Key Performance Indicators do just what they say on the box; they indicate how well your business is performing in key areas. If we liken a business to a vehicle, KPIs are the dashboard. They can answer questions such as: How fast are we going? How much fuel is in the tank? Should we change gears?

Just as you would check your car’s dashboard while you drive, so you should also keep an eye on your KPIs as a business.

“Key Performance Indicators indicate how well your business is performing in key areas.” 

Although KPIs are not compulsory, they should be included in a management report pack where they can be regularly viewed and, where necessary, investigated.

Designing your KPIs

When designing a set of KPIs for your business, you should ask the question: “What information do we need to make decisions based on the core operations of the business?”

This enquiry should be your point of departure and the KPIs will naturally emerge from the answers to this question. Answering this question will also help you to crystallise a deep yet simple understanding of the nature of the business.

Less is more

There is always the temptation to overcomplicate the KPI creation process. This often leads to a myriad of vague KPIs across the board, most of which will be of little use in making mission-critical decisions. Moreover, a weak set of KPIs will inevitably dilute crucial insights. We should guard against this over-the-top approach. KPIs are, after all,  key  performance indicators.

To return to the vehicle analogy, the dashboard shows you only the most important readings for your car. A cluttered dashboard is distracting and essentially useless because the crucial indicator should be evident at a glance. The same applies to KPIs for your business.

In order to whittle down the various indicators, we need to align our priorities and focus on the few measures that are truly indicative of the performance of the business. The idea is to be able to answer this question at all times: “Are we winning or are we losing?”.

“We need to align our priorities and focus on the few measures that are truly indicative of the performance of the business.”

Keeping score

Behavioural psychologists have proven that people play a game very differently when scores are being kept. In this sense, KPIs can be used as the scoreboard within an organisations’ incentive structure to motivate the team to play harder and assume more ownership of their deliverables and responsibilities. Everybody wins, and when they know they are winning, that is good for the whole business.

“KPIs can be used as the scoreboard within an organisations’ incentive structure to motivate the team.”

When designed correctly, these incentive structures can lead to positive feedback loops within the organisation. This has the potential to unleash greater human ingenuity, which is arguably one of the most valuable commodities in any organisation.

Lead, don’t lag

In their book   The Four Disciplines of Execution  Sean Covey and his team make a distinction of particular relevance to KPIs: the idea of lead and lag measures.

Lag measures  are reported after the fact. They typically shed light on what has already happened. Little attention is paid to the causal factors of this historical data. By contrast,  lead measures  are predictive and future-orientated. So while lag indicators look backwards, through the rear-view mirror, lead indicators look forward to the road ahead. In essence, lead measures are proactive, taking initiative for the future journey.

“Lag measures are reported after the fact; lead measures are predictive and future-orientated.”

Let’s use the vehicle analogy as an example. Our lag measure is revealed when we do a roadworthy test. Let’s say the car failed the roadworthy because the tyres are slick and one brake light is broken. The lead measures in this example are regular service check-ups on the car, to ensure that broken lights get fixed and tyres are in good order. When we concentrate on lead measures (regular car services), we can be more confident about the lag measure of “roadworthiness”, and that our vehicle will pass the test.

To put it simply, attaining lead measure targets invariably leads to the attainment of lag measures. This is far better than looking at a lag measure of, for example, revenue growth at the end of each month, and hoping that it will look better next month. Instead, we should be focused on lead measures, for example, reducing machine downtime through routine preventative maintenance. We predominantly want to make use of lead measures because this puts us in control.

Qualitative and quantitative indicators

Not all KPIs need to be finance-orientated. In fact, it’s a good idea to have a blend of both quantitative (hard numbers) and qualitative (softer and more subjective, but still measurable) indicators.

Quantitative indicators  will zoom in on things like revenue growth, machine downtime and physical output.  Qualitative indicators  bring awareness to the more subjective and ethereal dimensions of the business. This includes customer and employee satisfaction and motivation levels, the success of training programs and awareness campaigns, as well as other elements which are harder to quantify in absolute terms. Although they are slightly more difficult to measure, however, we should not neglect them.

“Quantitative indicators focus on things like revenue growth and physical output, while qualitative indicators bring awareness to things like customer and employee satisfaction and motivation levels.”

There are significant lead measures to be uncovered on the qualitative side of the KPI dashboard. Take the time to figure out how best to collect the data to gain these insights. As an example, Creative CFO used OfficeVibe, and now Lattice, to gauge the morale of its team anonymously. It is a great way to keep tabs on the more subjective side of running a business, which can be just as illuminating as the hard data.

