Scott Gregory, QuickBooks Expert

Building Better Business Finances - The QuickBooks Profit and Loss Report

Are you running a profit and loss report (aka an income statement) for your business every month?

If not, you should be!

WHAT IS THE PROFIT AND LOSS REPORT?

This report gives you a very handy recap of your income and your expenses. And of course, the difference between the two (and this is where we cross our fingers that there is more income than expenses!).

The profit and loss report quickly summarizes the various transactions that you have entered throughout the day, week, month, etc. (i.e. invoices, checks, etc.)

THE PROFIT AND LOSS REPORT IN QUICKBOOKS

Click Reports (in the menu bar) > Company and Financial > Profit and Loss Standard. From there, you'll see the report for the current month-to-date as shown in the sample below (click the image for a larger view):

This report helps you quickly see how your expenses stack up against your income. From there, you can develop plans to either increase your income and/or reduce your expenses in the weeks or months ahead.

Don't run this report only at tax time. Better - run it at the end of every month so there are no surprises. It will help you know exactly what is going on.

RELATED INFORMATION:

• 15 Trouble Spots that May Be Lurking in Your Business Finances

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Accountants: Your opinion on the cash vs. accrual question for small businesses?

Since I don't do taxes (other than my own), I find the annual debate about keeping the books on a cash vs. accrual basis quite interesting.

My understanding of these methods is pretty simple:

• For the ongoing financial management of the business, the accrual basis is the way to go
• For tax reporting purposes, the cash basis is the way to go (under the assumption that the business is not forced by the tax laws to use the accrual method of course). Why would you ever want to file your taxes on income you had not yet received?

In doing some QuickBooks consulting work recently, I have come across two accountants that insisted that filing the business taxes on the accrual basis is the preferred way to go (again, these businesses were not forced to choose this option).

NOT TO BE CONFUSED

For businesses that are using QuickBooks, my thought is that they choose "accrual" as their default method of reporting for running reports during the year.

Then, at tax time, their accountant does the "magic conversion" of the accrual values into their cash basis equivalents. But this magic act only happens once per year at tax time. The rest of the year, the business owner focuses on accounts receivable, accounts payable and other financial report data produced on the accrual basis.

WHAT AM I MISSING?

Do you insist your clients file their business taxes on an accrual basis? If so, what are the advantages to them of doing it that way?

Weigh in with your opinion in the comments box below. Thousands of small business owners eagerly await your insight!

RELATED POST:

• QuickBooks Should Come with a Warning Label

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Can I Set My Own Invoice Number Sequence in QuickBooks?

If your business has a desire to use their own invoice numbering sequence, QuickBooks can help with that (up to a point...).

By default, the very first invoice you create in QuickBooks will have the number 1 associated with it. From there, QuickBooks simply adds +1 to the number to get the next invoice number. For many businesses, that game plan works like a charm.

However, let's say that your business wants to start (or modify) their invoicing with the number 5000 instead of the number 1. Tackling that need is easy to do.

SETTING YOUR OWN INVOICE NUMBER SEQUENCE

If you want to start your own sequence, here are the steps to follow...

• Create the invoice as normal
• Before you save it, go to the invoice number box, erase what is there and enter what you want it to be. In the example below, the invoice number 5000 has been entered. Once you save this, the next invoice number will be 5001, etc.

DOUBLE-BONUS! This same process works with quotes, sales orders and purchase order numbers in QuickBooks. Each one of these forms runs on their own unique numbering, so if you wanted to start your sales orders with the number A1000, just follow the steps above and enter A1000 for the sales order number.

LIMITATION AND SUGGESTION

If your business is trying to use a more complicated scheme, QuickBooks may have some trouble.

Example - if you want your invoice number (or quote #, etc.) for salesman 1 to be 1-1000, etc. and for salesman 2 to be 2-1000, QuickBooks will only add one to the last number that was typed into the invoice number box. This will require you to manually look up and enter an invoice number each time so that this type of sequence works for you.

Key Consideration - with the many ways that QuickBooks provides to look up and find information, setting up a complicated numbering system like this example really is not necessary. In fact, it really gums up the works for no good reason that I know of. What I usually find is that these types of approaches are carryovers from really old accounting software that didn't allow the easy lookup of information.

Are there situations you have where you need a specialized numbering scheme beyond what QuickBooks provides? Please share your thoughts in the comment box below.

RELATED POSTS:

• How to Easily Duplicate an Invoice, Sales Order or Quote in QuickBooks
• How to Combine Multiple Sales Orders into One Invoice in QuickBooks
• 5 QuickBooks Invoicing Tips for Faster Payment

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Tracking Jobs and Projects in QuickBooks - New Webinar

Want to develop a better understanding of tracking jobs and project in QuickBooks?

