From Our Blog

Lee Davis and Company Blog

The goal of the Lee Davis and Company Blog is to keep you updated on all things Quickbooks and ideas to improve your business. We will update the Lee Davis and Company blog every other week, so stay tuned for our updates.

Blogging Topics

Lee Davis and Company Blog explores all kinds of different topics from business advice, to personal development, to Quickbooks tips. It is our hope that you will use our blog as a way to grow as a person and entrepreneur.

Business Advice

Lee Davis has over 30 years of experience managing businesses, both large and small and in a variety of industries. If you need advice for your business, this is a good blog to get it from. Find out more about Lee Davis.

Learning from his clients:

As the president of Lee Davis and Company, Lee works with 40 different companies in Quickbooks, business advising and business management. This give him the unique opportunity to learn from his clients, which continually adds to his experience and knowledge about small businesses.

Personal Development

Transferring personal development to the business world:

Thus, she takes what she has learned from her blog and brings that to the Lee Davis and Company Blog. She loves using what she has learned in personal development and applying it to the business world. She truly believes that there is nothing that you can’t achieve if you have the right teacher and motivation.

Quickbooks Tips

Lee Davis, as a Quickbooks Pro-Advisor, is an expert on Quickbooks. In fact, he teaches training courses on Quickbooks. If you can’t make it to those, you should check out our blogs on some of our students and clients issues with Quickbooks.

Learning from your questions:

Because Lee answers all of his students and clients questions about Quickbooks, he is very familiar with any problems you might have with Quickbooks. Thus, he writes about common problems on this blog.

What Can You Write Off? Understanding Business Expenses in QuickBooks

One of the most common questions business owners ask is, “Can I write this off?”

It’s an important question, but the answer isn’t simply about whether something was purchased for the business. Business owners need to understand why the expense was incurred, whether it is appropriate for the business, and what documentation supports it.

In Episode 43 of QuickBooks Mastery for Small Business Success, Erica Northrup and Lee Davis discuss what business owners need to know about deductions and how QuickBooks can help organize expenses before tax time.

Listen to Episode 43!

The goal isn’t to find every possible write-off.

The goal is to accurately identify legitimate business expenses and keep the documentation needed to support them.

What Has to Be True for Something to Be Deductible?

A business expense generally needs to be ordinary and necessary for the business.

In practical terms, the expense should be helpful and appropriate for the business.

This doesn’t mean that every expense has to be inexpensive. It means there should be a legitimate business reason for the purchase.

An expense that is unusual or excessive for the nature of your business may require additional scrutiny.

And there’s an important misconception to clear up:

A Deduction Doesn’t Make Something Free

When you deduct a legitimate business expense, you are reducing the amount of income subject to tax.

You are not getting the entire purchase price back.

For example, spending $1,000 on a deductible business expense doesn’t mean the government gives you $1,000 back. The deduction reduces your taxable income according to the applicable tax rules.

That’s why business owners should focus on making smart business purchases—not buying things simply because they might be deductible.

Ask Four Questions About Every Expense

When you’re trying to determine whether a purchase is a legitimate business expense, start with four questions:

1. What Did We Buy?

Be specific.

Don’t simply record something as “miscellaneous.”

Knowing exactly what you purchased makes it easier to determine how it should be categorized and whether it is a business expense.

2. Why Did We Buy It?

What was the business purpose?

Why was the purchase necessary or helpful to the business?

The purpose behind the expense matters.

3. What Part of This Is Personal?

Some purchases may have both business and personal components.

Identify the personal portion rather than automatically treating the entire transaction as a business expense.

Mixed transactions should be split appropriately.

4. What Documentation Do I Have?

What supports the purchase?

That might include:

A receipt
A bill
An invoice
A mileage record
A business-purpose memo
Other supporting documentation

Good documentation helps tell the story of the transaction.

Your Chart of Accounts Matters at Tax Time

Your Chart of Accounts is more than a list of categories inside QuickBooks.

It helps organize your business income and expenses and gives you a clearer picture of what happened during the year.

When your expenses are categorized correctly, you can review your Profit and Loss before tax time and see where your money actually went.

Some of the expense categories business owners may need to review include:

Wages and overtime
Bank charges
Advertising
Dues and subscriptions
Legal expenses
Accounting and bookkeeping
Repairs and maintenance
Office expenses
Rent or lease
Utilities
Travel

The better organized these categories are, the easier it becomes to review your financial information and work with your tax professional.