Final thoughts

When identifying a business’ KPIs, what are the key takeaways?

  1. Keep it simple. When designing your KPIs, distil them down as much as possible to gain only the most essential and illuminating insights.
  2. Are we winning or losing? Ask this question of every KPI.
  3. Lead, don’t lag. Concentrate on being proactive and focus on lead measures that will invariably help you achieve your lag measure targets.
  4. Blend qualitative and quantitative indicators. Don’t focus exclusively on hard statistics, but look at the affective aspects of your business performance too.

Ultimately, every set of KPIs will be as unique as the business that designs them. They should be tailored to reflect the key drivers of value, as well as the best way to interpret these. The process of building out a business’ KPI dashboard should take time and careful reflection, which can be seen as an exercise in setting priorities.

Business owners have often been impressed by the clarity and decision-making capabilities that emerge from this exercise. Moreover, the exercise empowers business owners to initiate effective action to take their organisation from strength to strength.

No matter the size of your organisation, there will be those few key indicators of unparalleled importance. Identify them, track them, refine them, and let them lead your decisions.

If you require some assistance in this process, please reach out to us. We would be happy to cast a KP-eye over things.

Happy reflecting!

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The profit and loss statement (or P&L in accounting jargon)  is arguably the central management statement for most SMEs, recording the majority of operational activities over any period of time, usually monthly. Ranging from the total revenue received to all the expenses incurred by the business over the period, the P&L is a treasure trove of information for any business owner.

This article aims to provide a detailed explanation of the role of the P&L, what information it contains, how to use it to determine an array of essential business health indicators, as well as how to set up a simple, well-tailored P&L structure for your own business.

BASIC FORMAT OF THE P&L

Modern cloud-based accounting platforms allow for sleek and elegant layouts of the P&L. Modern platforms also mean that it can be built in a highly customisable way, tailored to the specific needs of the business owner. The five main sections of the P&L are shown below. This is the most essential, bare-bones P&L format and really tells us only two things: How much money came in, and how much money went out.

The P&L’s skeleton is shown below:

Now that the skeleton is in place, we can start to flesh things out a bit.

We can add different revenue accounts for various income streams, or set up tracking categories – but more on this later. We can also create cost of sales accounts that show the direct expenses incurred to generate specific revenue items, as well as the other general expenses and overheads (OPEX) which the business has incurred over any given period of time, ranging from rent and salaries to staff welfare and entertainment.

GUIDING PRINCIPLES

Someone once said, “It ain’t simple being cool, but it’s cool being simple”, so keep it simple and avoid an overcrowded statement. Analyse your business’s revenue streams and major expenses and design your P&L layout accordingly. Keep the focus on the most important thing.

For revenue, ensure that you have a streamlined process for your invoicing and payment platforms. Cloud-based accounting tools are brilliant at setting up connections and integrations (called APIs) with other cloud-based tools and applications. It’s like one big ecosystem of chattering computer applications floating around in the cloud. Setting up your revenue and invoicing processes to be automated as far as possible is a great help towards the overall integrity of your business data. It also saves an incredible amount of time!

The same applies when capturing expenses through platforms like Receipt Bank – a simple system can go a long way in ensuring the accuracy and completeness of your P&L’s expense information. Clean revenue and clean expenses. Fantastic!

ANALYSING THE P&L: FROM DATA TO INFORMATION TO KNOWLEDGE

The management gurus are forever telling us to “measure what matters”. This applies to the P&L too. You can use the data from the P&L to identify key performance indicators rather than a myriad of confusing technical data. Determine what is really important and do not settle for standardised, generic reports.

The true value of the P&L is realised when relevant information is identified from within the report, turned into knowledge and used to the business’s advantage. Based on the industry, age, size and goals of the company, various key ratios can be determined. Using the correct software to prepare your statements will also simplify these ratios. Ratios can be presented and interpreted easily by converting them into colourful graphs and diagrams.

As an example, in service-based industries, salaries generally make up the largest portion of monthly expenses. From the profit and loss statement a revenue-to-salaries ratio can be determined. This provides business owners with valuable insight into their ability to pay salaries when revenue decreases.

An example of a revenue-to-salaries (in this case, revenue-to-wages) ratio is shown below:

A few basic questions to ask ourselves could be:

  • How is revenue growing?
  • What is the general gross profit % of the business?
  • What portion of monthly revenue goes to covering overheads and other expenses?
  • What are the main monthly overheads?
  • What is our “baseline” overhead expenditure on a monthly basis?
  • What does the bottom-line (the net profit) look like, month-on-month?
  • Where can we eliminate unnecessary costs?

