One of a company owner’s most important accounting goals is to track the profitability of the business.
Is profit growing? Or, decreasing?
Is the amount of profit worth the investment of time and money the owner puts into his/her business?
These are critical questions. Who wants to waste their time in a business enterprise that barely squeaks by and may never improve.
We always search for better ways to try and see what’s going on in the business. What’s working? What’s not?
One of the ways we try to do that is to break the business down into ever smaller chunks that are easier to examine.
So contractors start to look and the profitability of each job. Wholesalers and retailers scrutinize the profitability of different lines of merchandise.
Another way companies will examine businesses is with profit centers. That is, a business with more than one type of operation may want to see how these different operations, or departments, or profit centers, add to or take away from overall profit.
We accomplish this by using the Class feature.
Be sure class tracking is turned on in your QuickBooks Online (QBO) company file. Do this by navigating to Company Settings and accessing the Categories section.
You can place a checkmark next to Track classes. Checking the option to “Warn when a transaction isn’t assigned a class” is also a good idea. If you’re going to track classes, you want all your transactions to be assigned a class. It’s nice to have a reminder when someone enters a transaction but forgets to make that designation.
Another setting is highlighted by the second arrow. The selection shown is “One to each row in transaction”. That’s the one we’ll use.
The other selection is “One to entire transaction”.
Do we want the option to make one purchase for several items and have the flexibility to post them to different classes? Usually, the answer is yes. That’s the selection shown.
Now that we have instructed QBO that we want to use classes and what options we want with them, it’s time to create the actual classes we’ll use.
The sample QBO company is Craig’s Design and Landscaping Services. Let’s say that Craig wants to track profitability on the portion of his company that designs and installs new landscapes. He also wants to track profits for the maintenance services he provides.
Which part of the business makes money? Which part doesn’t?
Above is a screenshot of the class list. It is available in the All Lists section of QBO. By selecting the New button in the upper right, we have created two classes for Craig’s company.
Now, when we create a bill, there is a column allowing us to specify the class on each line. Above, a bill for equipment rental is being entered. Part of the bill from our equipment rental provider was for a trencher used in installing an irrigation system for a new landscape job. Clearly, that’s new construction.
Also, this month, Craig rented a detatcher for the lawns around one of his commercial office buildings where he has a maintenance contract. That goes into the Maintenance class.
It is important to classify both the expenses and income to answer the question we are asking. How profitable are the different profit centers in the business?
The above screenshot shows the invoice for the landscape job where we installed the irrigation system. Note the class designation.
Entering all our transactions in this manner will allow us to run a Profit and Loss by Class report. That report will show income and expense just like a normal profit and loss would. But, this one will show a column for each class, allowing us to review the profit picture of each department individually and the business as a whole.