Meals and Entertainment

Meals and entertainment are areas where business owners need to be particularly careful.

Entertainment expenses generally aren’t deductible under current federal tax rules, while qualifying business meals are generally subject to a 50% deduction limitation.

Meals also shouldn’t be lavish or extravagant under the applicable tax rules.

More importantly, don’t rely on your memory months later to explain a meal.

When recording a business meal, make a habit of documenting:

Who attended
What was discussed
The date
The amount
Whether entertainment was part of the transaction

The more information you record at the time of the expense, the easier it is to support the transaction later.

Don’t Forget Vehicle Mileage

Vehicle expenses can become complicated quickly, particularly when a vehicle is used for both business and personal purposes.

One of the most important habits is to track your mileage.

Don’t wait until tax time and try to reconstruct an entire year’s driving from memory.

Keep your mileage records current so you can distinguish business use from personal use and provide the documentation needed to support the deduction.

Equipment and Fixed Assets

Not every large purchase should immediately be treated as an expense.

Equipment and other long-term purchases may need to be recorded as fixed assets and depreciated over time, depending on the applicable tax and accounting rules.

A useful concept discussed in the episode is the $2,500 safe harbor threshold. Businesses that elect the applicable safe-harbor treatment may generally expense certain qualifying items below that threshold rather than capitalizing them.

However, the $2,500 figure isn’t a universal rule that automatically determines how every purchase should be recorded.

The key question is whether the purchase provides value beyond the current year and how it should be treated under the applicable tax rules.

When you’re unsure, flag the purchase and discuss it with your accountant.

Loans: Don’t Expense the Entire Payment

Loan payments are another common area of confusion.

A loan payment generally contains two different components:

Principal
Interest

Interest is an expense.

Principal, however, reduces the amount you owe on the loan. It isn’t simply another business expense.

If you record the entire loan payment as an expense, you can distort your Profit and Loss and your Balance Sheet.

Your bookkeeping should separate these components so your financial statements accurately reflect what happened.

Make Documentation Part of the Process

One of the easiest ways to make tax preparation less stressful is to document expenses when you enter them.

Don’t wait until the end of the year.

When you enter a bill, attach the documentation right away.

At the same time, add a memo explaining the business purpose when appropriate.

If a transaction includes both business and personal expenses, split it when you record it.

These small habits can make a significant difference when you eventually need to review your books.

Do a Quick Expense Review Today

You don’t have to wait until tax season to start reviewing your deductions.

Open QuickBooks and take a look at your numbers now.

1. Run a Year-to-Date Profit and Loss

Run your Profit and Loss from January 1 through the current date.

Then compare it with the same period from last year.

Look for significant changes.

2. Review Your Major Expense Groups

Scan categories such as:

Advertising
Automobiles
Meals
Insurance
Fees
Repairs
Utilities
Travel
Rent
Supplies
Subscriptions
Licenses
Depreciation
Interest

You’re looking for expenses that are unusually high, unusually low, or significantly different from the prior year.

3. Open the Details Behind the Five Largest or Most Unusual Expenses

Don’t stop at the total on the Profit and Loss.

Open the transactions behind your five largest or most unusual expenses.

Ask:

What was this? Why did we purchase it? Is it categorized correctly? Do we have documentation?

4. Review Uncategorized and “Ask My Accountant” Accounts

Look for transactions that haven’t been properly categorized.

These accounts can contain important information that needs to be resolved before your financial statements are considered reliable.

Don’t allow transactions to sit there indefinitely.

5. Find Equipment and Vehicle Purchases

Review equipment and vehicle purchases.

Confirm that supporting documentation is attached and flag anything that may need to be treated as a fixed asset.

6. Review Loan Payments

Find your loan payments and confirm that principal and interest are being separated appropriately.

If the entire payment is being recorded as an expense, it’s worth investigating.

7. Check Three Meals, Travel, or Vehicle Expenses

Choose three transactions from meals, travel, or vehicle expenses.

Check whether each one has the appropriate documentation and business-purpose information.

If those three transactions aren’t well documented, that’s a good indication that you may need to improve your process for the rest of the year.