The 80/20 rule (also called the Pareto Principle) can be easily applied and often delivers fantastic insights to hidden or obscured information. It is a surprising universal law that works well in the context of the P&L. Using the Pareto Principle, ask yourself some of these questions when looking at the P&L of your business:

  • Which clients are responsible for 80% of revenue?
  • Which products/services are responsible for 80% of revenue?
  • Which expense line items account for 80% of the monthly cash outflow?
  • Which marketing tools bring in 80% of the revenue-generating leads?

This is by no means an exhaustive list, but it should get you thinking in terms of this mysterious universal law. Try it, you might be amazed at the insights that can be gleaned from this simple approach.

XERO’S ADDITIONAL USEFUL FEATURES

As mentioned previously, the P&L consists of two main components: revenue and expenses.

Our revenue’s data integrity will come down to how well the invoicing function is run in Xero. Set up “Item Codes” for each product or service to ensure that invoicing is quick and easy, containing all the necessary information relevant to the product or service being sold.

Tracking Categories can also be created to assign both revenue and expenses to certain products, projects or services for “per product” reporting. Tracking Categories is a powerful tool to segregate different segments/departments/products/services and so on within the business to gain visibility on them in isolation. Reach out to us if you need help setting this up.

Once again, you don’t want to create administrative burdens by incorporating excessive detail which will result in you drowning in the complexity of your own design. Keep it as simple as you can.

FINAL THOUGHTS

A picture is worth a thousand words, and if that is the case, the P&L is worth ten thousand. It speaks volumes about your business. A customised report tailored to your specific business model is an invaluable source of information for timely and informed decision-making.

P&L’s of the 20th century contained all manner of boring and generic “accounting-speak”.  Luckily for us, in the 21st century, there is a lot more freedom in how businesses are defined.

The P&L is undoubtedly an essential statement for any business owner to read and understand at a glance. Let’s make the once-off investment of setting it up beautifully at the outset to reap the benefits in the long term. The P&L has profound insights to offer on your business if it is designed well. The name of the game is management through conscious business design, and the modern marketplace demands it.

Speak to our helpful consultants , they are available for your reporting and business processing needs.

👉  READ: Part 3 – An Explanation of the balance sheet for business owners

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When working remotely one needs to put more effort and structure into coordinating teamwork, and ensuring each person can ask for help and get the support they need.

You won’t be able to quickly walk over and ask for help or see that someone is struggling and needs a hand.

Regular catchups, with a good meeting structure, go a long way to ensuring that all team members have the opportunity to:

  • Check-in on how they are doing.
  • Share their work updates.
  • Raise any key roadblocks they need support on.
  • Work out their issues with the team.

For operational catchups, our team broadly uses the Holacracy  tactical meeting format. We use this in conjunction with our task management software, Asana.

Here’s how we do it:

  • Meeting schedule:
    • Team meetings are scheduled twice a week on a Monday and Friday, for a duration of 30 minutes.
    • This is designed for 4-6 people, but you may need to book out a slightly longer timeslot as you are getting used to the format, or if you have a bigger team.
    • The first meeting of the week is more about tasks and co-ordination.
    • The second meeting is more of check-in and updates, but both should stick to the meeting format outlined below.
  • Meeting roles: 
    • A facilitator is needed to run the meeting and is appointed to make any notes or create tasks that arise from agenda items.
    • Everyone else represents their role(s).
  • Meeting format: 
    • Follow the below format closely, or develop your own version, but do always follow a flow to ensure all team members know how to, and can, contribute.

Meeting Format

1. Welcome

The facilitator welcomes everyone to the meeting, notes apologies of team members that couldn’t make it and confirms the time allocated for the meeting.

They can also check if anyone needs to leave early, and make a note of that so everyone is aware.

2. Opening round (1-way)

The opening check-in round is a 1-way flow where only one team member speaks, without discussion.

*Tip: It is best to have laptop screens down and phones away.

Nothing is formally required beyond a ‘hello’, but it is an opportunity for each team member to share how they are doing, what’s on their mind and to get present for the meeting.

It is not a discussion time, no sympathy or praise required, just a few moments to let your team know how your day or weekend went prior to you arriving at the meeting, to give them context for your overall mood and to get ready to make the most of the team time ahead.

As an alternative, some teams do 30 seconds of silence to help get present.

