Does your P&L move each month like a roller coaster ? One month your profitability looks good and the next it is in the dumps, but you know your business is doing the same ?
This is often caused by not using a monthly closing process to identify distribution errors and properly allocating expenses to the correct month. This month will be Part 1 or what causes this, how to identify it happening, and how to fix.
I have written about the importance of “Closing Your Books” each month in many earlier articles, but we still see financials that have not been closed properly to account for many expenses that simply should not be included on the current P&L month, as well as expenses that have not been included as they should be. This is one of the key reasons our clients often do not trust the financial statements they get from QuickBooks… but they should be able to.
When you analyze your business it is important to do so in an Accrual Basis. You may elect to file taxes on a Cash Basis, but to get a true picture of your business, you should use Accrual. QuickBooks will default reports in Accrual Basis, but you can change them and memorize them so those reports to be on a Cash 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, and not when it may have been later paid.
Multiple Payments in Same Month
One of the most common causes of P&Ls fluctuating month to month is when payments are made for expenses that are for more than the current month.
This usually occurs from two scenarios:
Payments are made to the same vendor monthly account not using “Bill Payment”
Payment made is for an expense that is for more than one month expense
Not Using Bill Payment
We often see this when there is a payment made for an expense at the beginning of the month, and another for the same vendor at the end of the month. This often means that the first one was possibly for the expense the month before, or the second one was for the expense for the next month, paid early.
The best way to identify these issues is to run a Preliminary P&L report for the last 3 – 4 months and Show Columns set to “Monthly”
Figure 1 – Preliminary P&L showing discrepancy month to month same expense
The Internet Fees in this example have a possible issue in the second month, and last month. This should prompt you to double click the amounts and review them. In this case once reviewed it was noted two payments were made on the second month in which one was actually for the third month, and one of the payments made for the third month was also actually for the fourth month. Finally it was also identified that not all of this vendor’s bills have been entered in the fourth month as well.
This is where using the “Enter Bill” function stops this. The Bill Date when entered will place the expense on that date, even if you don’t actually pay that bill for months later. Then using the “Pay Bills” process will generate a “Bill Payment” which can be from any bank account, or credit card.
This is why instead of leaving bills unopened until you plan to pay them, is an incorrect process in your daily accounting/bookkeeping day. Our advise is to open your bills received daily and enter them as a “Bill” using the information provided on the bill. You can also memorize the ones that are the same each month, and have them entered automatically. In fact even if the amounts vary, you can have them enter automatically in which you will make the amount change, or set the Bill to remind you to enter … this will keep the expenses in the correct month.
More Than One Month Expense Another very common culprit is when expenses are paid for something that is actually for more than the month. Again run a Preliminary P&L Report for 3 – 4 months and the Show Columns set to Monthly.
Figure 2 – Report indicating expense may be for more than one month.
In this example there is an expense taken in the first month, but no additional costs for the three months after … this is a prime indicator the payment made in the first month was actually for multiple months. This is often common for expenses such as various insurance premiums.
In this case the expense paid was actually for six months, not just one month. To fix this the initial premium should be distributed to an “Other Current Asset” account as listed below 1630.00 Insurance Pre-Paid Premiums
Figure 3 – Other Current Asset Accounts for Pre-Payments You Have Made
Then the premium should be divided by the number of months it applies to, and a memorized transaction created to distribute from the 1630.00 Insurance Pre-Paid Premiums to the 6510.00 Liability Insurance Expense each month automatically.
In Part 2 next month, we will also look at what other transactions made, or not made, will also cause the P&L to become an out of control roller coaster.
Closing your QuickBooks monthly needs to be a high priority for all small business owners. You should have completed final monthly financial reports by no later that the 5th of every following month. I know most that are reading this, are no where close to this goal, but it can be done, and it is critical for the sustainability of your business.
But even if you do close by the 5th of each following month, do you spend adequate time to review what they are telling you about your business, your sustainability, and areas of improvement needed ?
In today’s business environment, this is a critical skill that needs to be mastered by all business owners, managers, and comptrollers. How is your business doing to your industry benchmarks ?
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 and provide the training and support needed to achieve their goals.
We have assisted businesses worldwide … why not yours ?
Thank You and I look forward in sharing QuickBooks Tips and Tricks with you next month …