What reports you should be running as a business owner

Most business owners we talk to know they should be running reports to track the financial health of their business, but few know where to start. If you open the reports section in Xero or Quickbooks you’ll see dozens of options and it can quickly become overwhelming. There are the standard profit and loss report or a balance sheet but a lot of people will open these without really knowing what they’re looking at.

In this post, we’re going to address the two key reports all businesses should be running and some other industry specific reports/metrics worth taking a look at.

Businesses live and die by their cash so the starting point should be a cash flow statement. Plenty of businesses operate at a loss without too many issues but not many survive without cash.

A cash flow statement shows all income and outgoing cash from the business. This includes the business’s income and expenses but also other cash items such as loan repayments, asset purchases and owner drawings which don’t show up on the profit and loss.

Having a detailed understanding of your cash flow will allow you to investigate any issues and hopefully move the business into a cash flow positive position each month. Having positive cash flow has plenty of benefits including:

Here are some things to look for when interpreting a cash flow statement:

Once you’re in control of your cash flow and understand how cash moves through your business, you’ll be well equipped to make accurate forecasts about the future cash flow of the business which helps with decision making.

If you run a standard ‘Statement of Cash Flows’ report in Xero it won’t look very useful on face value. Rather than use the standard layout, we’d suggest creating a layout specific for your business so you get the most out of it.

Free offer: to help you get the most out of your numbers, we’ll create a custom cash flow report for you…for free! All we need is an invite to your Xero file. Reach out if you’d like to take up the offer.

If you’re in control of your business’s cash, everything else should fall into place.

A profit and loss report is a staple for most businesses and for good reason. It shows the overall profitability (or lack thereof) of the business and the components that make up the profit or loss.

A profit and loss report will allow you to track relevant margins such as gross profit and net profit and will also give you the info you need to run some of the other reports we’ll discuss later in this post.

A profit and loss in isolation is useful but it can be improved:

A cash flow statement and profit and loss are the two key reports every business should be running on a regular basis (at the very least monthly). In addition to those core reports, you’ll also want to add in some more reports that show the key metrics that move the needle in your business.

We think the best way to review your financial position is by using a financial dashboard with your key metrics and then support this with the cash flow statement, profit and loss report as well as aged debtors and creditors (invoices waiting to be received or paid).

Here are some specific reports and the industries that these would apply to.

Debtor days

Debtor days measures the number of days it takes your business to get paid from the date the invoice is issued.

You can track your debtor days real time by running and aged receivables report which shows all outstanding debts. Otherwise, you can calculate your average debtor days using the below formula:

(Average debtors/total sales for the period) x # days in the period

The lower the debtor days the faster you get paid. Ideally you’d want your debtor days to be equal to or below your invoice terms. So, if your standard invoice terms are 14 days then your debtor days should be 14 days or less. If your debtor days are above your terms then you need to implement some strategies to reduce the debtor days such as:

• Automatic invoice reminders.
• Take a deposit or get paid upfront.
• Invoice in instalments.
• Communicate fees clearly and regularly so there is no disagreement or misinterpretation.

Good for businesses that offer payment terms on their invoices such as:

• Professional services (accountants, lawyers, IT consulting etc.)
• Trades
• Manufacturers & wholesalers
• Creatives

Effective hourly rate/employee

This is a measure of the productivity of your staff over a period. You might charge a particular staff member out at $150/hour but nobody can be doing chargeable work (i.e. work you actually invoice the client for) 100% of the time. Things like admin, business development, leave, public holidays and write-offs reduce the actual amount of time that your staff are doing chargeable work. This has the effect of reducing that staff members effective hourly rate down from $150.

For example, let’s say a staff member is charged out at $150/hour but you only recover 80% of their time. Assuming they work a 38 hour week you’d be earning $4,560 per week from that employee ($150/hour x 38 hours x 80%). However, as they’ve worked 38 hours, their effective hourly rate is $120 ($4,560 revenue / 38 hours).

The are a few reasons to report on effective hourly rates:

• To understand your actual recovery rate on your staff and how much time is going to non-chargeable work.
• To determine whether your charge out rate is appropriate.
• To highlight areas for process, procedure and system improvements to reduce non-chargeable time.

You can calculate the effective hourly rate at a high level based on revenue and payroll data but if you want to go further, having a timesheet data for your staff will give you more detail.

Good for businesses that rely on staff time to generate income:

• Professional services (accountants, lawyers, IT consulting etc.)
• Trades
• Creatives

Customer Acquisition Costs

Customer acquisition cost is the average cost of getting each new customer. The lower the cost the better.

You can calculate this simply as follows:

Advertising costs / # new customers

Your customer acquisition cost is an important metrics to understand and report on. It will tell you how much you’re going to need to spend to acquire the new customer and you can compare that against your average gross profit per customer to know whether you’ll be making money off that customer. Growth is great, but not when you aren’t profitable!

Good for businesses that pay for new clients through advertising or referral fees such as ecommerce.

Conversion Rate

To grow a business you ultimately need a pipeline of work to keep everyone busy. This pipeline starts with leads and your ability to convert those leads into paying customers.

If you know your conversion percentage (i.e. 5% = for every 100 leads you convert 5) and your average revenue per customer then you can work out how many leads you need to generate to meet your revenue target in your budget.

For example, let’s say your target revenue in the budget is $100k, your average revenue per customer is $500 and your conversion rate is 5%. You can calculate the number of leads required as follows:

$100k / $500 per customer = 200 customers

200 customers / 5% conversion = 4,000 leads required

Conversely, you can also estimate your future revenues based on the number of leads.

To track leads and conversion properly, you’ll want to know the number of leads actually coming in and their source, and your actual conversion rate. You can then investigate any variances between targets and compare month on month changes.