3. Checklist review (no discussion)

The facilitator asks everyone to review their tasks in Asana and make sure there is ‘no-task-left-behind.’ The team has about 60-120 seconds to do this.

The aim here is to:

  • Tick off any tasks that have already been completed.
  • Delete any tasks that were created but not actually relevant any more.
  • Adjust the due date of any overdue tasks, bringing them into the present – Yesterday is gone 👋

If you do not run a process like this, it results in tasks building up and slipping behind. This process helps us all hold each other accountable to make sure we use our Asana to-do list as a guide to running our day and week.

Everyone says ‘no-task-left-behind’ once they are up to date.

4. Agenda building (1-2 word agenda items)

The facilitator will ask the team to raise any agenda items they have, with 1-2 words only for each item. At this stage, we are only noting down the 1-2 word items, no discussions around them.

The team member also needs to specify whether the item is an ‘Update’ or a ‘To Discuss’, and how much time they need (2, 5 or 10 mins).

The difference between these two types of items is important:

  • ‘Update’: This is a 1-way communication flow from the team member on something that has changed since the last meeting that they feel the team should be updated on.
  • ‘To Discuss’: This is a 2-way communication flow where the team member specifically asks for input they need from the team, either information or a decision.

Once all team members have supplied their agenda items to the facilitator, the facilitator checks the agenda items and expected time required against the remaining meeting time.

If there is a substantial misalignment between the time remaining and the expected time, team members can offer to de-prioritise their items (move them to the bottom) or reduce time.

5. Triage issues (2-way discussion)

Here the facilitator  moves down the list of agenda items, specifically calling out each item, the name of the team member who raised it, the time allocated to this item and lastly the question “what do you need?”

The team member then explains explicitly what they need from the team. It is important to get this right because this is the opportunity to let your team know what you want from them before diving into the context.

Examples are:

  • “I need to know if we have selected a new supplier for our materials, so I can go ahead and place the order for my project.”
  • “I need to know if we can move Tuesdays working session for I have a family member visiting that day.”

By being precise about what you need the relevant team member(s) can offer the information you need or help with a decision for your issue. The aim is not to do specific work in the meeting but to co-ordinate information and support.

Common outputs from an agenda item are:

  • Creating or moving a meeting with team members to get the work support needed
    • “I need some technical help on the website project, can we put in a 30-minute session to work on that project together? Yes, let’s do Wednesday @14:30.”
  • Delegating a specific task to another team member to complete
    • “I need more materials for project X, can you order them and let me know when they arrive? Yes, I’ve added a task to order them and will let you know once received.”
  • Noting information that allows the team member(s) to continue their work
    • “I need to know if we have that new software installed yet before I change the network? Yes, it’s done and you can continue.”

The facilitator has a responsibility to make sure only one item at a time is discussed, and if a decision is required it should be clear on who should decide it. In this way, the agenda item does not become a consensus discussion but moves swiftly to the resolution. Ie. One person is responsible to make the decision, can make that decision or create a task to make that decision. Or similarly, if it’s some form of vote.

Most importantly, the agenda item is done when the person who raised it gets what they needed. If someone else has something they need, they can raise their own agenda item. The facilitator should always have the individual who raised the item in mind and keep checking in with them to see if they got what they needed. Once they have, that item is closed and the facilitator moves on to the next one.

Hopefully, you will get through the agenda in the allocated time. In the beginning, it does take time to learn how to predict the time needed for an item, and discipline to stick to it. As you and your team get used to this type of meeting format, you will easily raise an agenda list with the overall time in mind, self prioritise your issues and graciously roll over the less essential to the next meeting or address it in private communication with the people involved.

6. Closing round (1-way)

With the agenda done, it is time for each team member’s reflection on the meeting.

*Tip: It is best to have laptop screens down and phones away here too.

Nothing is formally required beyond ‘goodbye’, but it is an opportunity to share your overall thoughts on the meeting.

These can be the general feeling (“thanks for the meeting, excited for the projects and week ahead”) as well as constructive insights on how the process served the team today (“we do need to pay attention to the agenda and make sure we stick to the allocated time”).

Remember, it is one way only, so no discussion.

👉Join our Business Continuity Forum for more value-adding and curated content.

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Method 3 – Manual Manufacture at the time of Assembly (finished goods represented in inventory)

The idea behind this approach is to buy in raw materials, track the quantity and value of those raw materials and then convert raw materials into tracked finished goods when you do an assembly in your workshop.

Xero transfers the value of the raw materials to the finished goods item so that when you sell a finished good Xero will automatically bring the cost of sales across from the inventory account.

