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Selling Your Small Business: Winging It In QuickBooks

Posted on September 5th, 2020

Jack Kern
Owner, President
Outsourced Accounting Department, Inc.

As I tell prospective clients for our services, “QuickBooks has done a remarkable job of marketing its product as ‘easy to use’ — but that is also what makes QuickBooks easy to abuse.”  The truth is, QuickBooks will allow you to do just about anything you want, whether is it is correct from an accounting standpoint or not.  So you can be going along thinking everything is working just fine, when the reality is your financial statements are a total mess.  And your tax accountant is not going to clean all of this up at the end of the year either.  That’s too much work to do during tax season.  Instead, they’re going to extrapolate from QuickBooks only what they need for tax purposes, and instead rely more heavily on your reconciled bank statements.

As a QuickBooks ProAdvisor, we are often contacted to clean up a client’s QuickBooks file, and for the above reasons, their books are a total disaster.  Then one day the small business owner wishes to sell his business, and all of a sudden, the historical accuracy of his or her books has become urgent.

As a case in point, our firm was recently engaged by a small business owner’s CPA to clean up his books, as she had reached a point where she was no longer able to “work around” his massive mistakes.  Just about everything he was doing in QuickBooks was the wrong way to do things, and his financial statements and reports reflected this. Normally when we receive an engagement like this, our approach is to tie the client’s books to the CPA’s most recent tax return, usually the previous year, and then start the QuickBooks clean-up from there. In this case, however, after only a short period of time working on his books, the owner informed me that he had a prospective buyer for his business who needed certain information as soon as possible.  The information they requested, after their preliminary view of his file that he had sent them, is shown here in their Due Diligence List.

Since the inception of the business, this client had been using QuickBooks mainly to enter supplier invoices and record inventory purchases, and to create customer invoices to send to his customers for payment.  He knew nothing else about QuickBooks, leaving everything else to his CPA who, as described above, was mainly concerned with reconciling the bank accounts to prepare his tax return on a cash basis.  This ignores most of the accrual accounting information requested in the due diligence list.

Selling a small to medium-sized business is a complex venture, and many business owners are not aware of the the things prospective buyers look at.  So if you’re thinking about selling your business, the first step is to be able to provide accurate financial statements going back three or more years.  That is what will be needed to prepare an accurate business valuation to determine how much your business is worth.  And rest assured, potential buyers will scrutinize every aspect of your business.  Not being able to quickly produce financial statements, current, and prior years’ balance sheets, profit and loss statements, tax returns, equipment lists, product inventories, and property appraisals and lease agreements, may lead to loss of the sale.

Suffice it to say in this situation, the clean-up process suddenly turned in a whole new direction, the timing was critical, and much of it could not be recreated at this late stage.  Even if the sale goes through, you may not be able to get the price that the business would otherwise be worth if you had been able to produce an accurate financial history as requested by the buyer.  Thus, it’s important to maintain your books properly from the start, as someday you’re going to be asked to produce that information, whether it be to sell your business, or simply to obtain a bank loan.  And if you’re not comfortable with doing this yourself, then outsource it to someone who does have the expertise.

Related Articles:

Profit vs. Taxable Income

Winging It in QuickBooks

Larry’s Exit Strategies, Inc.

The Difference Between Your CPA and a Controller: M-1

Securing a Small Business Loan – Part III: The Application

 

 


QuickBooks Desktop vs. QuickBooks Online – Which is Better?

Posted on May 22nd, 2020

Jack Kern
Owner, President
Outsourced Accounting Department, Inc.

I am a Certified QuickBooks ProAdvisor and have been using the original Desktop version since 1996.  In recent years, QuickBooks has been heavily promoting its Online version, and because of that, a lot of new QuickBooks users are jumping on board.  First, let me come right out and say this:   We frequently receive inquiries for consulting with QuickBooks Online by people who are trying to use it and most likely, making a total mess out of it.  It functions completely different than the original Desktop version, and in our opinion, it is inferior in many respects, and calls things differently in the Online version which makes it that much harder and time consuming to correct things.

Now, after that, if you are still considering doing your bookkeeping yourself and trying to decide between QuickBooks Desktop and QuickBooks Online, here are some things to consider:

  • Navigation: If you are used to using the Desktop version, as mentioned above, QuickBooks Online functions completely different. Various things are called and located differently almost, it seems, for the sake of calling and locating them differently.
  • Reporting Capability: In my experience, the reporting capability in the Online version is not nearly as robust as the Desktop version.
  • Support: For the above reasons, I’ve found that to do just about anything in the Online version, I had to call Online support, a monumental waste of time!