Good Bookkeeping Makes Tax Time Easier

Understanding deductions isn’t just about finding expenses to write off.

It’s about having accurate books that tell the story of your business.

When your Chart of Accounts is organized, your expenses are categorized correctly, documentation is attached, mixed transactions are separated, and unusual purchases are identified, you and your accountant have much better information to work with.

QuickBooks can help you organize that information, but it still requires good habits.

Enter the expense correctly. Document it immediately. Categorize it appropriately. Ask questions when something doesn’t make sense.

The Bottom Line

A tax deduction is a business expense that reduces taxable income—it isn’t free money.

Before treating an expense as deductible, ask four questions:

What did we buy? Why did we buy it? What part is personal? What documentation do we have?

Then use QuickBooks to organize the information and review your financial statements regularly.

The goal isn’t simply to maximize write-offs.

The goal is to have accurate, well-documented business expenses that you can confidently support.

Good bookkeeping throughout the year makes that process much easier—and can help you and your tax professional understand the complete financial story of your business.

If you liked the podcast, you will like our training course. Click on the link below to join our upcoming course.

Join our Zoom Class

Is Your QuickBooks File Ready for Tax Season?

Tax season can be stressful enough without discovering that your QuickBooks file needs significant cleanup.

Before handing your financial information to a tax professional, you should have a reasonable level of confidence that your books are accurate, organized, and ready for review.

In Episode 42 of QuickBooks Mastery for Small Business Success, Erica Northrup and Lee Davis discuss what it really means for your QuickBooks file to be ready for tax season.

Listen to Episode 42!

Being ready doesn’t mean your CPA needs to take over your QuickBooks file.

Your tax professional should be able to review the financial information, identify potential issues, and use the completed bookkeeping to help optimize your tax situation.

The bookkeeping is your responsibility. The tax strategy is your tax professional’s responsibility.

What Does “Ready” Actually Mean?

When someone says their QuickBooks file is ready for tax season, what should that mean?

At a minimum, you should be able to answer some important questions about your books.

1. Are Your Bank Accounts Reconciled?

Start with your bank accounts and credit cards.

Have they been reconciled through the most recent statement?

If QuickBooks says you have one amount of money and your bank statement says something different, you need to investigate the difference.

Reconciliation helps identify missing, duplicate, or incorrectly recorded transactions.

2. Are There Uncategorized Transactions?

Look for transactions sitting in Uncategorized accounts or other areas waiting for clarification.

These transactions haven’t been properly assigned to the correct account.

Don’t leave them for your tax professional to figure out at the last minute.

Review them now and determine what they actually represent.

3. Are Your Loans Recorded Properly?

Loan payments need special attention.

A loan payment generally includes both principal and interest.

Interest is an expense. Principal reduces the loan balance.

If the entire loan payment is recorded as an expense, your Profit and Loss can be distorted.

Make sure your loan accounts are set up properly and that payments are being recorded correctly.

4. What’s the Status of Accounts Payable?

Look at your Accounts Payable.

Do you have bills that are still outstanding?

Are those bills actually owed?

Do you have a stack of unpaid bills that haven’t been entered into QuickBooks?

Your Accounts Payable should represent what the business genuinely owes.

5. Does Accounts Receivable Reflect What You’re Owed?

Accounts Receivable should represent money your customers owe you.

Review your outstanding invoices.

Are they legitimate?

Are they still collectible?

Are there old balances that should be investigated?

If your Accounts Receivable is inflated with old or incorrect balances, your financial statements aren’t telling the full story.

6. Are Major Assets Recorded Properly?

Review major purchases such as equipment, vehicles, or other significant assets.

Make sure they haven’t simply been recorded as ordinary expenses when they should be treated differently.

Major assets can affect both your Balance Sheet and your tax return, so they deserve attention before tax season.

7. Do Your Balance Sheet and Profit & Loss Make Sense?

Look at both major financial statements.

Your Profit and Loss should reasonably reflect the income and expenses of your business.

Your Balance Sheet should reasonably reflect what the business owns, what it owes, and its equity.

Look for negative balances that shouldn’t exist.

If something looks unusual, investigate it.

Your tax professional needs financial information they can rely on.

8. Review Undeposited Funds

Don’t forget Undeposited Funds.

If money has been sitting there for an unusually long time, determine why.

It may indicate that payments were entered but not properly deposited or matched.