You set this up by:

  • Creating tracked inventory items in Xero for all your raw materials
  • Creating tracked inventory items for your finished goods (similar to a service item)

The finished good is therefore represented in your inventory once you have done this process and will be visible on stock reports.

Method 3 Example – see video here!

You start the month with no stock.

  • Create the following tracked inventory items for your materials:
    • Bicycle frame
    • Bicycle wheel
    • Bicycle seat
  • Create the following tracked inventory item for your finished good:
    • Bicycle complete
  • Buy in quantities of tracked inventory items with the following prices:
    • Bicycle frame – QTY 5 at R750 each
    • Bicycle wheel – QTY 5 at R250 each
    • Bicycle seat – QTY 5 at R200 each

As Xero treats this as tracked inventory, you will see these values go directly to your balance sheet under inventory.

You’ll note that this should be enough to make 5 bicycles overall, with 1 frame, 2 wheels and 1 seat used in each assembly. This list is called thebill of materials as if you add up the numbers it should equate to R1400 of materials per completed bicycle.

Before you can make a sale of a tracked inventory item you must have stock of that item. Go test it, you will see in a sales invoice you can only create a draft and not an approved invoice for a complete bicycle.

So, let’s manufacture then.

We have two options to do this, one uses an invoice and one uses an inventory adjustment. Both work, the invoice method may be a bit quicker as you can do all the materials at once, the adjustment method does not leave a trail of ‘internal’ invoices.

  • Manufacture 3 bicycles from the materials using an Invoice method
    • Create a sales invoice and sell the correct amount of materials for 3 bicycles to the production contact. The selling price is Zero
      • Note the impact on the profit and loss report. There should be R1400 x 3 = R4,200 in ‘Manufacturing Costs (should be zero)’
    • Create a purchase bill for 3 complete bicycles from the production contact. You need to use the overall value of the costs produced b the step above divided by the number of bicycles. For example, using our numbers above you will purchase in 3 complete bicycles at R1,400 each.
      • Pay off the purchase to the ‘Manufacturing Costs (should be zero)’
        • Note the impact on the profit and loss report. There should be no ‘Manufacturing Costs (should be zero)’ amount remaining.
  • Manufacture 2 bicycles from the materials using an Inventory Adjustment method  
    • Sell the correct amount of materials for 2 bicycles to the production contact
    • Purchase 2 complete bicycles from the production contact

Now let’s do a sale

  • Sell 4 bicycles to a customer for R5,000 each  
    • Note the impact on the profit and loss report.
      • Sales of R20,000. Cost of sales of R5,600 (4 bicycles @ R1,400 each)
    • Note what remains on the balance sheet and your inventory reports
      • One complete bicycle @ a value of R1,400

Note, you must perform the either of the two manufacture options, invoice or inventory adjustment, after each actual assembly in your workshop otherwise you will not be able to sell the finished goods in Xero.

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Method 2 – The monthly manufacturing process (no finished goods are represented in inventory)

The basic idea behind this approach is to buy in raw materials, and track the quantity and value of those raw materials.

Then when you sell a finished good perform an extra step to reduce the raw materials used in that sale to create the correct cost of sale.

You set this up by:

  • Creating tracked inventory items in Xero for all your raw materials
  • Creating untracked inventory items for your finished goods (similar to a service item)

The finished good is therefore never actually represented in your inventory. Xero calls this an ‘untracked item’, and it’s treated the same as a service offering in that there is no physical quantity on hand and you can sell unlimited amounts.

You can still see how many of these items you sold but it never shows up on a stock on hand report.

Method 2 Example – see the video here

Click here for Part 2, and Part 3 of the video

You start the month with no stock.

You create the following tracked inventory items for your materials:

  • Tricycle frame
  • Tricycle wheel small
  • Tricycle wheel big
  • Tricycle seat

You create the following untracked inventory item for your finished good:

  • Tricycle complete

You buy in quantities of tracked inventory items with the following prices:

  • Tricycle frame – QTY 6 at R450 each
  • Tricycle wheel small – QTY 12 at R50 each
  • Tricycle wheel big – QTY 6 at R100 each
  • Tricycle seat – QTY 5 at R75 each

As Xero treats this as tracked inventory, you will see these values go directly to your balance sheet under inventory.

You’ll note that this should be enough to make 6 tricycles overall, with 1 frame, 2 small wheels, 1 big wheel and 1 seat used in each assembly. This list is called the bill of materials as if you add up the numbers it should equate to R725 of materials per completed tricycle.