The reporting capability in particular in the Desktop version is one of its major benefits.  This is extremely useful not only for researching accounting issues, but the ability to create and memorize numerous customized reports for the client for managing their business.  And as a former CFO /controller, I believe that the most important thing to come out of an accounting software are meaningful financial reports.

Now, what many people are not aware of (because QuickBooks doesn’t promote this service for themselves), is that there are companies that also provide access to the traditional Desktop version via the “cloud,” and have the Intuit certification of “Authorized Commercial Host – QuickBooks.”  In our business, we use Ace Cloud Hosting to support the Desktop version.

In the past when I’ve tried to use the Online version, I found myself spending most of my time “re-learning”QuickBooks, sometimes only to find out in the end that what I want to accomplish isn’t available in the Online version.  I’ve also read that many Online users are complaining about both software glitches, and issues with Online support.  I’ve rarely ever experienced software issues with the Desktop version.  But if I do, I have access to both Ace support staff, and as a QuickBooks ProAdvisor, unlimited access to QuickBooks ProAdvisor Support – and at no cost to my clients.

And I am not alone in my views of QuickBooks Online. I’ve been told on more than one occasion by ProAdvisor Support staff that they hear the same frustrations from most CPAs and accountants regarding the Online version. When I asked one of them why it was designed differently, his response was, “Because the desktop version is too powerful to create online” (meaning without being hosted in its entirety on a remote server).

In the area of “pricing,” a QuickBooks comparison chart shows $70 per month for Online Plus (currently discounted to $35), or $840 per year ($420 as of the date of this writing).  According to the chart, Online Plus is (“theoretically”) the closest in capability to QuickBooks Pro, the latter of which is what we have most of our clients purchase, and currently sells for a one time purchase price of $299.95 (retail before our ProAdvisor discount which fluctuates).  However, with the Desktop version, it is NOT imperative that you upgrade to the newest release every year for at least three years, when QuickBooks stops supporting it with maintenance relaeases.  The improvements each year with the Desktop version are mostly cosmetic, and would be of interest primarily to the most advanced QuickBooks users (which most small business owners are not).

Finally, in our case, a monthly user fee of $44 is paid to Ace Cloud Hosting which includes unlimited 24/7 support by phone or email.  (And as mentioned above, as a ProAdvisor, I also have unlimited free access to QuickBooks ProAdvisor Support.)

Ace Cloud Hosting recently published an article in their blog comparing QuickBooks Online to QuickBooks Hosting.  This is part of what the article concludes:  “Hosting [QuickBooks] on the cloud can offer you the flexibility and mobility benefits of the cloud, along with all the features available in the desktop version.”

But that all said, regardless of which QuickBooks you use, let me now say this:  QuickBooks has done a great job of marketing its software as being “easy to use,”….. but, that’s also what makes it easy to abuse.  Most QuickBooks users we’ve worked with have no idea of the accounting mess they’re making, and that’s when they throw up their hands and turn to us to do a major clean up their books.  Our philosophy is to relieve the client from the bookkeeping headache as much as possible by doing most of the data entry ourselves, and WE use QuickBooks Desktop and we do not support the QuickBooks Online version.

So, with our firm, some clients have access to their QuickBooks file, others do not and don’t care.  But if they do need access to their file, we still try to make things as simple as possible for the client, and therefore, for us, which is to the benefit of the client in more ways than one.  In those situations where the client does not need access, we are paying for our own user fees, the client is paying nothing for QuickBooks hosting, not even for the purchase of QuickBooks.  Instead, our clients are paying us to do their monthly accounting and bookkeeping accurately, thus freeing themselves up to focus their full attention on their own business rather than “learning” QuickBooks.  Those business owners are, in effect, factoring in the “opportunity cost” of doing the bookkeeping themselves, or hiring a full-time bookkeeper at $25,000 to $35,000 a year, or even half of that for part-time.

