To produce a profit and loss report in Xero, all you do is go to Reports, All Reports, Profit and Loss Account and hey presto you will see your profit and loss for the last 4 months and year to date.
But wait, these figures don’t look right! And guess what, they probably aren’t right. Many users we come across think that if they input all their sales invoices, their purchase invoices, employee expenses and bank transactions then Xero will produce an accurate profit and loss report. Well unfortunately, that is not the case. But… armed with a little bit of accounting knowledge, some Xero training and a desire to see accurate figures each month the situation can be rectified. How can you plan for the future if you are not aware of how much your business is making (or losing) on a monthly basis?
So what do you need to do to make the figures represent the actual business performance? Here are the top 6 reasons that your monthly profit and loss account is not accurate …
1.) THERE ARE NO FIGURES FOR DEPRECIATION INCLUDED
When you purchase high cost items such as computers that will last more than a year they are treated as fixed assets in your business. You then want to write off the cost of these assets over their useful life and this cost is called depreciation. Although depreciation is not a cash cost, it still is a legitimate cost which should be recorded in your business each month. In Xero, depreciation can be calculated from the Fixed Asset Register. Here’s where you can find help on how to set up your Fixed Asset Register in Xero.
2.) PAYROLL COSTS ARE EXCLUDED OR ENTERED INCORRECTLY
If you have employees your payroll costs need to be included each month. This will happen automatically if you use Xero Payroll but if you outsource your payroll or use different payroll software the figures will need to be entered manually. Your payroll costs are not the same as the amounts you pay to your employees each month. The payments made are for net wages, but the cost to the business is the gross salary amounts plus any employer’s national insurance.
3.) STOCK LEVELS ARE NOT TAKEN ACCOUNT OF
If your business holds stock, and the levels fluctuate then you will not have an accurate profit and loss each month without adjusting for the value of your stock at each month end. If you do not hold stock, or the levels remain fairly consistent this will not be an issue.
4.) WORK IN PROGRESS IS NOT ADJUSTED FOR
The sales figure in your profit and loss report will be based on the sales invoices issued during the month. This is fine if you invoice for all the work done each month, but if you undertake projects which last several months and only invoice at the end of the project then each month you need to adjust for any work in progress (i.e. not yet invoiced).
5.) YOU ARE BILLED FOR ITEMS IN ADVANCE
The accountant geeks call these prepayments; think about the insurance bill that covers the whole year. The cost for a year will appear in your profit and loss report in the month you have been invoiced, but this needs to be spread over the period it relates to.
6.) YOU ARE BILLED FOR ITEMS IN ARREARS
The accountant geeks call these accruals; think about the subcontractor who works for you each month but takes 3 months to send you his invoice. If you have costs which have still to be billed, you need to include these costs if they are significant.
So how do you make your profit and loss more accurate? Apart from depreciation, all other adjustments referred to above can be dealt with in Xero by entering Manual Journals. As Xero certified advisers we can teach you how to make the required adjustments, allowing you to plan for the future based on your current (accurate) business performance. If you would like to arrange a Xero audit or a personal Xero training session, please get in touch.