Services
Monthly bookkeeping run entirely in Xero — closed, reviewed and proven every period by the team that does the work.
Bookkeeping packages
The starting point
Three Billing Models
How you bill decides when revenue is earned, and the three common models pull in different directions.
| Model | Revenue is earned | What the books need |
|---|---|---|
| Time and materials | As the work is done | Unbilled time carried as an asset until invoiced |
| Fixed fee | As the work is delivered, not as it is invoiced | Both directions: unbilled work, and fees billed ahead of delivery |
| Retainer | Across the period it covers | A liability on receipt, released monthly |
A firm running all three, which most do, has revenue arriving on three different timetables while cash arrives on a fourth. Coding invoices to revenue when they are raised produces a profit and loss that reports your invoicing schedule rather than your business.
The missing number
The Asset Most Firms Never Record
Work in progress is work performed and not yet invoiced. It is an asset, it is often the largest one a services firm has, and it appears on very few small firm balance sheets.
A team delivers three weeks of a project in March and invoices in April. Without a WIP entry, March shows the salary cost with none of the revenue, and April shows revenue with none of the cost. Two months are wrong in opposite directions, and the swing is large enough to disguise whether either month was profitable.
Recording it is a journal, not a feature: debit work in progress on the balance sheet, credit revenue, then reverse when the invoice is raised. The work is in deciding the number.
- Value at cost, not at what you hope to bill. Hours times staff cost rate is defensible. Hours times charge rate assumes a realisation you have not achieved yet.
- Write down what will not be billed. A project that overran and will be invoiced at the fixed fee carries WIP that is not recoverable, and carrying it anyway is how firms discover a loss at year end instead of in month two.
- Review it monthly. A WIP balance that only grows is either a business that is scaling or a business that has stopped invoicing. Knowing which matters.
The check that tells you it is wrong
If your monthly gross margin swings by ten points or more without anything changing in how you work, the cause is almost always revenue and the cost of delivering it landing in different months.
The other direction
Money Billed and Not Yet Earned
Retainers, deposits and fixed fees billed up front are obligations until the work is delivered.
A twelve-month retainer invoiced in January is not January revenue. It is a liability released across twelve months as the work happens. Treating it as revenue on receipt inflates the first month, starves the following eleven, and leaves a firm spending money it may have to refund.
A repeating journal handles the release: set it once, and each month moves one twelfth from deferred revenue to revenue without anyone remembering. The same mechanism handles quarterly and annual arrangements.
Deferred revenue also answers a question buyers and lenders ask directly: how much of your reported revenue is already contracted rather than repeatedly won. A firm that can produce that figure from the ledger is in a stronger position than one that estimates it.
The tooling
What Xero Projects Gives You
Projects is included on the Established plan and covers the full cycle from quote to invoice to profitability, inside the same ledger.
The workflow
Create a project against a contact, assign staff, break the work into tasks, estimate time and set a charge rate for each task, estimate expenses, and send the customer a quote. Record time as it is worked, attach actual expenses back to the estimates, then invoice and watch profitability update in real time.
Staff cost rates
Each staff member carries an hourly cost rate, which is what makes project profitability real rather than notional. Charge rate minus cost rate is the margin on every hour, and Xero permissions cost rate visibility separately, so a project lead can manage delivery without seeing what colleagues are paid.
Invoicing that matches the billing model
Fixed price, time and materials, or progress payments, all raised from the project with the level of detail you choose to show the client. Bills, spend money transactions and invoice lines all link back to the project, so costs incurred against a job stay attached to it.
The reports
- Profitability dashboard, for an at-a-glance view of where each project stands.
- Project Financials, tracking tasks and expenses against budget.
- Project Detailed Time, including what proportion of recorded time is chargeable, which is utilisation measured rather than estimated.
- Project Staff Time Overview, showing time across all projects for a date range.
- Project Summary and Project Details, for the overview and the breakdown.
Project reporting lives in its own report set, which keeps job-level detail out of your statutory statements while remaining available to anyone managing delivery. Timesheet data can also copy through to payroll rather than being entered twice.
