Part 1: Get A Grip .. On Your QuickBooks Records

If your internal financial statements are becoming unruly and hard to read, you are not alone. Commonly, businesses start with a basic set of accounts but, as the business expands, the accounts multiply until a simple P&L statement has almost as many line items as the federal budget.   You can’t expect to make sense of disorganized financial information, and likewise your accountant and your banker will not be able to advise you properly. It’s time to get a grip.

Step #1:   Clean up that Chart of Accounts!

Here at CLM Advisors, we always help our clients organize their Chart of Accounts in Quickbooks accordingly to a standard format.   Here are some basic themes:

  • Account Numbering is important.   For instance, establishing that everything in the “1000” series in Cash, everything in the “4000” series is Income, the “5000” series is Cost of Goods Sold, and so on, gives good form and structure to your financial statements that helps you isolate categories for better analysis.
  • Account Names are important.   Be specific and consistent with account names.   If you have three bank accounts, label them clearly as “C/B” (cash in bank) and then, for instance, as Operating Account, Savings Account, Payroll Account.   Include the name of the bank. So, an example would be: “1000 – C/B Operating – Main Street Bank.” If you have a dozen different loans, label them all as “L/P” (loan payable) with the name of the lender.   Apply a consistent protocol to all accounts and do not deviate – it will save you time and reduce difficulty in comprehending your financials.   
  • Use Sub-Accounts.   One smart way to keep things organized, yet detailed, is to set up a Header Account, like “6000 – Sales and Marketing” and then employ sub-accounts such as “6010 – Advertising”, “6020 – Sponsorships” and so on.   Never post any transaction to the Header Account, but only to the sub-accounts. That way, you can use the Collapse function in Quickbooks to focus in on just the major account categories – and if you want to see more detail, you can expand to see all the sub-accounts.  
  • Eliminate duplicate accounts.   Accidental duplication can happen easily.   You originally set up an account called “Travel Expense”, but then your new bookkeeper didn’t notice it, and unwittingly set up a different account called “Business Travel” – and you now have transactions entered in both accounts.   Quickbooks will allow you to merge those accounts into one or the other, and make the rogue account Inactive.   

These solutions are not difficult, but nevertheless many business owners are not adopting these sound practices – usually because it seems time-consuming to clean up.   But you will spend more time sifting through sloppy data, and lose the ability to analyze data quickly for decision-making. For Part II of this series, we will write about how to make your financial records even stronger by using Classes and Items in Quickbooks.

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