Four Common Dairy Business Oversights Using QuickBooks

Tips to help you get the most out of your financial records. Like any record keeping system, the quality and usefulness of the information you get out depends on attention to detail as data is entered and reports are designed.
By: Robert C Goodling, Jr., Extension Associate, Penn State Extension

The following are four of the more common issues and how to address them to help simplify your financial records process.

Generating Appropriate Reports
Financial management software, like QuickBooks, has the ability to generate reports using either accounting method: cash-based or accrual-based. Though accrual-based is the preferred method, many agricultural businesses still use cash-based accounting principles, and their data is entered to satisfy that need. To ensure accuracy in generated reports, they should be based on the method of data entry. For example, just because an accrual-based balance sheet is available to generate does not mean it is accurate.

Fix It:
First, know which method of data entry the business is using. Then, set the QuickBooks report default preferences to that method (Edit->Preferences->Select Reports and Graphs on the left menu, and then click on the Company Preference Tab; be sure the summary reports basis reflects the appropriate accounting method). Remember, some pre-defined reports in QuickBooks are set to cash or accrual and are not impacted by this preference.

Entering Bills and then Writing Checks
Knowing the accounts payable (and receivable) of the business is vital given today’s market swings and tight margins. Even for cash-based reporting, it is important to know what is in queue to come in and leave, and how that will impact cash flow in the short term and long term. Too often, new QuickBooks users will start by entering bills, but then overlook an important step. Instead of using the Pay Bills feature within the system, they will go into the check register and write the check out. Doing so prevents a linkage between the bill and payment, thus the accounts payable value will grow, even though payments are made.

A similar situation can occur with the accounts receivable and invoices or sales receipts. Not only will you need to receive payment on invoices, but depending on your preferences in QuickBooks, the money from these transactions will be held in undeposited funds until you go into the system to deposit them to the appropriate account.

Fix It:
If the error has occurred, you’ll need to remove the checks/deposits and re-enter them against the appropriate bills or invoices through pay bills or receive payments. Some prefer to deposit directly to their accounts instead of using undeposited funds. To do this, uncheck the Use Undeposited Funds Company Preference from the Payments Preference in QuickBooks (Edit->Preferences->Select Payments on the left menu, and then click on the Company Preference Tab). To prevent these mistakes from happening in the future, use the zoom feature on a Balance Sheet report and examine the accounts receivable and payable regularly to ensure transactions have been processed.

“Unbalanced” Balance Sheet
Loans and their accompanying assets are another area that can impact a business’ financial reporting success. Many farms are still doing cash-based accounting, and as such, may not realize that within financial management software, like QuickBooks, both structures are needed to accurately maintain balance sheet reports. Too often, only 1 of the structures, typically the loan, exists in the chart of accounts, without the companion asset. This causes the generated balance sheet to be inaccurate.

Fix It:
When adding loans to QuickBooks, be sure the appropriate asset is also created. Also include an interest expense account to track interest expense for the loan. Be sure when entering loan payments that the appropriate split between principal payment (that goes toward the loan) and the interest (which is an expense) are recorded.

Cluttered Chart of Accounts
The chart of accounts is the infrastructure to any financial management software. It provides the categories across various types of accounts (banking, assets, income, expenses, etc.). QuickBooks allows for numerous levels of accounts in the chart of accounts. For example, we could have an expense category for Direct Crop Expenses, and then sub-accounts for seed, fertilizer, chemical, and custom hire. If we wanted to know those direct expenses for corn and soybeans, we could add a corn and soybean sub-account under each of the previous 4 sub-accounts, thus growing our chart of accounts. This presents a reporting challenge then to summarize them by commodity because they are in individual accounts.

Fix It:
QuickBooks has a classifying feature called classes. The class is a label that can be added to any transaction, and it allows for quick summarizing of data in various reports. Class labels are a preference that may need to be turned on (Edit->Preferences->Select Accounting on the left menu, and then click on the Company Preference Tab; be sure the class tracking is checked). Be sure that your class list contains the general enterprises of the business, as well as an overhead class to capture those costs that go across enterprises.

Summary
Managing the finances of today’s dairy businesses takes dedication and time. Today’s tough fiscal environment has driven the need for more accurate and regular reporting of the current status of the business. When using financial management software systems, such as QuickBooks, it is important to remember what accounting methods are being used, generate appropriate reports, and be sure the structure of the data meets the function needed by the dairy business.