So to summarize our position on all of the above, if you:

  • Are NOT interested in struggling with the bookkeeping (regardless of which version), or;
  • Are NOT interested in learning QuickBooks all over again if you’re accustomed to the Desktop version, and;
  • ARE more interested in managing your business, and letting someone else worry about which bookkeeping software they want to use, or;
  • Just want to perform minimal bookkeeping tasks yourself with someone overseeing and adjusting your work;

Then, consider a third alternative of outsourcing the bookkeeping to those who specialize in it.  In terms of the services we provide, as stated earlier, we do not encourage our clients to spend a lot of time “learning” QuickBooks, most of whom just end up making a mess out of it.  But rather, we encourage our clients to focus on their own business, and let us take care of the (tedious) bookkeeping and accounting tasks. Therefore, we do not wish to spend a lot of unproductive time ourselves, either, relearning QuickBooks for the sake of relearning it, and at our client’s expense.

In a nutshell, simply ask yourself, “How do I prefer to spend my time, learning QuickBooks, or running my own business?”

Related Articles:

4 Reasons Why You Should Consider Outsourcing Your Bookkeeping

The “Opportunity Cost” of Being Your Own Bookkeeper

Part-Time vs. Full-Time Accounting Staff

 


Why Outsource Your Bookkeeping?

Posted on April 26th, 2017

Jack Kern
Owner, President
Outsourced Accounting Department, Inc.

So how many of you small business owners out there had the childhood dream depicted in the above picture?  Based on this January 2015 article from Entrepreneur Magazine: “What’s the One Task Most Small Business Owners Loathe?,” I suspect not very many of you.

Yet, bookkeeping is an essential task, as is the need to do it accurately, as well as using an accounting method that gives you a true picture of your company’s profitability. So what many small businesses do first is to purchase a small business accounting software such as QuickBooks and attempt to do their books themselves. But they quickly learn that QuickBooks is not as “easy to use” as their name and marketing implies. In fact, I often tell people, “QuickBooks has done a great job of marketing its software as being easy to use, but that’s also what makes it easy to abuse”(and most small business owners I’ve worked with do just that – see my previous article, “Winging It In QuickBooks”).

At some point it becomes more advantageous to the small business owner to outsource this function to someone who better understands accounting, or at the very least, have someone oversee and adjust their work.  But it doesn’t take much to completely screw up a set of books, so the sooner you can outsource it completely, the better.  Otherwise, you’ll be constantly paying for someone to clean up your books anyway, which is a waste of money.  Furthermore, many tax preparers only do this in their own tax software at year-end, not in your books, and then charge you for the extra time to prepare your tax return.

In terms of the cost of outsourcing, don’t get hung up on “hourly rates.” That’s comparing apples and oranges. Keep in mind that you are hiring a person or firm that has its own payroll taxes and overhead just like your business, and you cannot sell your product or service at cost and expect to stay in business very long either.  Instead, compare the monthly fee to what it would cost you to hire a full-time bookkeeper on your payroll.  Also, compare it to what you could be doing with your own time, such as increasing sales and producing a larger profit, known in the financial world as “opportunity cost.”  The timing of course, is a matter of affordability.  I’ll have more on this topic in a future article, but in my experience, most small business owners can sense when the time is right to outsource.

Related Articles:

Profit vs. Taxable Income

The Difference Between Your CPA and a Controller: M-1


“Winging It” In QuickBooks

Posted on March 11th, 2017

Jack Kern
Owner, President
Outsourced Accounting Department, Inc.

I was recently closing year-end for a client and found out they had somehow downloaded numerous, duplicate payments on accounts receivable. As QuickBooks couldn’t locate matching invoices for the duplicates, it created a new customer name called “Other Customers,” and created a negative account receivable balance.

Then, to make matters worse, my client proceeded to enter the bank deposits through the Make Deposits window, but didn’t match up the date of the payment with the correct customer name and date of the deposit per the bank statement (which, by the way, was several months past due being reconciled).

The end result of the above was an accounts receivable report that was so messed up that one couldn’t tell which customers owed what, and several hours of reconciling and re-reconciling her bank account via trial and error on her part, until she finally got the correct payments matched up to the correct customers.

This client is actually also a friend, and I told her jokingly, “You know, QuickBooks will let you do anything you want, but you learn the hard way that after you’ve done it once, you’ll never do it again.” Then I asked her, “But seriously, how much time have you spent trying to fix this, and what would you have rather been doing?”