The design decision
Projects or Tracking Categories
Both give you job-level visibility. They answer different questions, and firms often need both.
| Xero Projects | Tracking categories | |
|---|---|---|
| Built for | Time, tasks, estimates and job profitability | Slicing the profit and loss by a dimension |
| Tracks time | Yes, with cost and charge rates | No |
| Best for | Individual jobs with a start, a budget and an end | Service lines, offices, client segments, partners |
| Volume | One record per job | Two categories per organisation, so pick the two that matter |
| Shows in | Its own project reports | Your standard profit and loss, filtered |
A common shape: Projects for the jobs, and tracking categories for service line and office. The job answers whether that piece of work made money. The tracking category answers whether that part of the firm does.
Where the firm runs on a practice management system that already owns time, scheduling and client records, that system stays the source of truth for delivery and Xero receives the financial result. The decision to make early is which system owns time, because two systems holding timesheets is a reconciliation nobody wins.
The metrics
The Two Numbers That Decide Profit
A services firm is profitable or not for two reasons, and both are measurable from the data Projects already captures.
Utilisation
What proportion of paid hours is chargeable. Project Detailed Time reports it directly. Low utilisation means you are paying for capacity you are not selling, and the fix is sales or headcount rather than pricing.
Realisation
What proportion of chargeable hours actually gets billed and collected. Hours written off at invoicing, discounts given to keep a client happy, and work absorbed on a fixed fee all reduce it. Low realisation means you are selling the capacity and giving it away, and the fix is scoping and pricing rather than sales.
The two failures look identical on a profit and loss and have opposite remedies. A firm that measures only revenue per head cannot tell them apart.
| Also worth tracking | Why |
|---|---|
| Gross project margin | Revenue less direct delivery cost, per job |
| Net project margin | The same after allocated overhead, which is what actually remains |
| Days sales outstanding | How long clients take to pay, which decides whether profit becomes cash |
| WIP days | How long work sits undelivered to an invoice, which is cash you have earned and not asked for |
Month end
The Month-End Additions
A services firm runs the standard close plus four steps that exist because it sells time.
- Value and post work in progress, at cost, with anything unrecoverable written down.
- Release deferred revenue for the portion of retainers and prepaid fees earned this month.
- Reconcile project costs to the ledger, so that costs attached to jobs and costs in the profit and loss agree.
- Review utilisation and realisation alongside the statements, because the accounts show the result and these two show the cause.
The standard sequence those sit on top of is in the month-end close checklist.
Questions
Commonly Asked
Is Xero good for a professional services firm?
Yes, particularly with Projects, which is included on the Established plan and covers quoting, time recording against tasks, staff cost rates, expenses linked back to jobs, fixed price, time and materials or progress invoicing, and a real-time profitability dashboard. The accounting judgments a services firm needs, work in progress and deferred revenue, are journals rather than features, and they are where most of the value in getting it right sits.
How do I record work in progress?
Debit a work in progress asset account on the balance sheet and credit revenue for work performed and not yet invoiced, then reverse when the invoice is raised. Value it at cost, meaning hours times staff cost rate, rather than at charge rate, and write down anything that will not be recovered because a project overran on a fixed fee. Review the balance monthly: WIP that only grows is either scaling or a firm that has stopped invoicing.
How should retainers be accounted for?
As a liability on receipt, released to revenue across the period the work covers. A twelve-month retainer invoiced in January is not January revenue. A repeating journal handles the release automatically, moving one twelfth each month from deferred revenue to revenue. This also lets you answer how much of your revenue is contracted rather than repeatedly won, which lenders and buyers ask directly.
Should I use Xero Projects or tracking categories?
Projects for individual jobs with a start, a budget and an end, because it tracks time with cost and charge rates and reports profitability per job. Tracking categories for slicing the profit and loss by service line, office or client segment. Many firms use both: the project answers whether that piece of work made money, the tracking category answers whether that part of the firm does. Xero provides two tracking categories per organisation.
Why does my monthly profit swing so much?
Usually because revenue and the cost of delivering it land in different months. Salaries hit the month the work happened, while the invoice lands whenever it was raised. Without work in progress and deferred revenue entries, one month carries cost with no revenue and the next carries revenue with no cost. A gross margin moving ten points or more with no change in how you work points at timing rather than performance.
What is the difference between utilisation and realisation?
Utilisation is the proportion of paid hours that is chargeable, which Project Detailed Time reports directly. Realisation is the proportion of chargeable hours that actually gets billed and collected after write-offs, discounts and fixed-fee overruns. Low utilisation means paying for capacity you are not selling, and the fix is sales or headcount. Low realisation means selling capacity and giving it away, and the fix is scoping and pricing. Both look the same on a profit and loss.