Being financially literate is one of the key skills you need as a business owner. As we mentioned in our recent blog, it’s important to know how to keep your bookkeeping tidy and to understand the fundamental building blocks of your accounts
Knowing the difference between your profit and loss report and your balance sheet is crucial. When you’re on top of the workings of your accounts, you get more value from your accounting software and can start using it as an effective tool to drive budgets and improve your financial success.
But where do you start? And which elements of your Xero accounts should you be looking at to get on top of your budgeting, costs and profitability?
Your profit and loss
Profit and loss (P&L) is as good a place to start as any. Your P&L report does exactly what it says on the tin – it shows your incoming (revenues) and outgoing (costs) money and whether you’ve currently made a profit, or a loss.
As part of our reporting to clients, we’ll review your P&L each month for you. And by breaking it down into income, outgoings, overheads, dividends and depreciation elements we can show you precisely where the business is turning a profit – or if you’re unlucky, showing a loss.
You may think that your aim is to make the biggest profit possible – after all, profit is the return you get for investing your time and money in this business. But, in the topsy-turvy world of accounting, it’s not always a good idea to boost profits.
The tax you pay as a business is calculated based on the profits you make. So, as a bookkeeper and finance adviser, we’ll actually aim to reduce your profits, so you pay less tax at the year-end. We’ll look at your P&L and will break it down into the component parts so we can make your end accounts as tax-efficient as possible.
Your balance sheet
Your balance sheet is a summary of the things you own and things you owe. In essence, it shows you what your business is worth at this point in time.
That’s not as complicated as it might sound. For instance, you own your computer, your equipment and the money in your bank accounts (these are your assets), but you owe the tax that’s due to HMRC, or the money that’s outstanding on any unpaid invoices (these are your liabilities).
Your trial balance
By combining the figures in your balance sheet with your P&L you get your ‘trial balance’. The trial balance includes all your debits and credits in the business and is the entire balance of your accounts.
Balancing the books is vital, so if you’re entering your conversion balance into Xero for a certain date you must ensure it balances. If it doesn’t, you’ll end up with an anomaly that’s known as a ‘historical adjustment’ – and these are notoriously hard to trace back after the event.
Creating a budget with Xero and Futrli
With your P&L, your balance sheet and your trial balance all present and correct, you’re ready to create a budget for your future spending.
Your budget is there to record, track and measure your overheads and expenditure, and to make sure you stick to the spending target you’ve set for the period.
With the right numbers in place, we can start creating a budget. And to do this we pull all your Xero data through into Futrli – a Xero Add-on that gives you top-notch cloud reporting and data visualisation.
What Futrli does brilliantly is let you dive down into your Xero numbers and pull out the figures you need. It’s like a magnifying glass that helps us focus in on the details we need to see in your accounts.
The starting point for building your budget is to look at your recurring expenditure – that’s all the things you pay out each month on a regular basis, like your phone bill, your office rent and your software subscriptions etc.
Then we’ll allow an amount for other sundry costs you’ll be paying – things like stationery for the office, lunch with a customer or toner for the printer. Accounting for these sundry costs means you don’t have to worry about the impact of ad-hoc purchases on the budget and your underlying cash flow once everything is finalised.
After this, we’ll add your recurring income – all the revenues we know you’ll receive based on your existing contracts, retainers and recurring payments etc.
Last, but not least, we’ll add in the income you can expect for the period based on predicted sales and any other revenue streams. This is a forecast of what we think the business will earn over the timeframe.
With all of these figures in place, you now have a basic budget for the business.
This basic budget can then be copied and renamed with a variety of different scenarios in mind. For example, what if your sales go up by 10% more than expected? You can plug that larger sales number into your expected income field and immediately see the impact on the budget (and your end profit).
Another common area we might look at is headcount. What would the budget look like with more (or less) people in the company, and a subsequently higher (or lower) payroll cost in your recurring expenditure field? With all the data and formulas in Futrli you can look at both scenarios and see exactly how taking on two new people might affect your numbers. And if your situation changes, you can make changes in real time and update your budget as you go along.
It’s flexible, extremely powerful and gives you an overview of your income and spending that really is invaluable.
The value of an experienced bookkeeper and business adviser
Creating a budget in Xero isn’t a complex business, but you’ll get far more insight from your budgets when you combine the power and detail of Futrli with our experience as bookkeepers and financial experts.
We can do all your budgeting for you, if you want, and can lighten the financial load for you that little bit more. Share your Xero information with us and we’ll create tight, practical budgets for you that you can access easily through Xero and Futrli.
We’ll also give you regular reports on how your actuals are measuring up against your budget, so you can see how accurate your budget is and make adjustments as they’re needed to keep you on track.
If you’re in a muddle with your budgets and want more clarity and real-time visibility of your financial information, please do give us a call.
Call us or drop us a line to have a talk about how we can help you with your budgets and get you a better view of your financial information.