Small Business Accounting: Financial Data Makes You Smarter

By August 31, 2014 July 14th, 2017 xero

Over the last year we have been helping small businesses in the US switch to Xero.  The majority of our customers have switched to Xero because of one, two, or all of the reasons below:

  1. The ease of navigating an intuitive, easy interface
  2. Integration with other cloud services
  3. Bank feeds

I could elaborate more on the advantages of the above reasons to switch to Xero,  but I prefer for this post to focus on, what I feel, is a more compelling reason to switch to Xero for your small business accounting needs,  The advantage of real-time data accessible by anyone and anywhere.  

With the desktop version of Quickbooks, a small business owner’s only option is to send your file off once a month (or if you dare once a week) to your accountant and have them do the work and send it back.  Most of the time, your accountant will simply perform the reconciliation and send it back to you completed without comments on the business, much less analysis of the financial data.  Enter Xero.

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The three reasons listed above that customers switch to Xero open a world of possibilities that make it easier for small business owners to actually use their accounting data to their advantage.

Xero integrates with your bank:  Okay, there is half of the reconciliation equation integrated into your accounting system.

Xero also integrates with other cloud services such as CRM, invoicing platforms, etc. that quickbooks doesn’t have – There you have the other half.

All of this data comes together into an accounting system that’s agile and ready for analysis. Never before have small businesses had the opportunity to access financial data this fast.

However, there is a problem.  Most small business owners prefer to focus on revenue generation rather than learning to leverage their financial data into a weapon.  And quite honestly, isn’t that the popular accountant selling point?  “Spend more time on your business and less on your books”.  So how can a small business owner leverage the valuable information pouring into his accounting system?

That is where a Xero Advisor can help.  We aren’t saying we’ll take care of the accounting so the owner doesn’t ever have to hear about it.  We want the owner involved in the numbers that anxiously wait to be used by the entrepreneur.  We’ll do all the reconciling, reporting, data conversions, etc.  But the value of the accounting reports at the end shouldn’t be ignored by the business owner.  And that is the small business mentality that we want to seek to change with our clients.

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The Key Behavior of a Small Business

Behavior is simply defined as “The way in which one acts or conducts oneself in response to a situation”.  The current small business behavior, as described above, is to not pay attention or get involved in the financial reports and accounting.  One way to determine whether a behavior has positive effects is to use positive deviance.  In our case, this means to study a situation of business owners in identical situations that behave differently, and measure their outcomes.  If one owner is more successful than the other, perhaps the success can be ascribed to the different behavior studied.

Though I have not tested the behavior of financial analysis for small business myself, the evidence of businesses that succeed suggest that financial analysis can be a great tool to a company’s success.  Consider an example of a service company that is in the carpet cleaning business. Here is the company profile:

Carpet Cleaning Service

Time in Industry: 15 Years

Average Annual Revenue: 150,000

Number of Unique Clients” 1,500

Number of Vans: 2

Number of Full Time Employees: 3

The company appears to be reasonably successful.  But how could analyzing financial data help this company earn higher revenues and be more profitable?  Perhaps a few questions could spur thought into how financial data can help.

  1. Which customers have been the most profitable over the past 15 years?
  2. How much revenue has each employee generated per hour?
  3. What is the average profit margin for each job?
  4. How many hours do employees spend driving?

For each of the four questions above, let’s see how having the question answered can yield a positive result for the business.

  1. Once the most profitable customers are known, the business can focus marketing to these customers and ensure high retention rates of profitable customers
  2. Revenue per hour per employee can detect worker efficiency/inefficiency so that it can be addressed and managed
  3. Knowing the average profit margin per job can lead to the identification of expenses that contribute to higher or lower margins, which can show areas of needed change
  4. Employee utilization rate can help to explain increases or decreases in profit and be an impetus for a positive change in scheduling jobs

In this case, with the tools the financial data can provide, the business can adjust it’s marketing strategies, customer relationships, and scheduling to positively affect the profits of the business.

Takeaway

The sad news is that most small businesses can’t get access to this information without a large amount of time and effort.  That’s because most small businesses don’t use Xero.  The enabling power of Xero, through its automated avenues of information coming into the accounting system, allows us advisers the ability to provide real-time data and financial advise to our clients at a price that small businesses can afford.  So what are you waiting for?


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