This article is an extract from the book 'Everything you need to know about Xero Practice Manager'
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There are some settings in XPM you need to get right. In this section we’ll be reviewing the essential settings to ensure your practice is set up to succeed.
To get started, go to ‘Business > Settings > Job Settings’ in your XPM.
Job categories are a very powerful part of XPM. They can be applied to jobs to help us with reporting, and to map our revenue streams from XPM through to Xero when we do our invoicing. In XPM it is important we set these up a specific way to ensure we achieve two things:
- We can filter our WIP by our billable fees and our fixed-price agreements
- We can split out revenue streams, so when invoices flow to Xero they show the correct revenue account code for the type of work we have done.
Filtering your WIP balance
When we have both billable fees and fixed-price agreements, it is difficult to get a useful WIP report from XPM because we have both negative and positive WIP balances in the same report. Let’s say for example we have $200k of billable time on our billable fee jobs. This is $200k of WIP, which is time we can bill. This is an asset to us because WIP turns into invoices, and invoices turn into cash.
Let’s also say we have $300k of fixed-price agreement jobs that we have billed in advance. This is the opposite to the situation above, so we have a negative WIP balance of $300k. We have invoiced for the work, but not done it yet, so our WIP balance is negative. This is a liability to us because we have collected the funds from the clients, but we have a liability to complete the work.
If we run a standard WIP report, our total balance would be negative $100k. This looks like we have $100k billed in advance. But in reality, we have $300k billed in advance, and $200k that we can invoice now. It can be difficult to see how much we need to invoice without the ability to filter out WIP in this way.
By using our job categories to split these engagement types, we can easily filter between our billable fees and our fixed-price agreements.
At a starting point, we would want our job categories to be split between:
- Fixed-price agreement
- Billable fees
Internal is the job category we would use for our internal jobs for non-client time.
We may want to use some variation on the names provided above. Perhaps you call your fixed-price agreements 'Monthly Service Agreements’ and your billable fees are called ‘Time-charge Agreements’. Whatever the terminology you use, you want to ensure you are splitting your job categories by the different billing models so you can filter your WIP reports.
There is another problem we need to solve using our job categories, which is our revenue mappings to Xero. The chances are, we perform a wide variety of services for our customers. It is a good idea to see where your revenue is coming from by the type of services you are delivering.
Here is an example of how you might view revenue streams for your practice:
- Compliance Services
- Advisory Services
We use job category mappings to not only filter our WIP but to also ensure that the invoices for a job are going to the correct Xero income accounts. You’ll notice that revenue streams are mutually exclusive because revenue must sit in one or the other, never neither, never both.
There are three levels of hierarchy for your revenue stream mappings from XPM to Xero:
- Task and Cost mappings (task and cost settings)
- Job Category mappings (job settings)
- Default mappings (Xero integration settings).
We want to set up our revenue streams to be mapped from our job categories. This will override the default mappings, but not the task and cost mappings, so we need to ensure we do not have any revenue streams set up on our tasks and costs. You can check this by going to ‘Business > Settings > Tasks > Accounting Interface’.
It is also worth noting that our fixed-price agreements are billed from Xero. For these we split our revenue streams inside our Xero invoices, rather than using the job categories in XPM. This means we only need to worry about splitting out our job categories for billable fees by the different revenue streams.
Let’s look at an example.
You could have a fixed-price agreement that includes ‘Annual Accounts’, ‘GST’, ‘Payroll’ and ‘Coaching’. The first three tasks would be coded as compliance revenue, whereas the coaching task would be coded as advisory revenue. This means we would set up our repeating invoice in Xero to be split by these four services with the appropriate revenue codes.
If this exact engagement is on the billable fees either quoted or time/cost basis, you may want to split it into two jobs: one for all the compliance work, and one for the coaching work. This is so we can set the appropriate job category in each job, so our revenue streams are correctly populated when the invoice arrives in Xero. We can still create a multi-job invoice if the customer wants to receive a single invoice for both the annual and one-off engagements.
Here is an example list of job categories:
- Fixed-price Agreement
- Billable Fees – Compliance
- Billable Fees – Advisory
This is a nice tidy list.
We do not worry about allocating a revenue stream to the fixed-price agreements or internal categories.. This is because we will be invoicing our fixed-price agreements from Xero, and our internal jobs we do not invoice. Our billable fees, however, we want to split out based on the revenue streams.
On a final note, the reason we do not use task and cost revenue mappings is because these are not picked up for any interim invoices. If you send a deposit invoice, the tasks and costs are not invoiced as tasks and costs, but as interims. Therefore XPM does not know which revenue codes to use, so it goes to the next layer down which is the job categories, and if we have nothing there, it will go to the default income account. This creates re-work for us in assigning income accounts in our Xero. If we set up the revenue mappings based on job categories, however, it will always pick up the job category revenue code, regardless of whether it is a time/cost/quoted invoice, or an interim.
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