You then manufacture and sell a tricycle.

Note – Xero only allows you to sell these complete tricycles as they are treated as untracked inventory items.

After the sale, you can see the sales amount on your profit and loss but there is no cost of sales. If you check your balance sheet you will see the inventory is still there.

To process the cost of sales we need to do a production invoice to recognise that we have used up the raw materials during the month and sold them in the form of a finished bike.

The sale happens at zero value for all the components but this brings in the cost of sales.

When you do your stock count at the end of the month you should find you have the components for 5 tricycles still on hand. If you manufactured more but did not sell them what you will notice though is that since we are not using a method that allows finished goods to be represented you will see that the finished tricycles are still represented on the stock count as raw materials.

As only the raw materials are represented on your inventory list this method clearly works well when you manufacture to order or don’t hold many finished goods in stock over a month end.

This method is a step up from the stocktake method in terms of cost of sales accuracy as the only manual component now is entering the materials used in the manufacture of the finished goods.

Xero is calculating the average cost of your inventory so you don’t have to estimate the cost of the materials anymore. If you buy some materials at one price and some at another then Xero will keep track of this.

You can perform the cost of sale step after every finished good sale or once a month based on all finished goods sales for that month.

If you need to represent finished goods on your stock count please use Method 3.

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Xero Inventory

Xero’s inventory module allows you to purchase in and sell inventory items using the average cost method.

This means if you purchase inventory, Xero will store the quantity on hand and the average cost of that inventory, and represent the sum of those amounts on your balance sheet under inventory.

This is preferable over immediately recognising any stock purchases as an expense, as when the item is sold the average cost of that inventory item will automatically be moved from the inventory account on the balance sheet to your profit and loss under the cost of sales.

This is important as it improves the reporting on your profit and loss report, and shows you the sales and related cost of sales in the same month.

Getting this timing right, sales and cost of sales in the same month is the main part of using an inventory module and allows you to work out your profit margins.

Here are some resources from Xero on how the inventory module works:

The options available to manufacture in accounting systems

In general, there are 3 main options to do manufacturing in Xero.

Method 1 – The monthly stocktake adjustment

In this method, you would expense all raw materials when you buy them. This results in a very high cost of sales in the month of purchase. At the end of the month, you do a stock take, assign values to all the items on hand, using purchase prices or your best average estimate, and reverse out some of the cost of sales to an inventory account on your balance sheet.

Example – see the video here!

You start the month with no stock. You buy R8,500 of stock and it shows up as an expense of R8,500 in the Cost of Sales section.

You then make some sales, let’s say R17,500 of sales using R4,500 of stock.

At this point, your profit and loss show R17,500 in sales and R8,500 in cost of sales. A cost margin of 48.57% (8,500/17,500)

When you do your stock count at the end of the month you should find you have R4,000 on hand still. You then post a journal to reverse out R4,000 from the Cost of Sales and add it to your balance sheet under Inventory.

Now your sales show R17,500, your cost of sales shows R4,500. This is a cost margin of  25.71%, which is a lot better than before. Your R4,000 of stock is sitting as inventory on your balance sheet.

This is a very rudimentary method and means that you cannot track individual sales against their cost of sales. It also means that your inventory balance and cost of sales amount are based on the estimated values of your stock count.

It is the simplest to perform, however, can be done in any accounting system, and is best suited when there is a single person in charge of the business and stock who already knows the margin and cost of sales for each item they sell.

The manual manufacturing process in Xero

Manufacturing cannot be done in Xero as a standard inventory workflow. This means:

  • There is no bill of materials functionality to allow the manufacture or perform an assembly of, several raw material inventory items into a single finished good item.
  • There is no automatic calculation for cost of sales when a finished good, comprising of a number of separate raw materials in inventory, is sold.

What Xero does allow however is for you to purchase raw materials into stock, track the quantity and cost of that inventory.

With this function, you can use a manual manufacturing process to get your cost of sales and sales aligned in the same month.

There are two ways of doing this after you have bought in the raw materials as tracked inventory items:

  • Once a month, and based on what was sold, you expense the raw materials to cost of sales(method 2a).Finished goods set up as untracked ‘service’ items
  • After each manufacturing run convert the raw materials used in the process into a specific quantity of available finished goods. This reduces raw materials on hand and increased finished goods(method 2b).Finished goods set up as tracked items

Method 2b requires you to follow the process after every assembly you make as you can only sell a tracked inventory item once it’s been assembled and is in stock. Xero will not let you sell the item if the quantity is zero.

