I believe that no business owner should have to move off of their genius work to learn how to actually setup their QuickBooks themselves. Notice I said “set it up themselves.” This is important.
What I do believe is that every business owner should know how to think about their money. And if you, like so many purpose-based entrepreneurs, struggle with organizing the financial side of your business, then listen up!
The first thing we do when we setup your books, whether in QuickBooks or any other accounting system, is to design what is called a “Chart of Accounts,” which is a list (chart) of all the possible unique categories (accounts) that each and every business transaction takes. The term “accounts” here does not refer to bank accounts, but to General Ledger accounts. And it’s OK if you don’t know what “General Ledger” means. It’s not important here.
Creating a chart of accounts is not a low-level bookkeeping function. It requires a high level of strategic thinking. Creating your chart of accounts is very much like building a house: you have a much better chance of ending up with the home you want if you plan it out in advance. Otherwise you end up living in a rabbit warren!
So here’s what happens when you set up your chart of accounts: you think strategically. You understand the difference between types of expenses and why it’s important to group like expenses together in sections. Categorizing and segmenting your income and expenses is what gives you the reports that will tell you with pin-point accuracy how much you are making and spending. It gives you the ability to analyze where you’ve been so that you can plan where you want to go.
Say for example, that you’re putting together your budget for next year and you have a year’s worth of data to look back on. By segmenting your marketing expenses together, for example, you can create a report that shows how much you spent in marketing compared with all of your expenses put together. Say you know that successful companies in your industry have marketing expenses that fall in the 20-25% range and that yours were at 45% last year. You can make a strategic decision to reduce your budget for next year so that your marketing expenses get down to 25%. This is how analysis of historical data informs and shapes budgets. You look back so you can look forward.
Once you understand how to think about what to call your transactions, you can code them and a bookkeeper can do the data entry into QuickBooks. You can’t leave the coding and classification up to the bookkeeper. You are responsible for thinking about your business and translating that thinking into data; she’s responsible for entering that information into QuickBooks. A bookkeeper is never responsible for thinking about your business; she’s responsible for accurately inputting data into QuickBooks. That data then is organized by a well-designed chart of accounts to produce reports which provide you, the business owner, with information, so that you can think about your business and make strategic decisions.
You do the thinking, translate that thinking into data, your bookkeeper inputs that data, QuickBooks organizes the data into information, and you (always back to you) use that information to tweek and re-think. It’s feedback analysis, really. Voilà!, you’re now thinking strategically.