Setting up your bookkeeping in a program like Xero sounds like an easy option, right? You create your account, use the standard settings and you’re off. The realities of this however could not be further from the truth and can have a lasting impact on your business.
We’ve compiled some points you need to think about when you’re choosing how to set up your accounts:
What’s important to your industry?
A standard Chart of Accounts tries to be all things to all businesses and for those tradie businesses that want to manage and improve their business, this just isn’t good enough and can result in poor reporting and thus a poor understanding of how your business is truly performing.
Is your Gross Profit being tracked correctly?
Tradie businesses can thrive, survive or die based on their Gross Profit. It’s basically, the difference between your trading income and your direct costs. Direct costs include such things as labour, subcontractors and materials. It’s your gross profit that pays for all of your other business overheads and determines whether your business makes a Net Profit.
Monitor your margins with more focus
A standard Chart of Accounts setup by Xero (or similar) will generally include an account for the purchases of materials. More often than not, everything you buy for a job will be thrown into that one account. What this means is, that if your margins start to deteriorate it will be much harder to find the cause and correct the problem.
Set your Chart of Accounts up correctly – the first time
A well-considered and appropriate Chart of Accounts by Xero (or similar) may reduce the need to set up an account every time a new expense is incurred. In my experience, the more complex a Chart of Accounts is for a business, the more likely that the Profit and Loss will not be as meaningful.
One of the reasons for this is that in a long Chart, you’ll find the same expense coded to a number of different accounts, which results in poor reporting and confusion into true cost of running the business.
Your Chart of Accounts helps you to monitor performance
Monitoring what you do is critical in business. Each industry even has key performance indicators (KPI’s) that help them to determine how they are tracking in comparison to other businesses.
The best performing businesses know what these indicators are, track them and over time improve them. You gross profit percentage is just one of many KPI’s that, when monitored, can help your business to grow. This can only be done when your Chart of Accounts is setup correctly!
The big picture is that without a clearly defined and tailored Chart of Accounts setup from the get-go, your business is in danger of running along without really understanding the path. Planning will always be the key to a successful business, so speaking with a bookkeeper to ensure that your accounts are setup correctly will be of the best investment you’ll make.
Until next time, Troy
Troy Wink is the driver behind Newcastle Bookkeeping Plus. He is committed to helping small to medium business clients increase their revenue and profits by getting their bookkeeping right. Connect with him on LinkedIn