If you do not have the financial team members to drive this assembly process in the system, then method 2a is preferable as you will always be able to make the sale as untracked items do not have a quantity on hand.

Learn more about Method 2

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This has been a month of new learnings and research for the Creative CFO systems team as we continue to explore various pieces of software to meet the needs of clients as well as our own.  Follow us as we take you on a fixed asset walkthrough, harnessing all that DEAR has to offer and some scheduling software used by the likes of  Amazon and MacDonald’s – home to the famous Big Mac.

1. Fixed Assets in Xero

Take-ons in an implementation

  • Adding fixed assets
    • Fixed assets may be added to Xero one-by-one or through CSV upload but before you do this you will need to specify some asset types
    • The important inputs are purchase date, purchase price, asset type, opening book accumulated depreciation (being the accumulated depreciation at conversion date) and book value (being the carrying amount at conversion date)
  • Asset types
    • You can create these by navigating to the settings of the Fixed Asset section of Xero
    • Asset types are used to link a fixed asset account, an accumulated depreciation account and a depreciation expense account
    • Asset types also specify certain defaults, such as the depreciation method and the effective life of that asset class

Managing the FAR post implementation

  • Adding new fixed assets
    • Bills allocated to a fixed asset account (which is used in one of the asset types) will populate the FAR with a draft fixed asset
    • A spent money (allocated straight from the bank rec screen to a fixed asset account) will populate the FAR with a draft fixed asset
    • However, fixed assets may also be added manually, the important inputs follow the above and the depreciation start date should in most cases be the asset purchase date
  • Running depreciation
    • This is easy to do by clicking on the Run Depreciation button and the date range specified is malleable
    • As a sanity check, after loading all fixed assets at conversion date, one can run the depreciation for March and check this against the Feb depreciation expense from the old system
    • It is also very easy to roll back and redo depreciation so do not hesitate before running depreciation

Reconciling fixed assets to the balance sheet

  • The Fixed Asset Reconciliation (New) Report
    • This report shows the differences between what is in the FAR and what has actually been allocated to balance sheet accounts
    • This fix asset register does not force inputs to match the balance sheet accounts so discrepancies may arise
    • This includes differences in cost (from the bill vs what was specified in the FAR), and accumulated depreciation (from conversion balances vs what was specified in the FAR, as well as, accumulated depreciation arising from running depreciation in the FAR vs the journal effect of these depreciation runs)

2. DEAR Features

Lock periods

  • Periods should also be locked in DEAR and not only Xero
    • If one locks the periods in Xero only, clients can still process backdated transactions they will just not flow all the way through to Xero as they will be blocked by the DEAR-Xero sync
    • The result of this is that when doing a DEAR vs Xero comparison, revenue and COGS may not match as backdated transactions processed in DEAR would not have entered Xero
    • If one locks the periods in Xero and DEAR then clients will not be able to process backdated transactions in DEAR and the two systems will remain in line
    • To lock the periods in DEAR, navigate to Settings, General Settings and scroll down to Period Lock Date

B2B

The DEAR B2B portal setup is available under the integration options in DEAR

  • We have done more of these B2B setups for clients of late
  • The portal is geared towards regular wholesale customers and it works  excellently as it is quick and easy to give an existing DEAR contact portal access
  • Customers are able to log in and place orders (whilst viewing their own personal pricing) meaning that what the customer sees in the portal depends on their login
  • Customers are also able to track their orders and view the current stage of processing, as well as, access their invoices

3. Deputy Scheduling

The systems team is currently working on the implementation of this software for a new client. It is a brilliant piece of software where users can not only create schedules for their staff, but staff can also track time from a mobile app. Recorded data can then be imported into SimplePay and payroll can be run based on the Deputy hours. We will do a full review of this software in next month’s newsletter (post-implementation).

If you have any questions related to the above or feel like you may benefit from any of the mentioned features, please book a session with the systems team here

Jason Proctor (Creative CFO – Systems Team)

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April has been a busy month so far, with the new South African VAT rate now in full swing. Here is a summary of  what we expectedwhat actually happened and any  systems changes that may still be required.

