Having worked now with many small businesses it still surprises me how painful accounting tasks can be and how much productivity is lost. It may be because business owners have had minimal training and there feels like a real fog around accounting functions.
Thankfully, once shown, and set up, it can be very easy. And really satisfying once you have it under control.
I’ve noticed that there are a couple of ways that small business owners do their books. The first is the Cash Book method. Under this method you simply code what comes through your bank account. Many products are just a simple Cash Book.
Xero can operate as a Cash Book. The two main transactions are ‘Spend Money‘ and ‘Receive Money‘. Using the bank reconciliation you simply create these transactions as they come in. Our bank rec remembers how things were last coded.
But this approach does has some limitations.
- You have to keep checking on missing transactions.
- It’s hard to forecast what’s going to happen.
- Your computer system isn’t helping you as much as it can
The convention in traditional accounting is then you move up into an accrual system. This sounds scary but what it really means is adding invoicing into your processes. Even really small business can use invoicing. Accounts Receivable are invoices you send out and Accounts Payable are invoices mailed to you that you need to pay.
Under a Cash Book basis you might just have the paper copies of these invoices, act on them them, and wait until the cash hits the bank until you load them into your system.
Xero allows you to be smarter that that. You can enter in your invoices in immediately. Whenever you sell something or do a job you create an Accounts Receivable invoice. Whenever you check your mail and open your bills you can enter your Accounts Payable invoices.
For Accounts Receivable we provide tools to allow you to stay on top of when people pay you. You can even send statements. For Accounts Payable you’ll have everything you owe (rather than have to hold it in your head) and we’ll soon be providing more tools to help you more efficiently manage those payments.
We also have repeating transactions, that allow you to template your business. Xero will automatically create invoices that occur regularly for you. The machine can start doing some of your work.
Then your daily bank Reconciliation is about matching things off, rather than inputting data. This is really important. Your bank reconciliation becomes a check on the status of Accounts Receivable and Accounts Payable. You’ll have a much better understanding of your business. It will save you time and money.
Xero is unique in that it provides both the Cash and Accrual view of your transactions. Under the Accrual view you see where your accounts are based on what has been invoiced. The Cash view allows you to see the actual cash movements. You’ll soon learn that timing matters a lot for small business cash flow.
If you are just using Spend Money and Receive Money I urge you to check out Invoicing with Accounts Receivable and Accounts Payable. It will make your business better.
Your Xero advisor can help you take the next step up in understanding and help you move beyond the Cash Book.