You Must Understand These 3 Xero Reports As A Business Owner

Out of the hundreds of reports in zero, these are the key three that you want to get your head around if you want to run a successful business in New Zealand. Now, just because you didn't study accounting doesn't mean that you can't learn them. Unfortunately, for a lot of people, the dashboard in zero is as far as they will go with their learning and understanding of business. But now that we have live data, we have it available to us to help us make better decisions and guide us and tell us what is happening inside our business. Now, unfortunately, many business owners never learn how to read these statements and so then they don't go looking for them. So we're going to go through the key three that we believe. If you can just understand these, you will give yourself a better chance of running a better business in New Zealand. Now very quickly, if you want to learn more about these, we are running a workshop on the 29th of July. Know your numbers where we take people through a number of these reports to help people understand them and have their questions answered. More on that later on. But anyway, let's get into it. The first one is your profit and loss. Now this is going to tell you your sales minus your expenses equals your profit. And it sounds very simple, but there is a lot to learn about this statement. So what we suggest of all these reports is to start with, actually put a calendar reminder in to go and look at these statements weekly or monthly. Now you're going to do this so that you get closer to it and you can start to see how it's changing. It's changing when you reconcile things back in the dashboard because it's constantly updating based on the business transactions that are running through your bank account. Now of course your sales are going to be driven by the invoices that you are sending out as well. So when you go and create an invoice in zero and then it proved that that's going to move the revenue to the profit and loss. What's revenue? Well it's sales, but accounting again, we give it all these different titles. So turn over revenue sales normally the same thing. Let's say you go into zero, you create an invoice and you send it to me for $10,000. Once you approve that invoice, the data which you data that invoice to me, it is then going to trigger revenue in that period on the profit and loss. So that's what's driving the sales in your business, typically the invoicing that you're doing. Now if you're not doing invoicing, the revenue is just going to be based on the sales transactions that are coming through that you are coding to sales. But the fundamental is that something is driving the sales figure on your profit and loss. That's normally the key thing people always talk about. Turn over revenue, what's revenue growth, sales, sales, sales. But of course then we have expenses. What does it cost us to generate those expenses? Now these will be things like rent, creating the product, wages, insurance, subscriptions, accounting fees of course, entertainment, all those little things that add up to the total cost of you to run your business. So sales minus expenses equals our profit. Now we want to be checking this profit to see is it increasing? Most business owners want to see profits increasing. It just seems to be how the world works and how business works. Tell you what, if you run out of profit and you start running into loss, you get a run out of money pretty quickly and you won't be able to run your business. So it is important to track your profit and ensure that you are trying to improve it. And most business owners do want to improve their profit as well. Now where this gets confusing for people is that they look at the profit on their profit loss and say, "Well I don't have that money in the bank." Well the first thing to remember is that we've sent the invoice. Now you sent me that invoice but you may not have collected that cash yet. So that's the first point, just because you've sent the invoice, recognise the revenue, it shows up on the profit loss, doesn't mean that you've got the cash in the bank. But also, the profit and loss doesn't reveal all of the cash that is going out of the business. So where could this cash be going that's not sitting on the profit and loss? Well that brings us to report number two that you want to understand and that is your balance sheet. Now your balance sheet is effectively the spine of your business. So how sturdy is it? It's your assets minus your liabilities equals what we call equity. Now if you put it into personal terms for instance, it's a bit like tracking your net worth. What assets do you have, what liabilities do you have, and therefore what is your net worth? These are accounting terminologies but they're important things to understand. So when you pull up your balance sheet, that's what it's going to be doing for you. It's going to be tracking your assets minus your liabilities equals your net asset position or equity. Right? So the assets will be things like stock, it'll be bank accounts, it'll be accounts receivable, what's an accounts receivable. Or remember you sent me that invoice, that's an accounts receivable for you until such time as I pay that to you. Now it's not an account receivable, it's cash in the bank but both of those things are assets. One is cash, one is not but both are still assets. Now of course thing you have other assets like board ranges, of course. Are they an asset? Well technically in accounting terms, your vehicles will be an asset. It could be plants and equipment, office equipment, whatever assets that you have in your business, you had to use cash to buy those. We'll come back to that. Now your liabilities will be things that you owe. So those are people that you owe money to, could be the bank, so it could be loans, for instance, it could be an overdraft, it could be a credit card, it could be a longer term loan, it could be someone in the family that lent you money that you now owe money to, it could even be you. You put money into the business to start with and now the business owes you money. That's often what's called a shareholder current account. But again, assets minus liabilities equal your net asset position. So there's not too much to understand there and it should be relatively simple. However, what we need to understand is that what's happening in that liability position is often what's driving more cash out of the business. So you might have loans to the bank on some equipment or on some vehicles. Now every month that money is going to go out of your business bank account. So it comes out of the bank account, but