A smarter way to code transactions in Xero
Most of us think coding transactions in Xero is a no-brainer: just choose the code that best describes the transaction.
But the mess resulting from this “no-brainer” approach is precisely what our new CFO Sarah spent hours cleaning up this week, so we’d have clearer reports. (Thanks, Sarah!)
Here, she shares her wisdom to help you avoid the mess and get more actionable reports and forecasts from your Xero data.
The more Xero account codes you use, the messier your reports
“Many people fall into the trap of coding a transaction with the aim to describe it, not report it,” Sarah says.
“There are a lot of account codes on Xero. The aim of the game is not to use as many as possible, it’s to code your transactions in a way that makes sense for your reports.”
It may be tempting to code a payment for posting a one-off package as ‘Freight & Courier’, because that’s the closest description.
If you’re not a freight company, it makes no sense to have a one-off ‘Freight & Courier’ transaction muddying your reports. Instead, code it as ‘Office Expenses’, or something management is interested in tracking.
With too many codes, you get meaningless charts like this:
“To organise your transactions on Xero in a useful way, you need to switch from thinking about now (coding the transaction) to thinking about the future (reporting the transaction),” says Sarah.
Step 1: Decide what information you want reported
“Sit down with whoever’s in charge, and discuss what information matters most in the financial reports. Then base your codes on that.”
For example, do you need to distinguish ‘Advertising’ costs from ‘Marketing’ costs?
If it’s important to see how much you’re spending on paid adverts vs other marketing expenses like design and copywriting, then sure.
If not, it’d probably be more helpful to see them grouped under the same umbrella.
Do you need to know how much you spent on ‘Printing & Stationery’ this month?
If you’re not a printing company, ‘Office Expenses’ should suffice.
And is coding ad-hoc Uber trips as ‘Travel - National’ really necessary?
Step 2: Code/ recode transactions on Xero
Go through all your transactions and code or recode them according to the list you agreed in Step 1.
Sarah spent hours recoding transactions from 30+ codes down to a more manageable list of 13 account codes that are most useful to us:
- Bank Fees
- General Expenses
- App Expenses
- Legal and Insurance
- R&D - Product and Engineering
- Rent and Office
- Salaries and Benefits
- Sales and Marketing
- Travel and Transport
Our charts used to be super complicated like the one above. Thanks to Sarah, they’re now nice and clear, like this one:
Your list may look a lot different, depending on your company.
And don’t worry about being too general — if you ever need to do a deep-dive into an account code, it’s easy. In Xero, go to Accounting > Chart of Accounts, and click on the YTD value of an account code to see all transactions listed under that code.
Step 3: Set up a system for ambiguous transactions
Some transactions may apply to more than one code, like marketing software, for example, which could apply to both ‘Sales and Marketing’ and ‘Software’.
“We discussed it and decided it’s easier for us to keep track of software expenses if they’re in one place. It’s not as important to see which department they’re for.” Sarah explains. “So we code our marketing software transactions under ‘Software’.”
“It’s definitely worth having discussions like these to get clear on what the reporting objectives are.”
Voila! You’re done.
Now you can sit back and relish in the fact that you did good. Thanks to you, the team has crystal clear reports, with information they can easily make decisions from.
Go treat yourself to a coffee!