Gain a massive advantage through Xero

Hamish Mexted Business Strategy & Planning, Increasing Profit, Time Saving & Processes, Xero & Addons

Many people rush into the Cloud expecting it to be the panacea to all the problems in their business. They typically end up being massively disappointed. People often expect Xero (and other online programs) to solve their cashflow problems, to highlight the trends in their business, and be a tool to identify the areas for them to improve on.

These people are always disappointed (keep reading to find out how not to be disappointed).

Xero, Receipt Bank, Debtor Daddy, Spotlight and all other Cloud products, no matter how automated or slick, just won’t deliver. Ultimately, they’re not an Advisory Board, Accountant or Business Coach – they can highlight a trend, but won’t replace first-hand experience and insights.

There is light though – it’s all in the setup and how you use them. Here’s the five secrets to getting gold from Xero and all other Cloud programs.

Garbage in, garbage out

We often hear comments along the lines of “Xero will take care of all my accounting and taxes – it can do my GST and give me all the reporting I need. I’ll hardly need an accountant and can do my own bookkeeping”. If you just happen to be a top-flight bookkeeper then you might be onto something.

If you’re like most people though, you’ve got an internal accounts person finding their way around Xero, or you’re doing it yourself. This is where the danger lies.

No matter how accurate you are, if you don’t understand exactly where you’re putting things then you’re unlikely to get accurate reporting. If you’re getting inaccurate reporting, then the decisions you base on that reporting will be off.

Recently we had a customer who miscoded payments to some employees. Basically, they screwed it up. Because of that, their Profit & Loss Report showed them making more money that they were. It looked as if they were above budget, and that each job they did was profitable. In reality, they had one product line which was losing money, and were barely breaking even.

They trusted the reports they were getting from Xero (because Xero basically does away with the need for an accountant or bookkeeper…right?). Using those reports, they assumed that everything was okay and that no changes were needed in their business. This turned out to be very wrong. Garbage into Xero, garbage out.

When you’ve got accurate data in Xero, the reports you can pull are exceptional. You can pull out insights into your cashflow, track profitability, monitor working capital, get margin history at a glance, see trends in ratios and more. This detail is exceptional, but also overwhelming.

Most people loathe numbers. For those who don’t, they often can’t see the trend or the big picture from the numbers – their level of detail is stuck at “this number is up, that number is down”. There’s no depth to look at the correlation in sales and wages, wages and office overhead, or weather and gross profit.

Xero can work out all of that, and more. The secret lies in knowing where to go, the questions to ask, and then what to do with that information.

For example, you might feel like your sales are up and down a bit and be struggling to deal with it. Xero’s not going to immediately alert you to that. It’s not going to automatically give you the 18 months of Profit & Loss data to create a volatility analysis showing the reasons behind the ups and downs. You need more rigor than Xero to get that level of insight.

Your perspective is fixed

Firstly, I’m a dog person so that colours this analogy, but when you’re walking your dog down the street, the dog will take an entirely different path to you. The dog’s interested in the scent of other dogs, while you’re interested in the shop you’re walking past or dodging the lamppost as you check something on your phone. You’ve got your perspective on what’s interesting and happening around you, your dog has another.

Now while this seems obvious, the same lessons don’t get applied in your business. You’ll look at your business on way, and use the reports from Xero (accurate or otherwise…) to justify your perspective.

For example, we often hear from business owners that they’re too busy, and that finding more skilled staff to relieve the pressure is close to impossible. They’ll then pull up a Xero report showing how busy they are (based off turnover), but that there’s not enough money to spend building a better culture or to pay higher wages with. Yet, it’s their poor culture or low wages which are often the reason behind them not being able to hire the skilled staff they so desperately need.

Their perspective is that they need more but are stuck, and there’s nothing they can do about it. A fresh approach might highlight that their profit margins are being squeezed, causing the reduced profitability. That reduced profitability is causing the inability to spend on wages or culture.

The Cloud or Xero won’t give this new perspective – it can simply end up reinforcing your existing view of the world. You may as well be taking advice from your dog – take advice from someone you trust with a nose for business, like your Accountant. Then take the data from Xero to analyse whether that new perspective is accurate, and what the impact will be if you follow that new path.

Questioning and accountability

Let’s assume for a moment (yeah yeah, I know that’s dangerous) that your Xero account is in tip-top shape. All the bookkeeping is accurate, you’ve got your head around the reporting capabilities and  you’re using the add-ins to streamline your business. Congratulations – at this point you’re doing better than most.

Xero’s not then going to ask you about why you’re in business, what the biggest challenge your facing is or what exactly it is you’re going to focus on over the next 90 days. It’s not going to help you work out your direction, whether you should take on a new product line or hire a new employee.

Xero’s also not going to hold you accountable to what you said you’d do. That’s the place of your Chartered Accountant (you’re best using your accountant look forward at what’s coming rather than just joining the historical dots from your Xero account).

It’s important though to answer these questions with in light of the data from Xero. If you’re answering them based on gut feeling then your decisions could be off. Making a decision on gut feeling is as bad as not answering the question at all.

It won’t take you to the next level

Marshall Goldsmith is one of America’s leading corporate speakers. He teaches people to advance their careers by changing the things holding them back. Put another way, you can get half-way up the corporate ladder through brute force, but you can’t reach the top that same way. If you got half way through brute force, you might need to say “thank you” to climb the second half. What got you here won’t get you there.

The same is true for business. To be honest, it’s not hard to achieve a mild level of success in business. Put up a sign, call a couple of people and you’re away. You don’t need to be genius to get going. If I could setup an accounting firm as a 27-year-old, working from the boot of my car, then you don’t need to be a genius to pick up a few clients and earn a dollar or two.

Ultimately all you’ve created is a job for yourself – it’s a job dressed up as self-employment.

Business isn’t paint by numbers – and relying on Xero to paint those numbers is a mistake we see all too often. Don’t assume that because you’ve got Xero, your debtors will magically collect themselves, that your business model will be profitable, or that your GST (Sales Tax) Returns will take care of themselves.

Business is creating something where noting existed before. That’s the art of business. There’s about as much art in my children’s kindergarten paintings as there is in relying on Xero to run your business.

What we see time and time again is that all businesses go through a series of identical Stages as they build their businesses. These Stages apply in the same order, regardless of a business’s industry, size, profitability or age. It’s been true for both of our businesses, and in hindsight I can see it in all the small businesses my family members have run.

What gets a business to the top of one Stage won’t get them to the top of the next Stage. What made you successful today won’t make you successful tomorrow.

The same is true for Xero. What worked in your Xero account as a start-up during the Experimentation Stage, won’t work for a business trying to reach scale or during the Growth Stage. You need different information, in different formats at different times. There’s no one-size-fits-all approach to Xero, and what you used to begin with won’t necessarily help you when you get bigger.

For example, the grasp you have of the numerics in your business is different depending on where you’re at in the Stages of business. A Breakeven business might know how much they need to turnover each month, while a Leverage business might want to know what their customer churn rate is. Alternatively, for a Breakeven business we’ll coach them to focus on three key numbers (bank, debtors and creditors), while for a Reach business we’re focused on business valuations and how increasing profit increases value.

The secret is asking yourself what you need to do to reach the next level, and then take the data from Xero to guide the next steps.

Xero won’t fix your problems, but people will

If you’re expecting Xero to be the golden-bullet to grow your business then you’re sadly misguided. Xero won’t solve your problem. The answer lies in:

  1. Understanding where your business is today
  2. What’s made you successful so far
  3. What’s holding you back from reaching the next level.

Then, use the data you’ve got in Xero to guide you there.