How do I know if my business is doing well? A 15-minute monthly check in Xero

Short answer: a business is doing well financially when five things are true at once: profit is holding or growing against the same months last year, gross margin is not slipping, the cash that is really yours is growing, customers pay close to your terms, and you can pay the bills due in the next month without waiting on anyone. No single number tells you this. Sales can rise while profit falls, and the bank balance can look healthy while most of it is tax you owe. Each check below takes a few minutes with standard Xero reports, and together they take about fifteen minutes once a month.

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Why sales, the bank balance and being busy all mislead

• Sales say nothing about what is left. A business can sell 10% more at a thinner margin and keep less.
• The bank balance includes GST or VAT you have collected, payroll taxes you owe and money for income tax, and it ignores what customers owe you and what you owe suppliers. The Xero dashboard guide shows how to take those out in five minutes.
• Being busy is the most convincing of the three and the least reliable. A full order book with slow payers and underpriced quotes can run out of cash.

The checks below look at profit, cash and timing together, which is what the three headline numbers miss.

The five checks

1. Is profit holding against last year? Run the Profit and Loss for the last three complete months and compare it with the same three months a year earlier (use the compare option on the report). Compare with last year, not last month, so seasonal swings do not fool you. Look at net profit first, then sales. If you only have a few months of history, use the Profit and Loss by month and look for a trend. How to read a Profit and Loss in Xero explains each line.
2. Is gross margin holding? Gross profit divided by sales, for the same two periods. A drop of 2 or 3 percentage points is often the first sign that supplier prices rose and your prices did not. It only works if cost of sales is coded in Xero; see Xero gross profit margin, or check a price change with the margin and markup calculator.
3. Is your free cash growing? Run the Balance Sheet for today and for three months ago. For each, take the bank total and subtract the GST or VAT account, payroll taxes owed and anything put aside for income tax. Free cash should rise over time in a profitable business. If profit is positive but free cash fell, profit but no cash shows where it went.
4. Are customers paying on time? Take the total on the Aged Receivables Summary and work out debtor days (owed to you, divided by a year of sales, times 365). Compare it with your payment terms. The debtor days calculator does the sum and shows how much cash is tied up beyond your terms.
5. Can you pay what is due? Compare free cash with the bills due in the next 30 days on the Aged Payables Summary, or use Xero’s short-term cash flow. Then divide free cash by a month of fixed costs: how many months of cash should a business have explains the target.

All five use reports Xero already has; Xero reports shows where each one is and how to save them as custom reports so next month is one click. Mark each one good, watch or act. Two or more on “act” is a business that is busy but not doing well, however full the diary is.

A worked example: a joinery workshop that feels like it is doing well

A joinery workshop with seven staff has had its busiest quarter yet. Sales for July to September are $201,000, up 8% on the same quarter last year. The owner’s feeling is “best quarter ever”. The five checks say something different.

Checks 1 and 2: profit and margin.

July to September	This year	Last year
Sales	$201,000	$186,000
Gross profit	$84,420	$83,700
Gross margin	42.0%	45.0%
Overheads	$62,000	$58,000
Net profit	$22,420	$25,700

Sales rose $15,000, but net profit fell $3,280, about 13%. The main cause is margin: 3 points on $201,000 of sales is $6,030 a quarter. Timber and fittings went up during the year and the quotes did not. Overheads rose $4,000 too, mostly a new hire for the extra work.

Check 3: free cash. The bank shows $58,000. Take off $14,000 of GST or VAT collected and $9,000 set aside for income tax, and free cash is $35,000. Three months ago the same sum gave $41,000. So the workshop made $22,420 of profit in the quarter and still has $6,000 less of its own cash.

Check 4: customers. The Aged Receivables total is $96,000 against $780,000 of sales over the last year, which is $2,137 a day. That is 96,000 ÷ 780,000 × 365 = 45 debtor days on 30-day terms. The 15 days beyond terms are about $32,000 sitting with customers, which explains where the quarter’s profit went: into bigger jobs that have not been paid for yet.