Please join me for my upcoming webinar and learn the following:

• How to create a new job from scratch
• Understand the differences between customers and jobs
• How to create and categorize job types
• Assigning income and expenses to jobs
• Tracking job estimates vs. actuals
• Much, much more...

DON'T WORRY: If you can't make the live webinar, it will be recorded and a link provided to everyone that registers for viewing at your convenience.

Is Your Accountant Bullying You?

I'm curious...

When you asked your accountant about choosing accounting software for your business, is this about how the conversation went:

YOU: "I want to get my books in order for the new year. What accounting software do you think I should use to do that?"

YOUR ACCOUNTANT: "I think you really should use QuickBooks. Many of our clients use it and it is a very popular package."

Here is my translation of what your accountant really meant...

"Since we don't know about or use any other accounting software other than QuickBooks, it has to be the right choice for you. Oh, and by the way, even though we're accountants, we really only know how to use QuickBooks for what WE need it to do. When it comes to helping you understand how to use it for what YOU need it to do, we really can't help you there either".

SAD BUT TRUE

Unfortunately, I have heard this dialogue repeatedly over the years.

The conversation on the topic of accounting software is usually very slanted in terms of what will make it easiest for the accountant. Not what will make it easiest for you on a daily basis.

And that's too bad. It doesn't have to be that way.

WHAT IF QUICKBOOKS IS OVERKILL?

In my mind, there is no question that QuickBooks is a fantastic software package. Especially when you consider the price point. It provides an incredible amount of tools and functionality that allows small businesses to keep track of their finances. I have been providing QuickBooks consulting and training services since 1999 and plan to continue doing so for many years.

But...

For many small businesses, QuickBooks may simply be overkill. These businesses don't need a full-blown general ledger and all the complication that comes with it.

SOME REAL WORLD OBSERVATIONS

Tradtitional accountants tend to get the jitters if they aren't working with accounting software that has the capability to prepare a balance sheet, trial balance, journal entries and historical detail back three centuries ago (ok, that last point is an exaggeration, but you get the idea).

Here is the reality as it applies to many small businesses (and I'm talking about those with revenues less than $100-$200k):

• My experience has shown that if they do run a balance sheet, it is almost completely wrong a large percentage of the time. Why bother with it then? Let the accountant prepare a correct one at the end of the year instead.
• If you mention the phrase "journal entry" to many small business folks, their eyes instantly begin to glaze over.
• Many accountants don't trust the numbers they get (for good reason in many cases), and they end up completely re-keying data into their own bookkeeping or tax preparation software. So if they do this, why are they forcing their clients to live in the world of QuickBooks when simpler alternatives exist?

WHAT ALTERNATIVES ARE OUT THERE?

The beauty of "web 2.0" is that there are some new accounting software vendors that offer some really compelling products.

A few of them that come to mind:

• Freshbooks
• Less Accounting
• Xero
• Indinero

WHAT DO YOU NEED YOUR ACCOUNTING SOFTWARE TO DO?

This is the key question that your accountant should be asking you to help you make an informed decision.

For example, if you need your accounting software to handle purchase orders or sales orders, many of the examples listed above will get knocked out of consideration because they don't offer that functionality. And that is perfectly fine. You've identified what you need and they might not have it.

But...

What if you only need your accounting software to take care of invoicing some clients, keeping track of a checkbook and producing a profit and loss statement every month so you can see how the business is doing?

If that is the case, the world of alternatives just got bigger.

EASIER DOESN'T MEAN MISTAKE-FREE

If you are an accountant reading this post, I know what you're thinking. It doesn't matter how easy the software may be - we'll have clients that mess it up. And you are absolutely right.

The issue of whether a business should even be doing their own bookkeeping and accounting is definitely one that is debated frequently. But you know the outcome of that debate - until a business owner has tried to do the books themselves first, they don't see the value of outsourcing it or bringing someone on board who "gets it". Why not try to make it as easy as possible right out of the gate, rather than introduce all the complexities of QuickBooks first thing?

GRADUATE TO QUICKBOOKS - THE ULTIMATE GOAL?

QuickBooks has been around for decades now. They have a 90%+ share of the small business accounting market for good reason. Everyone know about them.

However, all you need to do is follow a Twitterstream for a few days, and you'll no doubt see comments coming through such as (these are actual quotes I have seen!):

•  "I think QuickBooks just broke my brain"
• "QuickBooks is making me pull my hair out. Soon = bald."
• "There it goes again. QuickBooks sucking all the oxygen out of the room. How rude."

When I first discovered Freshbooks a few years ago, I struck up a great conversation with a VP (who has since left the company). One remark he made really rang true, and it was:

"We hope that our clients ultimately get big enough and sophisticated enough to graduate to the world of QuickBooks. If they do that, everyone is a winner."

I couldn't have said it any better myself.

WHAT'S YOUR TAKE?

