciling expenses and revenue by matching them to your codes. You can also set bank rules to streamline this process.
Xero will further point you in the right direction, thanks to machine-learning capabilities that constantly improve its functions. You’ve probably noticed some of these already, every time the platform recognises familiar expenditures, matches figures, and remembers where to code the transaction.
5. Meaningful reporting
Finally, review Xero’s different types of financial reports regularly and you’ll start to get a longer-term view of the business.
See which invoices are outstanding with an Aged Receivables report, or which bills you’re late paying with an Aged Payments report.
View your cashflow and see the general health of your business with a Profit and Loss report, or a big-picture overview of assets, liabilities and equity with a Balance Sheet.
And of course, know your upcoming tax obligations with Xero’s various other accounting reports, such as the Simpler BAS (Business Activity Statement) report.
Having gone on a spree of business acquisitions to adopt new technology, Xero is always adding another feature, function or app integration. It’s definitely exciting times ahead for businesses that use the platform. But unless you get the basics right, you’ll struggle to make the most of your Xero account.