I have seen messes like this (and far worse) created by numerous QuickBooks users, and it’s almost always the result of not understanding the accounting effect of QuickBooks methodology and instead just “winging it.” In fact, many of our clients came to us initially as a QuickBooks clean-up engagement, after which the client threw up their hands and turned over most or all of the bookkeeping to us.

For any small business owner who is currently attempting to do their own bookkeeping, or contemplating it, I would highly recommend these two articles I found in Entrepreneur Magazine: “What’s the One Task Most Small-Business Owners Loathe?” , and this one;  “5 Tasks Entrepreneurs Are Better Off Outsourcing.”   And here’s one of my own recent articles on a similar topic:  “How You Use QuickBooks Can Distort Your Company’s Profitability.”

Bottom line, as I’ve often told my clients, “Focus on your strengths, delegate your weaknesses.” In other words, where is YOUR time best spent?

 


How You Use QuickBooks Can Distort Your Company’s Profitability

Posted on November 21st, 2016

Jack Kern
Owner, President
Outsourced Accounting Department, Inc.

As I’ve stated in several previous articles, business owners need to set up their internal accounting properly so that they know whether or not their company is profitable. Today, a large number of small businesses use QuickBooks, as it is heavily promoted as being a “user-friendly” accounting software, and you don’t have to be an “accountant” to use it. And both claims are true.  But as I always tell my clients, these “benefits” are also what make QuickBooks easy to abuse.

In QuickBooks, the key to accounting accuracy lies in the proper set-up of your Items List, Chart of Accounts, and Preferences.  How these are set up and managed in turn control how transactions affect not only what your “forms” look like, but also, the behind-the scenes accounting, and therefore, your profit or loss, the taxes you owe, and when.

Here are just a few examples I’ve seen of how companies can grossly distort their profitability:

  • Maintaining their books on a “cash basis” of accounting. In QuickBooks you can switch back and forth between accrual and cash-basis financial statements. Depending on your type of business, cash basis statements can grossly distort your profit margins, as you are analyzing your collections and disbursements which is a timing issue, NOT your profit or loss – apples and oranges.  Set your Preferences to Accrual.  If your tax return is prepared on a cash basis, most CPA firms have tools that can convert your accrual financial statements back to cash for tax purposes, and in their own tax software, NOT yours. (For more details on this subject, see my previous article, “Profit vs. Taxable Income”.)
  • Using “Non-Inventory Parts” to track inventory purchases.  As Non-Inventory Parts are usually pointed at a cost-of-goods-sold account, your costs may be posted in one month and your revenues in another.  This then causes your profit margins to be wrong in both accounting periods so that you can’t tell how you did in either one.  (Note: At times, for various reasons it may be preferable to use Non-Inventory Parts rather than Inventory Parts, but additional accounting adjustments are then required to get the revenues and costs into the same accounting period.)
  • Using “check” or “bill’ transactions to record inventory purchases in cost-of-good-sold, rather than tracking inventory using Inventory Parts.  Has the same effect as described above.
  • Entering a “Bill” to record a supplier invoice, and then paying it with a “check” transaction rather than the “Pay Bills” feature.  The expense has now been recorded twice.  This is a clear indication that the user does not understand how to use QuickBooks properly.
  • Entering a “Bill Payment” without first having entered a Bill – As Bill Payments affect the balance sheet account Accounts Payable, not the Profit & Loss Statement, the expense has not been recorded at all, and the account payable is now negative (which should never be unless your supplier has issued you a credit). This is another clear indication that the user does not understand how to use QuickBooks properly.

So it’s best to manage your books properly right from the start.  With my clients who do their own data entry, I try to make things as easy as possible by setting up “memorized transactions” for them to use on a day-to-day basis.  This helps keeps the accounting accurate and consistent, and removes all of the guesswork – as opposed to my client essentially having to learn “accounting” and QuickBooks’ unique method of accomplishing it (which some people find extremely frustrating and a non-productive use of their time).

There are numerous other examples I could mention, but the point is, many small businesses use their accounting software as a “checkbook,” thinking their QuickBooks accounting software is “miraculously” putting everything where it belongs behind the scenes – NOT TRUE!  As the old saying goes, “garbage in, garbage out.”  Sooner or later, someone has to clean-up the mess, and hopefully before tax time, or worse, the company is out of business.

In my next article, I will talk about various other indicators that your books are in desperate need of a clean-up.