It would be great to know more about your perspective on this issue that many small businesses face every day.

Feel free to post a comment in the box below!

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Loan Principal Payments Should NOT Show Up on Your Profit and Loss Report

A very common problem I see in QuickBooks files is this...

1. A business takes out a bank loan.
2. Monthly payments are made on the loan
3. The entry in QuickBooks to record the payment is wrong, with the end result being the distortion of the profit and loss report (in some cases, a BIG distortion) and a distortion of the balance sheet report (which shows what a business owns and what it owes).

Some accounting concepts you need to know...

• Every monthly payment to the bank includes some loan principal and also interest (unless it is an interest only loan - if so, that is not the topic of our discussion).
• The only portion of that monthly payment that qualifies as an expense to the business is the interest portion. No matter how much you want it to, the repayment of the principal is NOT an expense of the business and should NOT show up on your profit and loss report.
• The bank (or your tax CPA) should provide you with what is called an "amortization table" (now there is a mind-numbing term if ever there was one!) that details out how much of each payment is principal and how much is interest. Having this information makes the monthly entry in QuickBooks a snap.

BY EXAMPLE

Let's say that your business is making monthly payments of $250 on its' loan. To keep our example very simple, let's also say that the bank has told you that of each $250 payment, $35 is interest and $215 is principal (the reality is that the interest portion usually decreases over time and the principal portion increases).

When you write the check in QuickBooks to record this payment, three things need to happen:

1. The balance of your bank account will decrease by $250
2. The balance of your bank loan will decrease by $215 (not $250), the principal portion of the payment. If the loan was set up properly, you should have an account in your chart of accounts in the "long term liability" section called "Bank Loan"
3. Your interest expense will increase by $35. This $35 should show up as "Interest Expense" on your profit and loss report.

What I often see is this - the checking account goes down by $250 and the interest expense goes up by $250. Not correct at all.

So, in accounting-speak, to recap the above, you have a credit to your checking account for $250, a debit to your bank loan liability account for $215 and a debit to your interest expense account for $35. Voila - your debits and credits equal!

RUN, DON'T WALK!!!

If any of the discussion above gives you a headache, it is essential that you run (do not walk) to a QuickBooks expert to get your loans and loan payments set up properly.

Naturally, the more loans (and various types of loans) a business has, the more complicated this process can get.

In a future post, I'll discuss the QuickBooks Loan Manager that may help simplify the administration of your bank loans.

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Looking for Bookkeeping Courses or Online Bookkeeping Training?

Do you sometimes feel like "an accidental bookkeeper"?

You are not alone in that feeling.

In fact, I often hear clients saying "I wish I knew more about bookkeeping and tracking the finances for my business"

YOUR SOLUTION IS HERE

I have created a webinar series, called "The Accidental Bookkeeper" just for you.

This online bookkeeping training series will help you learn more about keeping your books, understanding critical terms, getting your accountant the information they need and improving your financial picture.

MY "ACCIDENTAL BOOKKEEPER" WEBINARS

• Sorting Out the Basics of Bookkeeping - in this webinar, you'll get an in-depth understanding of the chart of accounts and important bookkeeping terms and concepts; get a handle on the differences between debits and credits and why you should care about that; learn how to interpret and understand the differences between cash and accrual basis and more.
• Handling Tricky Transactions, Why Reconciling is Critical to Your Success, and 5 Tips to Improve Your Internal Controls - in this webinar, I'll provide insight on how to deal with the things that drive you nuts. Things such as personal expenses paid by the business, business expenses paid by the owner, writing off customer balances, transferring money between accounts AND between businesses, handling petty cash, bartering, and much more.
• Understanding the End Results of All Your Hard Work - learn about what financial reports to print, when to print them, what information your accountant needs, understanding a profit and loss report, ideas to improve your bottom line and much more!

BEST OF ALL

If you can't make the dates of the live events above, sign up anyway!

Each webinar will be recorded, and you will have 24/7 access to the contents of the webinar for a period of 30 days once the webinar has ended. You can play back the information as much as you like.

YOU DON'T HAVE TO HAVE QUICKBOOKS TO ATTEND!

It is not essential for you to have QuickBooks or Peachtree to attend these webinars. Everything will be presented in such a way that you'll better understand it regardless of what software you use to track your business finances. I will be using QuickBooks to demonstrate some of the concepts so you can see them visually, but you do not have to have it at the time of the webinar.

YOUR SATISFACTION IS GUARANTEED

Each of my webinars comes with a complete money-back guarantee. Not happy with the content or delivery? Just request a refund, and it will be delivered. No questions asked (other than to learn more about how I can improve things).

SEE YOU ON THE WEBINARS!

Whether you take one, two or all three of my online bookkeeping training sessions, I look forward to having you on the webinars and helping you boost your bookkeeping skills and knowledge!