Unpredictable profits: why cut-off is vital in Xero

Unpredictable profits: why cut-off is vital in Xero

Do your Xero accounts show great results one month, but rubbish the next? It’s likely your accounts don’t reflect the appropriate cut-off. Do you feel you cannot rely on the accounting information produced? We explain why it’s vital to match income and expenditure, and get cut-off right. With this concept in place, you’ll see how your business is really doing.

Graham Potts, Managing Director

What is Cut-Off?

Cut off is the basis for the accurate reporting of financial information. It is the process of matching sales with costs and accounting for all transactions in the correct period.

Without appropriate cut-off procedures, you can expect to see unpredictable profits and losses in your accounts, and it’s hard to see how your business is really doing.

Avoiding unpredictable profits and losses

Correct cut-off procedures mean:

  • Management accounts are more accurate. As a result you can make better informed decisions.
  • Accounts show the true profit position of the business rather than the cash position.
  • The financial results are comparable across periods. This means results are ‘smoothed’, instead of large profits in one period, followed by losses in the next.
  • Margins and KPIs are more accurate.
  • Tax liabilities are accrued so you’re not going to get unexpected surprises.

You should check cut-off at each period end.  This could be monthly or quarterly depending on the needs of your business.

What are cut-off adjustments?

The main adjustments we record are:

Accrued Income

Income earned in the period which hasn’t yet been invoiced.

Unearned/Deferred Income

Sales invoices raised in the period, but work hasn’t yet been done or is incomplete.

Accrued Wages, Costs and Expenses

Wages, costs and expenses incurred for the period, however the wages are paid the next month, or the supplier invoice has not yet been received.

Prepaid Costs and Expenses

Costs and expenses in the period for benefits that extend beyond the period end, for example up front payments and annual insurance bills.

Stock

Does your business hold stock?

Accurate recording of stock is key to correct cut off.  Stock is a significant figure in the accounts, consequently errors will impact gross profit, margins and other KPIs.

Ensure stock control systems include:

  • Use of accounting software suitable for your stock management requirements.  There are many options in the marketplace.
  • Performing stock-count procedures at key cut off dates (e.g. year end, or quarter end).
  • Maintaining supporting stock records (e.g. goods received notes and delivery notes).

How can Wessex help ensure Xero shows the right results?

We can review and help you develop your existing systems to ensure accurate and efficient cut-off procedures are in place.

Our team will work with your admin staff to put processes and technology in place to capture the data we need. We’ll prepare regular management accounts, and make appropriate cut-off adjustments.

We specialise in Xero and ecommerce, and our team are all Xero Certified.

Say goodbye to:

  • accounts that don’t really tell you how your business is doing
  • unpredictable profits and losses through the year
  • finding out your results at the end of the financial year – when it’s too late to make changes!

Say hello to:

  • seeing how your business is performing
  • understanding performance over the seasons, and by category
  • knowing where to focus your time and energy.

Ready to take your first step? In our Business & Xero Review we’ll take a close look at your Xero account, explore the business issues with you, and provide an actionable report setting out the steps you can take to improve results.

Book online today:

Book your Business & Xero Review

Author: Rachael Baker

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