A large or old Undeposited Funds balance can be a sign that part of the sales and payment process needs to be reviewed.

Red Flags to Look For

As you prepare your books, certain issues should immediately get your attention.

Loan Accounts Classified as Expenses

If loan accounts or entire loan payments are being classified as expenses instead of separating principal and interest, your Profit and Loss may be overstated.

Investigate how those transactions have been recorded.

Old Accounts Receivable

Outstanding Accounts Receivable can make your financial position look better than it really is if the balances aren’t actually collectible.

Review old invoices and determine whether the balances are legitimate.

A Stack of Bills

If you have bills sitting on your desk that haven’t been entered into QuickBooks, your books may not reflect your actual obligations.

Enter your bills and make sure Accounts Payable accurately reflects what you owe.

Uncategorized Expenses

Uncategorized transactions are a warning that your books aren’t finished.

Go through them and determine what each transaction represents.

Old Bank Feed Transactions

Don’t let old transactions sit indefinitely in the bank feed.

They may be duplicates, transactions that were entered incorrectly, or items that haven’t been properly categorized.

Investigate them.

Outstanding Payroll Liabilities

Payroll liabilities that are old or unexplained need attention.

Make sure payroll taxes and other payroll-related liabilities have been recorded and paid correctly.

Unreconciled Loans

If you have loans, make sure the loan balances and payments are being reconciled and reviewed.

The loan balance in QuickBooks should make sense compared with your actual loan statements.

Why Find These Problems Now?

You might wonder why you should spend time cleaning up your QuickBooks file before your tax professional even looks at it.

The answer is simple:

You have deadlines.

Businesses have reporting requirements for items such as W-2s and 1099s, and the information supporting those filings needs to be accurate and up to date.

The longer you wait to identify problems, the more difficult it can be to resolve them before deadlines arrive.

Finding an issue in October gives you time to investigate.

Finding it right before a filing deadline creates unnecessary pressure.

Your Tax Professional Shouldn’t Be Your Bookkeeper

One of the most important distinctions discussed in this episode is the difference between bookkeeping and tax preparation.

Your tax professional’s job is to help you optimize your taxes and prepare your tax return based on accurate financial information.

Your bookkeeping is the foundation that provides that information.

You don’t want your CPA or tax preparer spending valuable time trying to reconstruct your books, categorize transactions, reconcile accounts, or figure out why your Balance Sheet doesn’t make sense.

Instead, your tax professional should be able to review the completed financial information and focus on the tax questions that require their expertise.

Think of it as a flyover.

They want to look at your books, identify potential red flags, and determine whether the financial information is ready for tax preparation.

What Does Your Tax Professional Want?

Your tax professional will typically provide a list of documents and information they need.

But before you hand everything over, make sure your QuickBooks file supports those documents.

They want to see clean books.

They want to understand significant changes.

And they want to investigate red flags before preparing your return.

If there are major problems throughout the QuickBooks file, the tax professional may have to spend additional time addressing those issues before they can move forward.

That’s time and money that could often be saved by getting your bookkeeping in order first.

Give Yourself 15 Minutes

You don’t need an entire afternoon to begin.

If you only have 15 minutes, start here:

1. Check the Bank Feed

Look for old transactions that are still sitting there.

Make a note of anything unusual or unresolved.

2. Look at Your Profit and Loss

Does it make sense?

Does the income look reasonable?

Are there expenses that seem unusually high or low?

Are there categories you don’t recognize?

3. Check Your Bank Reconciliations

Are your accounts reconciled through the most recent statement?

If not, make a note of which accounts need attention.

Make a List and Start Investigating

You don’t have to solve every problem in one sitting.

Start by making a list.

Maybe you find:

Three old bank-feed transactions
Two unreconciled bank accounts
An unexplained loan balance
Several uncategorized expenses
Old Accounts Receivable
Outstanding payroll liabilities

That’s okay.

Now you know what needs attention.

You have time to investigate.

Work through the list one item at a time.

Get Ahead of Tax Season

Being ready for tax season isn’t about making your QuickBooks file look perfect.

It’s about making sure the major pieces of your financial information are accurate enough for you and your tax professional to rely on them.

Reconcile your accounts.

Clean up old transactions.

Review Accounts Receivable and Accounts Payable.