1. XERO

what we expected

  • New 15% rate added
  • Old rate renamed
  • Default inventory and contact rates changed to 15%

what actually happened

  • The new rate appeared in Xero
  • The 14% rate was only renamed if you were using the Xero defaults (this mainly affected older Xero accounts)
  • Default inventory and chart of account rates changed to 15% (happened around the second week of April)
  • Default contact rates not changed

systems changes that may still be required

  • If you were previously using the Xero default rates and do not assign VAT your contacts then no further updates are required
  • There is a hierarchy used to determine the VAT rate on an invoice or bill which follows the image below:

  • Most Xero users do not utilise the contact VAT rate feature, but if you do you will need to export all of your contacts, update the default VAT rate and re-import them
  • For older Xero users who were not using the default VAT rates in Xero, you will need to update the Chart of Account defaults and any inventory item defaults, yourself

2. DEAR

what we expected

  • New rules to automatically sync from Xero
  • Rules to automatically be applied to SOs and POs (new rule would have the same name as the old rule previously had)

what actually happened

  • Old rates remained customer and supplier defaults if you were not using the Xero default rates
  • If Xero default rates were used in DEAR VAT rates flowed through to Customer, Supplier and Product setup correctly

systems changes that may still be required

  • If you were using rates which were not the Xero defaults then you will need to export all of your customers, suppliers, and products, update the default VAT rate and re-import them
  • The correct VAT rate names to include on the import can be found by navigating to Settings, Reference Books, Taxation Rules

3. SHOPIFY

what we expected

  • A manual change of the VAT rate to 15% on 01 April 2018

what actually happened

  • The rate changed automatically as Shopify changed their default VAT rate for South Africa

systems changes that may still be required

  • If your Shopify sales are flowing into Xero with the wrong VAT rate applied or not flowing through to Xero at all, create a VAT rate called SH VAT Global, with the Tax Component – SH VAT GLOBAL @15% and assign it as the default rate for your Shopify Sales account
  • Refresh your Xero settings in Shopify and try the Shopify export

4. VEND

what we expected

  • A manual tax rate added – “VAT – 15%”, making this the default tax rate
  • Linking this tax rate to the correct Xero VAT rate in the integration settings

what actually happened

  • If product specific default tax rates were specified then these overrode the new rate which was added manually

systems changes that may still be required

  • If you were using product-specific rates you will need to export all of your products, update the default VAT rate and re-import them
  • If the new rate isn’t pulling through to your iPad then you will need to delete the VEND app and re-install it

5. RECEIPT BANK

what we expected

  • Selecting “Allow Xero to decide” would ensure that the Xero defaults were applied

what actually happened

  • Xero defaults were only changed later so new rates were not applied

systems changes that may still be required

  • After making the relevant changes in Xero, follow the steps below;
    • Ensure that the Tax Settings in the integrations setup are as follows;
      • Publishing tax data – Allow Receipt Bank to decide
      • Use tax list – On
      • Use supplier tax rates – Off
    • Ensure that before publishing a receipt the receipt details are as follows;
      • Tax – Extracted amount (always double check this against the actual amount on the receipt, if the tax amount is incorrect, enter it manually or select the 15% rate)
      • Ensure that the total amount matches the receipt
  • Helpful tip
    • To double check that Xero is setup correctly – Have a look at the tax default for the account that you would like to allocate the receipt to

If you are still struggling with any of the above please book a session with the systems team.
And feel free to send over any questions you may have regarding this month’s newsletter.

Jason Proctor (Creative CFO – Systems Team)

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December was an exciting month in the space of integrations, and the new VEND-YOCO  integration is making waves.

There is now a high-level integration between VEND POS and the YOCO payment service.

Previously, when checking out on VEND, one had to tap the “Credit Card” payment type on iPad and manually enter the payment amount into the merchant payment device (card machine). This process used to take a fair amount of time and allowed room for error as cashiers could enter an amount not matching the sale amount.

VEND and YOCO, well mostly YOCO, have worked hard to make this process “SEAMLESS”

The new integration ensures:

  • The YOCO device pre-populates the sale amount matching VEND (no human entry required)
  • The cashier does not need to touch the customer’s credit card as no data entry on the YOCO device is required by the cashier
  • It is now *almost impossible to have a discrepancy, during the cash-up, between the total card payments displayed on VEND and YOCO in your end of day reconciliation

With YOCO doing so well in South Africa at the moment (and stealing market share from the big dogs like Nedbank), other payment providers are trying to get in on the action (or reclaim the market). See below!

This integration can be a huge value-add to clients and is quick to set up. If you have any client’s using VEND and a YOCO device please forward them this link containing the set-up guide:

https://support.vendhq.com/hc/en-us/articles/115005545668

Feel free to send over any questions you may have regarding this month’s newsletter.

Jason Proctor (Creative CFO – Systems Team)

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