Where is my business money going? How to find your biggest costs in Xero

Short answer: run the Profit and Loss in Xero for the last 12 months as one column, and rank the expense lines from biggest to smallest. In most small businesses three or four lines (usually direct costs, wages and premises or vehicles) are 70 to 80% of everything you spend, so that is where savings are. Then run Expenses by Contact to see the same money by supplier, and compare each big line with the year before as a percentage of sales. Two things to know first: money also leaves the bank without ever being an expense (loan repayments, drawings, tax, stock, equipment), and cutting a cost that is 1% of sales can never save you more than 1% of sales.

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Is it costs, or money that never shows as a cost?

“Where is my money going?” usually starts with a bank balance that feels too low. The Profit and Loss only shows income and expenses. These all take cash out of the bank and never appear on it:

• Loan and hire purchase repayments (only the interest is an expense; see loan repayments in Xero).
• Owner drawings or dividends.
• GST, VAT or sales tax paid to the tax office, and income tax.
• Stock you bought but have not sold yet.
• Equipment, vehicles and other assets, which are spread over several years.
• Customers paying late: the sale counts as income, but the money has not arrived.

If profit looks fine and the bank does not, the answer is probably on that list, and profit but no cash walks through finding which. If profit itself is thin, the answer is in your costs. Read on.

How to find your biggest costs in Xero, step by step

1. Run the Profit and Loss for the last 12 complete months as a single column (Reports, then Profit and Loss, with a custom date range). A year evens out annual bills and seasonal months. Use accrual basis if your books are on it, so costs land in the month they belong to.
2. Rank the expense lines. Export to Excel or Google Sheets and sort cost of sales and operating expenses together, largest first. Add a column for each line as a percentage of sales. That number tells you the most a cut on that line could ever be worth.
3. Compare with the year before. Run it again with Compare with set to 1 previous period of 12 months. A line that grew faster than sales is the one to question, not the one that is simply big.
4. See the money by supplier. Run Expenses by Contact for the same 12 months. It totals what you spent with each supplier, which the Profit and Loss cannot show. Bank transactions coded without a contact land in a blank or “no contact” row, so if that row is large, add contacts when you reconcile from now on.
5. Look inside a line. Click any amount on the Profit and Loss and Xero opens the transactions behind it. For subscriptions, phone and software lines, look for the same amount every month: that is the quickest way to find things nobody uses any more.
6. Check your repeating bills. Repeating bills in Xero (under Bills to pay, or Purchases, depending on your version) list costs that will keep arriving until someone stops them.

If one month suddenly looks expensive, the Profit and Loss by month shows twelve columns side by side, so you can see whether a cost is new, seasonal or a one-off.

A worked example: a plumbing business with $420,000 of sales

A two-van plumbing business made $38,000 of net profit on $420,000 of sales over the last 12 months, so it spent $382,000. The owner felt busy all year and wanted to know where it went. Ranked, with each line as a share of sales:

Line	Last 12 months	% of sales
Wages and super	$148,000	35.2%
Materials (cost of sales)	$126,000	30.0%
Vehicles (leases, fuel, repairs)	$31,000	7.4%
Rent	$24,000	5.7%
Marketing	$14,000	3.3%
Insurance	$9,000	2.1%
Everything else (10 small lines)	$30,000	7.1%
Total	$382,000	91.0%

The top three lines are $305,000, or 80% of everything spent. The ten small lines together are under 8%.

Comparing with the year before: wages rose in line with sales, and rent was flat. Materials went from 28% of sales to 30%. Two points on $420,000 of sales is $8,400 a year. Expenses by Contact showed about 70% of materials came from one merchant, and job quotes had not been updated since that merchant’s price rise in the spring.

Inside the “everything else” lines, software subscriptions came to $7,800 across eleven services. Three were no longer used (an old job app, a second cloud storage plan and a design tool) at $145 a month between them, or $1,740 a year.

Together that is $10,140 a year, which would take profit from $38,000 to $48,140, up 27%. Notice where it came from: fixing two points of margin on the second-biggest line was worth almost five times as much as the whole subscription clean-up. The margin and markup calculator shows what to charge on materials to get back to 28%.

Which costs to look at first

• Direct costs (cost of sales). Usually the biggest win, because a margin change applies to every sale. If gross margin slipped, see the gross profit margin guide.
• Wages. Rarely something to cut, but worth comparing with sales: if wages grew faster than sales, ask whether the hours are going into paid work (profit by job in Xero shows which jobs pay for their hours). The wage percentage calculator works out wages as a share of sales and of gross profit. The Xero payroll reports guide shows how to check the wages line against payroll, and what staff cost once super or pension and leave are added.
• Fixed costs that grew. Rent, leases, insurance and software raise your break-even point every month. The break-even calculator shows how much more you need to sell to cover a new fixed cost, and the overhead rate calculator what your overheads add to each hour and job.
• Small recurring lines. Worth one clean-up a year, but do not expect them to fix thin profit on their own.

Also check who you are paying late or early: the aged payables report shows what you owe each supplier and when it is due.

Common questions

What is the Expenses by Contact report in Xero? It totals spending by supplier for a date range, built from bills and from bank transactions that have a contact. It answers “who am I paying the most?”, which the Profit and Loss, organised by account, cannot.

Why is my bank balance low when my expenses look normal? Because a lot of money leaves the bank without being an expense: loan repayments, drawings, tax payments, stock and equipment. Customers paying late also leave sales in the Profit and Loss with no cash behind them. The profit but no cash guide shows how to find which.

How do I see my expenses by month in Xero? Run the Profit and Loss for one month and compare with the previous 11 periods. Each expense line then has twelve columns, so a cost that started, stopped or jumped is easy to spot.

What percentage of sales should my costs be? It depends on the industry, so the most useful comparison is with your own previous year. A line that grew faster than sales is worth a question; a line that is simply big may be the cost of doing the work.

How often should I review my costs? Do a full ranked review once a year, and glance at the monthly Profit and Loss for any line that jumps. Most cost creep is small monthly amounts that nobody notices until the year adds up.

Noticing cost creep every Monday

ReportPilot reads your Xero figures and sends a short plain-English email every Monday. It flags any expense line running more than 25% above its six-month average by a meaningful amount, and gross margin when it moves by 3 percentage points or more, so a supplier price rise or a new cost is pointed out the month it starts, not at year end. It also says how net profit moved, and covers cash, who owes you and bills due soon. It asks Xero for read-only access, and there is a 14-day free trial with no card.