How To Track And Measure Your Most Profitable Income Streams In Xero
May 18, 2016
Part 3 of a 3 part series in using Xero to manage your business.
#3 How To Track And Measure Your Most Profitable Income Streams In Xero
Tracking is a powerful feature available using Xero accounting software. It allows us to capture the quality information we need to see how parts of the business are performing and keep track of them.
We might be interested in understanding how the different departments in the business are going, how the cost centres are moving and how different business locations/agents are performing. Once we have the information from the Tracking, we are able to make better business decisions.
For example, a virtual assistance company may want to track profitability of various packages or services, or a business coach track their mastermind workshop. Without setting up tracking you are looking at the big picture but it can be next to impossible to identify high performing and low performing income streams. And make necessary changes armed with this information.
In traditional accounting systems, the account code rules the system. We have one code for the revenue account and numerous sub-account categories that would create a long and inflexible chart of accounts. With Tracking, we could have just one general revenue account for our company and then create tracking categories and options to see where more revenues are created. We are also able to apply our categories to our reports and run the Tracking summary report, which will give us a report on our accounts from a tracking point of view.
How to Create Tracking Categories in Xero
Go into Settings and click on Tracking:
From there we can add up to TWO Tracking Categories and for each category we can have up to 100 options.
Let’s create a category called CLIENTS and then, as options, we will create as many client names as we want.
Another category could be to measure our agent’s performance. Click on Add Tracking Category and named it Agents. Then as options we can put names or agent no 1 etc.
Then, on our Chart of Accounts we have to create Direct Costs accounts so we can keep track of which costs directly relates to the client/agent, and we will need these accounts in order to measure the performance in the P&L report for example.
So let’s go into Settings, Chart of Account and click on Add Account.
- Account Type we will choose Direct Costs;
- Code with an available and consequent number;
- Name, use one that will represent the direct costs for the client, for example timber costs if we are making house frames for this client;
- Add a description (optional);
- click on Enable payment to this account;
- Save it.
This will allow us to have a more detailed profitability image of our clients/agents.
Now let’s create an invoice for one of the client as example: we go into Accounts, Sales, New invoice.
Fill in the following fields: To, date, due date, description, price, account, choose the client name. Approve.
As you can see there is the Agent categories as an option to add as well.
Then we create the bill to connect the costs in relation to our client. We go into Accounts, Purchases, new Bill. Fill in: From, date, due date, description, unit price, account (Timber costs for frames) and choose the client Andrew White: Approve.
Now we go and check our Income Statement.
Go to Report, P&L, click on Compare Client and this is what we will see:
We have created the P&L for the client as well as the unassigned one that contains all the numbers that have not been allocated to the tracking.
The tracking gives us the ability to create profit and loss reports, budget variance and budget summary, balance sheet and tracking summary reports that shows which parts or project or agent is more profitable.
The tracking will work also for a non-profit organization who could set up their tracking system to measure the grant income and expenditure and therefore produce a specific report detailing each grant or all grants separately.
The Tracking Summary report is what we use to report on accounts from a tracking prospective.
Let’s go on Report, all reports, Tracking summary. Choose the account group, for example Cost of Sales and the Tracking Category, i.e. Client.
This report contains the movements that have been registered during the period and assigned to a tracking category. If we click on opening, closing balance or net activity we will have the detailed transactions:
As explained, the Tracking in Xero can really give us the data we need to run our business better, understanding who is more profitable and where the areas that needs improvements are compare to others.
- Set up your tracking categories and direct costs.
- Register Invoices and Bills tracking the chosen categories and options, as well as whichever operation is important for your business.
- Run the following reports and choose the compare categories
- Profit and Loss
- Tracking summary report
- Look for more / less profitable parts of your business.
Revise your management plan based on these findings.
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This week’s post has been a team contribution. Giuliana is our Xero and bookkeeping expert and when not actually doing bookkeeping for our clients she also offers one-on-one coaching sessions. Contact Justine to learn more about what these sessions involve.