The profit and loss report looked ordinary for a growing agency. Revenue was moving in the right direction, payroll ran each fortnight and the bank feed was connected.
That did not mean the accounts were ready to support decisions.
In this illustrative case study, a 14-person creative agency generates approximately $2.4 million in annual revenue and uses Xero for its accounting. The founder wants to understand whether the business can hire another account manager without putting pressure on cash.
The review goes beyond the headline profit number. It tests bank and credit-card reconciliations, aged receivables and payables, payroll liabilities, GST accounts, loans, clearing accounts, selected expenses and the timing of project revenue.
Seven matters require follow-up.
What the review found
1. $86,400 of receivables was more than 90 days old
The aged receivables report showed $312,000 outstanding. Of that, $86,400 was more than 90 days old.
A closer look suggested that $12,900 related to customer payments that had not been allocated correctly, while $8,800 related to invoices or credits that were no longer expected to be collected in full. Together, $21,700 of the old balance did not represent ordinary late-paying customers.
That matters because accounts receivable is an asset. If part of the balance is not genuinely collectible, the balance sheet can overstate what the business owns. Under accrual reporting, stale or duplicated invoices can also distort the revenue and profit picture management is relying on.
The useful question is not simply whether an invoice is old. It is whether the business still expects to collect it and whether the ledger agrees with what the client relationship team knows.
2. An $18,600 annual software bill distorted one month
The agency paid $18,600 for a twelve-month platform subscription and recorded the full amount as an expense in the month it was paid.
That treatment might be acceptable for one purpose and still make monthly management reporting less useful. For a founder comparing margins from one month to the next, the payment made one month look significantly weaker even though the software supported the business for the following year.
The issue is not a demand for complexity. It is a question of whether the reporting treatment matches the decision being made.
3. $48,000 of project deposits related to future work
The business had received $72,000 in upfront project deposits. Based on the illustrative project schedules, $48,000 related to work planned for the following quarter.
Recording every receipt as revenue when cash arrives can make a project business appear to have performed earlier than it actually did. The accounting treatment depends on the underlying arrangement, but the management question is straightforward: how much of the cash received has actually been earned?
Without that distinction, one month can look unusually strong and the following months unusually weak.
4. An $11,800 payroll-related liability had no clear support
Payroll continued to run and staff were paid. However, an $11,800 balance remained in a payroll and superannuation liability account without a clear reconciliation to the payroll records or subsequent payments.
An unexplained liability does not automatically mean the amount is wrong. It does mean somebody should be able to show what makes up the balance, when it arose and how it will clear.
Operational completion—employees receiving their pay—is not the same thing as proving the general ledger is correct.
5. The equipment loan was $16,200 away from the lender statement
Xero showed an equipment loan of $142,600. The lender statement showed $126,400.
Several repayments had been treated without consistently separating principal from interest. The payments had left the bank, but the liability had not moved in the way the lender's records showed.
This affected both sides of the accounts: the loan balance was unreliable and the expense treatment needed review.
6. Twenty-three bank-feed exceptions had a net effect of $6,740
The reconciliation work identified 23 duplicate, missing or incorrectly matched items with a combined net effect of $6,740.
None of the individual transactions looked dramatic. That was the point. Small recurring items are easy to overlook because each one appears immaterial in isolation.
Bank feeds reduce data entry. They do not establish that every item has been matched, coded and supported correctly.
7. There was no defined month-end close
The final finding explained why the others had survived.
There was no recurring point at which somebody reviewed the balance sheet, resolved outstanding questions and signed off that the accounts were ready for management use. Reports were available, but there was no clear definition of when a month was complete.
This was the process weakness behind the individual exceptions.
The bigger problem was not seven mistakes
It would be easy to describe this as a messy file. That misses the more useful lesson.
The agency had grown. Its finance process had not grown at the same pace.
More staff created more payroll activity. More projects introduced deposits, work in progress and timing questions. More software created recurring and annual costs. More cards and payment channels produced more transactions. The founder was further removed from the detail while relying more heavily on the reports.
Nothing needed to fail dramatically. Small unresolved matters simply accumulated because no one process was responsible for surfacing and closing them.
What the owner should ask
- How much of our receivables balance is more than 30, 60 or 90 days old?
- Do we still expect every old invoice to be collected?
- Have customer payments and credits been allocated correctly?
- Are large annual costs making an individual month misleading?
- Does upfront cash relate to work already delivered or future work?
- Can somebody explain each payroll, tax and loan liability?
- Does a named person sign off the balance sheet each month?
- Are reports issued only after material exceptions have been reviewed?
One unusual balance does not prove the books are wrong. A material balance that nobody can explain is a reason to investigate.
What a better process looks like
The answer is usually not more dashboards. It is a dependable operating rhythm:
- Reconcile bank, card and payment accounts regularly.
- Keep one visible list of exceptions that require context or judgement.
- Review aged receivables and payables with the people who know the clients and suppliers.
- Reconcile payroll, GST, loans and other material balance-sheet accounts.
- Consider timing adjustments where they materially affect management decisions.
- Document recurring accounting decisions.
- Complete a reviewer sign-off before management reports are treated as final.
That work is less visually exciting than a new dashboard. It is also what makes the dashboard worth looking at.
Sources and further reading
- Professional services accounting: a guide for consultants and agencies — Xero ↗
- Do a year end in Xero — Australia ↗
- What is accrual accounting? — Xero ↗
This article is not tax, accounting or financial advice for your circumstances. Accounting treatment depends on the facts of a transaction and the requirements applying to the business. Seek professional advice before making a material accounting or tax decision.