ACCA Now - March 2019

Business Buzz By Tom Grandy Making Your Accounting SystemMore Useful I f your accounting system is just to col- lect data for your accountant to file your taxes you have missed the point. Yes, we all must file taxes and yes, we need a system for doing that. However, your accounting system should do more than help you file your taxes, it should help you run your business more effi- ciently and profitably. Having worked one-on-one with con- tractors for over 30 years, I have noticed a fewthings about accounting systems. Below are a few thoughts that might help you turn your tax data collecting system into a more useful tool to help run your business more efficiently and/or profitably. CREATE “USEFUL” CATEGORIES. For an accounting system to be of benefit; income, expenses, and cost of goods need to be split out into simple, but understand- able categories. Don’t just list “Utilities.” Have a heading that says Utilities with sub categories for gas, electricity, water etc. The same goes for “Insurance.” Create subcategories for life insurance, vehicles, workman’s comp, etc. Similarly, break out your income by depart- ments. If you only do service and installation, two depart- ments, or categories, are suf- ficient. However, if you also do commercial work and/ or new construction those departments’ incomes need to be split out as well. By the way, create an income category for main- tenance agreements, if you offer them. There are lots of reasons to track main- tenance agreement income separately, which we will touch on in another article. Your accountant may tell you this amount of detail is unnecessary. If you are the one filing taxes that may be true. However, if you are the company owner, you need to know where every dime comes from and where it went in language you understand. KNOW WHAT “OTHER” MEANS. Many contractors use QuickBooks. When cat- egories and subcategories are created it’s not unusual to view a P/L Statement and notice a subcategory, that you did not create, called “other.” What that means is the person entering the data put the infor- mation in themain header category rather than one of the subcategories. When that happens QuickBooks automatically cre- ates a new subcategory called “other” and sticks it in there. If that happens, simply double click “other” on your P/L State- ment and it will bring up the detail and allow you to reclassify it into the correct category or subcategory. DEVELOP A BUDGET. Once you have a years’ worth of detailed data in your accounting system it’s time to create a budget for the coming year. To my knowl- edge, every accounting system (large or small) has a place the owner can create a budget, by month. QuickBooks has one by clicking Company/Planning and Bud- geting/Set Up Budgets. Since you already have all the proper categories developed within your system creating next year’s budget is pretty straightforward. To create a budget simply review the past 12 months actual income and expenses and ask yourselves one simple question, “Will this income or expense go up, down, or stay the same next year?” A second question is “When” do you expect to pay it, what month or months? Plac- ing income and expenses in the proper months begins the process of creating the cash flow part of your budget. REVIEW BUDGET VS. ACTUAL EACH MONTH. Now creating a budget is of little value if you don’t use it. It’s kind of like buying a brand-new car, but never taking it out of the garage. You feel great because you own it, but it has no practical value. Each month review your Budget vs. Actual Report. The objective is to find out how close your actual figures are to your budgeted figures. Note any significant differences asking yourself why it’s dif- ferent and what, if anything, can you do about it. You are now beginning the pro- cess of managing your business. Keep in mind that the ultimate goal of budgeting to develop proper pricing, by department. Having accurate cost information is the foundation stone for setting profitable hourly rates. Next issue we are going to look at breaking materials out by department and budgeting your salary. We will also discuss a couple things that will never show up in a standard P/L Statement but have the potential of putting you out of business. Lastly, we will discuss finding the “right” accountant to review your numbers with each month. Tom Grandy is president of Grandy & Associates, producers of the well-known “Business Boot Camp” training series. / PART 1 / MARCH 2019 18