In last month’s QuickBooks & Tricks we looked at two very common improper postings that will cause your P&L to move each month like a roller coaster, and how to fix them. They are the most common cause, but the amounts they affect are normally much less than the two we will be looking at this month.
I can’t stress enough about the importance of “Closing Your Books” each month properly, but often this one lack of process can wreck havoc on the accuracy of financial statements.
Remember, it is a key point to always analyze your business in an Accrual Basis. Accrual Basis analysis allows for the expenses to be taken in the month they occurred, and not necessarily when they were paid. This is a key feature for creating a “Bill” in the month the expense was due as shown in last month’s information.
The next two include:
- Other Accruals
- Inventory Adjustment (Or actually the lack of each month)
Accruals, or the lack of, can cause specific months to fluctuate, and many business owners don’t consider how much they do affect the monthly financials. So what are Accruals ? They are expenses to your business similar to the Pre-Payments we looked at in our last month’s QuickBooks Tips & Tricks, but almost in reverse.
Expenses that should be considered to accrue for the entire period include:
- Vacation Pay
- Sick Days/Personal Time Off Days
- IRA Employer Contributions
- 401K Employer Match Contributions
As an example, Year End Bonuses … Was the bonus actually just for December ?
Or was it a bonus for the services performed for the entire time they worked during that year ? These expenses when improperly posted hit the month’s financials for only that month when they should have been accruing for a longer period and spread over that period.
At the beginning of each year, you should determine your yearly “Budget” for your accruing expenses and divide it by the number of months it represents.
Then create a memorized transaction (either a Journal Entry or a Zero Dollar Check) to add it to the Accrual Account this amount and cost to the appropriate Expense Account.
When the payment is actually made, it is charged against the Accrual Account, not the expense account. This way the actual costs are distributed for the entire time it represented, and not all at once during a specific month. This can have a significant impact on specific months, especially often for December.
Even month end or quarterly bonuses should be accrued before the month is closed, so they can be paid accordingly in the following months.
In many businesses there is a large amount of inventory present to expedite the processing of the sale. In service businesses this is often a major reason why the P&L moves so much each month, if not accounted for properly.
It may be a wise decision to purchase fast moving products in larger quantities to get better pricing, but it does not mean the cost of these purchases should hit the P&L all at once either.
It is important to realize that it is not correct to “cost out” the purchases for products used in your business unless they are consumed during that accounting period. In other words, just because you bought it and paid for it doesn’t mean you should cost it out 100% unless it is fully consumed during that same month. This is the point for tracking inventory and managing it.
QuickBooks does have a rudimentary inventory program built in to QuickBooks Pro and Premier, and a more advanced program available in Enterprise. However, for most service businesses this program isn’t quite what is needed.
In service type businesses there are many 3rd party options that allow you to track and manage your inventory. Setting them up to manage “all” your inventory does take a little time and planning, but this is well worth it.
Many of these 3rd party systems are included with your vendor relationships of their products; some are part of an industry management system. They often have bar code scanning options that allow your staff to login what items they needed, when they got them, and what job they needed them for. They can often create an invoice for billing purposes as well. The key feature of a good system is that it will allow you to add different categories or departments, plus additional products not necessarily sold by that specific vendor. This allows you to use one system for your entire inventory.
So What Should be Considered Inventory ?
Businesses of different types will include items that other businesses may not have but here is a short list you may not be considering: boxes of copy paper, laser and inkjet cartridges, boxes of checks, stationary and other office supplies, cleaning supplies, and maintenance supplies are just a few examples.
Then for specific businesses there may be: antifreeze, oils, filters, tires, bulbs and fuses, nut bolt and clip assortments, preparation materials, refinish paints and clears, mixing toners, mixing cups, reducers and thinners … again but a few, but can cost thousands of dollars, and swing your P&L as much each month.
Depending on the business, you may be tracking costs for inventory in several General Ledger Accounts (GL). Cost Accounts may include Cost of Goods Accounts (COGS) for Parts, Materials and Supplies. They also may include other supply, safety items, and small expenses tools being tracked as an Expense.
Month End Inventory Adjustments
Setting up an inventory control system with categories for different types of inventory is important since the month adjustment may need to be performed on different GL accounts. Having different categories set up will make it much easy to distribute the adjustment to those different accounts.
There are two basic methods to handle inventory each month. Both require a way to evaluate your inventory value each month … again the easiest way to do this is with a software solution. However, periodically, a manual physical inventory will need to be done to confirm the inventory. This is often done either quarterly or year end. This process will identify areas of possible theft, or if not using the system properly is an issue.
During the month, the first method all your vendor invoices (Bills) for items included in your inventory that come in should be properly coded and distributed to the proper COGS and/or expense accounts. Then at the end of each month the “Change to Your Inventory Value” should be used to adjust your COGS and/or Expense Accounts.
The second method requires that all Vendor Invoices (Bills) of inventoried items during the month are distributed to an inventory account, rather than a COGS and/or expense account. Then at the end of each month the true cost of your expense purchases should be calculated and entries made to your COGS and/or expense accounts to the monthly costs.
To Determine Your True Cost:
As an example, your tire inventory at the beginning of the month was $17,500.00. During the month your purchases total to $10,000. Your ending inventory value was $16,500.00.
True Cost Month End Tire COGS would be $17,500.00 + $10,000.00 – $16,500.00 = $11,000.00
Key to Managing Inventory:
Evaluating the value at the end of each month is the key to properly managing your inventory, and the determining the adjustments needed to properly account for the fluctuations it causes. There are some items in each business type which provide challenges to do this, but they can be overcome if proper storage, distribution, and software are implemented.
From examining hundreds and hundreds of financials for small businesses worldwide, this is the second leading cause for roller coaster financials, but almost never accounted for properly. Isn’t it time to begin managing your Inventory ?
In our next month’s QuickBooks Tips & Tricks, we will conclude our look at what normally is greatest cause affecting the P&L leading to an out of control roller coaster.
Well we have just finished our Labor Day Holiday, and going to finish up the third calendar quarter before you know it. This is the time to begin planning for year end, and the new year as well, not in November or December.
Is your company file getting to large ? Are you getting close to the limits we have discussed in previous QuickBooks Tips & Tricks ? This is the time to assess the situation and make plans for year end and a new year. Waiting until your company file crashes, is not a very good business decision and can cost you a lot of frustration and extra money.
Are you thinking about upgrading your chart of accounts to reflect a better detail for your financials ? If so, the best time to make the transition is at year end. However, to schedule this type of project, needs to be done now, and not wait until November or December.
In addition, closing your QuickBooks at the end of the year needs to be a high priority for all small business owners. To do the year end normally requires a great deal of “Clean Up” to correct accounts and verify them for a good new year beginning, and certainly before you turn them over to your CPA for tax preparation.
There are several resources you should consider to get assistance in this area… the first being our company AEII, QuickBooks R Us. We are here to assist any small business with these services, and provide the training and support needed to achieve their goals. We have assisted businesses worldwide … why not yours ?
If you have missed our earlier issues of QuickBooks Tips & Tricks, you can catch up on past issues by Clicking Here
Thank You and I look forward in sharing QuickBooks Tips and Tricks with you next month …
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