Check your loans.

Review payroll liabilities.

Look at your Balance Sheet and Profit and Loss.

Review Undeposited Funds.

Investigate anything that doesn’t make sense.

Then your tax professional can do what you hired them to do—help you make the most of your tax situation using financial information they can trust.

The Bottom Line

Tax season shouldn’t be the first time you discover problems in your QuickBooks file.

The earlier you identify issues, the more time you have to understand them and correct them.

Your bookkeeping provides the foundation.

Your tax professional uses that foundation to prepare and optimize your taxes.

So before tax season arrives, ask yourself:

Are my books accurate enough that I trust the numbers?

If the answer is no—or you’re not sure—don’t wait until your tax deadline is approaching.

Start with 15 minutes.

Find the red flags.

Make a list.

And start getting your QuickBooks file ready.

If you liked the podcast, you will like our training course. Click on the link below to join our upcoming course.

Join our Zoom Class

Can You Trust Your Books? A Monthly QuickBooks Health Check

As a business owner, you rely on your financial information to make important decisions. But how do you know that information is reliable?

In Episode 41 of QuickBooks Mastery for Small Business Success, Erica Northrup and Lee Davis discuss what it really means to trust your books.

Listen to Episode 41!

The goal isn’t necessarily to have perfect books. Perfection can be difficult, especially for a busy small business.

The goal is to have a process that gives you confidence that the major pieces are accurate.

Can you answer questions such as:

Are my bank accounts accurate?
Does my Profit and Loss reflect what actually happened in the business?
Do my customers really owe the amount shown in Accounts Receivable?
Do my vendor balances accurately show what I owe?
Do my payroll liabilities make sense?
Are there transactions or accounts nobody can explain?
Can I trust these numbers enough to make a business decision?

If you can’t answer these questions, it may be time for a bookkeeping health check.

Your Books Don’t Have to Be Perfect

One of the most important points from this episode is that your books don’t have to be perfect to be useful.

What matters is having a process for checking the areas that have the greatest impact on your financial statements.

For some businesses, that may mean cleaning up the books before they can truly understand what the numbers are saying.

Once the cleanup is done, the next step is maintaining the books through regular reviews.

A monthly health check can help you catch problems before they become bigger problems.

1. Are All of My Bank Accounts Reconciled?

Start with your bank and credit card accounts.

Ask:

Are all of my accounts reconciled through the most recent statement?

A bank reconciliation compares what QuickBooks says you have with what the bank says you have.

If your bank statement shows one amount and QuickBooks shows another, you want to identify the difference.

Reconciliation can uncover:

Missing transactions
Duplicate transactions
Incorrect amounts
Transactions recorded in the wrong account
Other bookkeeping errors

Don’t simply assume the balance is correct because the bank account is connected to QuickBooks.

Reconcile it.

2. Is Anything Old or Unexplained Sitting in the Bank Feed?

Bank feeds can be helpful, but they shouldn’t become a place where transactions sit indefinitely.

Review transactions that are still waiting in the bank feed.

An old transaction may have been:

Categorized incorrectly
Duplicated
Entered previously but not matched
Left unresolved because nobody knew what to do with it

The longer unexplained transactions sit there, the harder it can become to understand what your books are telling you.

Make reviewing the bank feed part of your regular process.

3. Does Accounts Receivable Represent Money You Actually Expect to Collect?

Accounts Receivable represents money your customers owe you.

But the balance in QuickBooks isn’t automatically a guarantee that you’ll collect all of it.

Look at your Accounts Receivable Aging report.

Ask:

Who owes us money?
How long have they owed it?
Are these customers still active?
Are there old balances we don’t understand?
Are there amounts we realistically expect to collect?

An old balance can make your Accounts Receivable look larger than the amount you are actually likely to collect.

If your books say customers owe you $50,000, but a significant portion of that balance is several years old and unlikely to be collected, the report isn’t telling the full story.

Your books should help you understand reality, not just display numbers.

4. Does Accounts Payable Really Represent What We Owe?

The same principle applies to Accounts Payable.

Ask:

Does Accounts Payable accurately represent what the business currently owes?

Look for old balances.

If a bill has been sitting in Accounts Payable for months or years, determine why.

Is it still owed?

Was it already paid?

Was it entered twice?

Was there a mistake in how the payment was recorded?