it doesn't show up on the profit and loss. Why? Because in accounting terms it's not actually an expense. But in your mind you probably see it as an expense. Well, it's still money that leaves your bank account. Well in accounting terms we don't let you call that loan repayment a tax deductible expense. So it doesn't bring your profit down. The depreciation on the vehicles or the equipment that you own is a tax deductible expense that sits on your profit and loss. See how we start to get a little bit technical. Now this is why it's important that you learn more about this. And if you want to learn more about it, come to our Know Your Numbers Workshop on the 29th of July. 7pm is going to be two hours. You're going to do it live and interactive. It's been really popular in the past. There's more details below. So of course you're going to have to continue to repay those loan repayments. That will suck money out of your business. But the importance of understanding your balance sheet is you can kind of use that to guide you on where some more cash will be going out of your business. It could be clearing old debt from the IID. It could be making those loan repayments. But it could even be going into buying more stock. So purchases of stock on your profit and loss are going to show us an expense. But realistically we're going to then reflect the fact that that's an asset that you've got ready to sell. So you have to understand your business and how your business operates. You might have a great profit on your profit and loss, but it's all tied up in debtors. You haven't turned that into cash yet because I haven't paid you. And I get the invoice and I ignore it. And you do some more work for me and your profit keeps going up because you're selling to me. And that's all good and well. But you're not turning it into cash and I don't pay you. If you want to chase the people who aren't paying you because then you've got your cash tied up in debtors, you're never going to see it in your bank account. You're going to feel like you have a cash flow problem. So by now you're starting to get a good insight as to how the profit and loss and the balance sheets start to overlap. But we keep talking about cash as well. And that brings us to report number three. Now it's the statement of cash flows. We call it that as a technical term, but realistically, you want to have some form of cash flow model. What does that mean? What money do we have coming in? What money do we have going out? And therefore what should my bank balance be? Because what we're going to do here is we're going to combine everything from the profit and loss to what's driving the cash going out of the business based on the balance sheet. And that's going to then start to build our cash flow forecast. And hot tip these days, you can probably get an AI tool to help you build this based on your zero data. If you want to give AI your zero data. So if we take an example, we would take the sales that we would expect to have over the next three months in our business, the expenses that we expect to have. And then of course the loan repayments that we expect to have. And that's how we know our profit and loss is very different to a cash flow statement. So the cash flow statement is going to try and map every single cash movement. Actually what will we collect and what will go out? And then what's our starting balance at the start of that period? And then if those cash ins and outs happen, what would our bank balance be at the end of that period? Now if you go to the bank and you say that you want to borrow some money, what would that do? Well they would advance you money and that's going to add a liability to your balance sheet in the form of a loan. You're going to then go and buy an asset with that loan hopefully. And then that's going to show an asset on your balance sheet so your asset will then match your liability. But now you have cash flow payments going out into the future. So you're going to have to repay the loan back to the bank for the asset that you purchased. But those cash repayments again won't be on the profit and loss. But the depreciation is the expense that reflects the value of that asset decreasing and value. That will be the thing that will then be on the profit and loss. So you've still then got to pay tax on your profits that you have. You then got to put money aside for tax as well. And that's another cash out going. But this is why it's important you understand how these three reports overlap. And if you can get your head around this and it could take some time. Again right at the start we said do this monthly. Keep coming back to it. Learn more about it and you will be ahead of 95% of business owners in this country. Because simply people do not take time to learn how these three reports work. And it's really really important if you want to go far into your business journey. You have to understand it because there will be times that you are requested to provide a cash flow statement for instance. And you're going to have to delegate all of that power through the accountant or somebody else to generate it for you. And you'll have to pay for that. But you at least want to understand it. Sales, expenses, cash out goings as well. What's happening to our cash balance. And these are the sorts of things that the bank is going to ask for. Should you want lending or even if you're to buy property or assets outside of the business. Okay what's your statement of financial position? That's another word for balance sheet. What are your assets, why is your liabilities, therefore your net worth. They're going to want to look at your accounts. Your accounts have your profit and loss and your balance sheet. And then they may be. And they say we want you to forecast cash into the future. Okay, tell us what you expect to earn. Tell us what you expect to pay for. Tell us what other loan repayments you've got. Then we can map out your net cash position based on those outgones and those incomings as well. So it's really important that you get your head around these reports because they are important. And if you want to demonstrate that you're a bit of client to the bank, for instance, if you've got some understanding of these, then they will really value that. That you they can tell that you are starting off of a better start point than some other business owners that they will be dealing with. So again, if you want to learn more about this, know your numbers. It's a workshop that we've hosted before. We haven't done it for years. We're bringing it back. It's two hours on the 29th of July at 7 p.m. The link in the details are below. We'll see you there.