Check 5: bills. Bills due in the next 30 days come to $27,000, so the $35,000 of free cash covers them. But fixed costs are about $20,700 a month ($62,000 of overheads ÷ 3), so the free cash is about 1.7 months of fixed costs.

Check	Result	Verdict
Profit against last year	down 13% while sales rose 8%	act
Gross margin	45.0% to 42.0%, $6,030 a quarter	act
Free cash	$41,000 to $35,000	watch
Debtor days	45 on 30-day terms, $32,000 tied up	act
Bills due in 30 days	covered, 1.7 months of fixed costs	watch

Three “act” results: the workshop is busier, not better. The two fixes are both worth more than more work. Reprice quotes for the current cost of materials (the price increase calculator shows how much volume a rise can lose before it costs you), and chase the overdue invoices: collecting half of the $32,000 turns the $8,000 of free cash left after the next month’s bills into $24,000. Who owes me money? covers who to chase first, and how to improve cash flow ranks the other ways to free cash.

What “doing well” looks like over a year

One good month proves little. Over twelve months, a business that is doing well usually shows:

• net profit for the year at or above the year before, with no long run of loss-making months;
• gross margin steady within a point or two;
• free cash higher at the end of the year than at the start, after you have paid yourself;
• debtor days within about 10 days of your terms;
• a cash reserve of a few months of fixed costs, building towards your target.

If you work in the business, also check that the profit is more than a wage: true profit takes off what it would cost to hire someone to do your job and a return on the money you have put in. If profit is fine but you cannot take money out, how much can I pay myself? works out what the business can afford. If profit dropped and you do not know why, start with why did my profit drop?.

Common questions

What is the best single sign that a business is doing well? There is not one, but if you only check one thing, check free cash (bank balance minus tax you owe) against three months ago, alongside profit. Cash growing while profit holds is the healthiest combination. Profit growing while cash shrinks is the most common warning sign in small businesses.

How do I know if my business is profitable in Xero? Run the Profit and Loss for a complete period and read the net profit line at the bottom. Use whole months, make sure the bank accounts are reconciled and bills are entered, and compare with the same period last year. Drawings you take as an owner are not on the Profit and Loss, so a profit figure does not mean you have also been paid.

Is a good month enough to say the business is doing well? No. Single months swing with timing: one large invoice, a quarterly bill or a slow week can move profit a long way. Compare three-month periods with the same months last year, or look at the last twelve months as one total. The sales growth calculator does the comparison and shows how much of the growth is price rises.

How often should I check how my business is doing? A quick look at cash and overdue invoices every week, and the full five checks once a month after the books are reconciled. Weekly catches a late payer or a cash dip while it is small; monthly is enough for profit and margin, which need complete months to mean anything. Xero’s Business Snapshot is a quick monthly starting point: it compares profit, margin and the time to get paid with the month before.

What profit margin means a small business is doing well? It depends on the industry, so compare the business with its own history first. A net margin that holds steady or rises year on year, with free cash growing, is a better sign than hitting a benchmark. Your accountant can tell you what is typical for your trade, and what is a good profit margin for a small business shows how to work out the margin yours needs.

Getting the check done for you every Monday

ReportPilot reads your Xero figures and sends a short plain-English email every Monday that covers most of these checks: how sales and net profit moved against last month, gross margin when it moves by 3 percentage points or more, the bank balance against last month end, who owes you and how much is overdue, and bills due soon. When cash has fallen in two of the last three months it also says how long the cash lasts at the recent pace. The dashboard keeps 24 months of history, so you can compare with the same months last year. It asks Xero for read-only access, and there is a 14-day free trial with no card. To see these checks on your own figures once, without a trial, get the free Xero health check: cash runway, overdue customers, margin trend and the top three things to fix.