Old Accounts Payable balances can distort your understanding of your obligations and cash needs.

5. Do My Payroll Liabilities Make Sense?

Payroll is another area that deserves regular attention.

Payroll doesn’t simply create an expense. It can also create liabilities that the business needs to pay.

Review your payroll liability balances at month-end.

Ask:

Are there old payroll liabilities sitting on the books?
Do the balances make sense?
Were payroll taxes and other liabilities actually paid?
Are there amounts that nobody can explain?

If old liabilities continue accumulating, don’t ignore them.

They may indicate that payroll was recorded incorrectly or that payments were not properly connected to the liabilities.

6. Is There Anything Unusual on the Balance Sheet?

Your Balance Sheet can reveal problems that aren’t obvious when you’re only looking at your bank account.

Review it for unusual items such as:

Negative balances
Very old balances
Accounts you don’t recognize
Accounts nobody can explain
Unexpected asset or liability balances

A Balance Sheet should tell a logical story about what the business owns, what it owes, and the owner’s equity.

If something looks strange, investigate it.

7. Does My Profit and Loss Make Sense?

Next, look at the Profit and Loss.

Don’t just look at whether the business made money.

Ask whether the numbers make sense based on what actually happened during the period.

For example:

Does the income look reasonable?
Did sales increase or decrease as expected?
Are expenses consistent with business activity?
Are there unusual changes?
Did any expense category suddenly increase?

You know your business.

Your Profit and Loss should generally reflect what you experienced.

If something doesn’t make sense, that’s a reason to investigate—not simply accept the report.

8. What Expenses or Costs Have Increased?

Comparing your current numbers with historical information can reveal changes that aren’t obvious when looking at one month by itself.

Compare this year to last year.

Look for expenses and costs that have increased significantly.

A change may have a perfectly reasonable explanation. Perhaps you hired an employee, expanded, purchased equipment, or experienced higher material costs.

But you want to know why the number changed.

This is where accurate historical QuickBooks data becomes especially valuable.

9. Are There Mystery Accounts or Transactions?

Every business eventually encounters transactions that don’t immediately make sense.

But mystery transactions shouldn’t remain mysteries forever.

Look for items such as:

Unapplied income
Unapplied payments
Uncategorized transactions
Accounts nobody recognizes
Old balances without an explanation

If nobody can explain a transaction, don’t simply leave it sitting there.

Find out what happened.

A small unexplained item may not have a major impact. But a pattern of unexplained transactions can indicate a larger bookkeeping problem.

10. Do I Trust These Numbers Enough to Make a Business Decision?

This may be the most important question of all.

Do I trust these numbers enough to make a business decision?

Can you use your financial statements to determine:

Whether the business is profitable?
Whether sales are improving?
Whether expenses are increasing?
Whether you can afford to hire?
Whether you have enough cash?
Whether pricing needs to change?
How the business is performing compared with previous periods?

If you don’t trust your numbers, you’re forced to make decisions based on guesswork.

That defeats one of the biggest benefits of using QuickBooks.

Don’t Forget Personal Transactions

Another important part of reviewing your books is checking for personal transactions.

Personal and business expenses should not be mixed together.

Review transactions to make sure personal purchases aren’t being recorded as business expenses.

This is particularly important because incorrectly categorized personal expenses can distort your Profit and Loss and make the business appear more or less profitable than it really is.

Review Loan Payments

Loan payments also deserve attention.

A loan payment isn’t necessarily one expense.

Typically, part of a payment goes toward principal, while another portion goes toward interest.

The principal reduces the loan liability, while the interest is an expense.

If the entire payment is recorded incorrectly, both the Profit and Loss and Balance Sheet can be affected.

Review loan balances and payments regularly to make sure they make sense.

Don’t Ignore Cash Transactions

Cash transactions can be easy to overlook, especially when a business uses both bank and cash activity.

Make sure cash transactions are recorded appropriately and that the balances make sense.

If cash is being withdrawn, spent, or deposited without being properly recorded, your books can quickly become difficult to understand.

Build a Monthly Habit

Trusting your books isn’t about looking at QuickBooks once a year when your tax return is due.

It’s about developing a regular habit.

At the end of each month, take time to review the major pieces:

Bank accounts → Bank feed → Accounts Receivable → Accounts Payable → Payroll liabilities → Balance Sheet → Profit and Loss → Expense changes → Mystery transactions → Business decisions

This doesn’t have to take hours every month once the process is established.

The important thing is consistency.

What If Your Books Aren’t Reliable?

If you go through this health check and find problems, don’t panic.

You may need to clean up your books before you can rely on the financial statements.

Start with the biggest issues.

Reconcile the bank accounts. Investigate old receivables and payables. Review payroll liabilities. Look at unusual Balance Sheet accounts. Clean up unexplained transactions. Make sure personal expenses aren’t mixed with business expenses.

You don’t have to fix everything at once.

Take small steps toward accurate books.

And if you find yourself in deeper waters, getting help can save time and prevent additional problems.

Trust Your Numbers Before You Act on Them

QuickBooks is a tool for understanding your business, but the software can’t tell you whether every number makes sense.

That requires a process.

A monthly health check helps you move beyond simply entering transactions and toward actually understanding your financial information.

Your books don’t have to be perfect.

They need to be reliable enough to tell you the truth about your business.

When your bank accounts reconcile, your receivables and payables make sense, your payroll liabilities are accurate, your Balance Sheet is logical, and your Profit and Loss reflects what actually happened, you can have greater confidence in your decisions.

And that’s ultimately what trustworthy books are about:

Knowing your numbers well enough to use them.

If you liked the podcast, you will like our training course. Click on the link below to join our upcoming course.

Join our Zoom Class

Where Are Your Costs Creeping Up? How to Take Control of Business Expenses

One of the most frustrating questions a business owner can ask is, “Why am I not making more money?”

Sometimes the answer isn’t a lack of sales. Sometimes costs are quietly creeping up.

Vendor prices increase. Insurance premiums change. Payroll costs rise. Discounts disappear. Product costs go up a little at a time. Individually, these changes may not seem significant, but together they can have a major impact on your bottom line.

In Episode 40 of QuickBooks Mastery for Small Business Success, Erica Northrup and Lee Davis discuss how business owners can identify creeping costs and take intentional steps to protect profitability.

Listen to Episode 40

A Real-World Example: When a Discount Disappears

This conversation came from a real experience at Lee Davis and Company.

One of their clients unexpectedly lost a payroll discount that they had been receiving through Lee Davis and Company. Lee recognized the impact and pushed to have the discount reinstated.

That experience highlights an important lesson:

You have to pay attention to what your vendors are charging you.

If you aren’t watching your expenses, you may not notice when a discount disappears, a price increases, or a service changes.

And when you don’t know your costs have increased, you may continue operating as though your old pricing and profit margins are still working.

Don’t Just Look at Your Bank Feed

One of the best ways to understand your costs is to actually enter your expenses into QuickBooks correctly.

That means using the appropriate forms, such as bills and checks, instead of simply relying on the bank feed to tell you what happened.

When you properly enter your expenses, you create a much clearer record of what you are spending and why.

The bank feed can help you verify transactions, but it shouldn’t replace a bookkeeping process.

Accurate records give you the ability to ask better questions:

What am I spending?
Which vendors have increased their prices?
Which expenses are increasing the fastest?
Are my product costs reducing my margins?
Am I still receiving the value I expected from a vendor?
Is this expense necessary?

You can’t effectively control costs if you don’t know what they are.

The Cheapest Option Isn’t Always the Best Option

Cost control doesn’t mean choosing the cheapest possible vendor every time.

Lee and Erica emphasize the importance of considering quality as well as price.

A lower-priced product or service isn’t necessarily a better deal if it creates more problems, takes more time, performs poorly, or results in unhappy customers.

Business owners need to understand the value they’re receiving for what they’re spending.

The goal isn’t simply to spend less.

The goal is to spend intentionally.

Review Your Insurance

Insurance is another area where costs can creep up, and it can be easy to simply renew a policy without taking a close look at what you’re paying for.

Read the fine print. Understand your coverage. Know what has changed.

It can also be helpful to work with an insurance agent who is willing to shop around for you.

The cheapest policy isn’t necessarily the right policy, but neither should you automatically assume that your current policy is still the best option.

Your business changes over time, and your insurance needs can change with it.

Watch Cost of Goods Sold and Gross Profit

For businesses that sell products or have significant direct costs, Cost of Goods Sold (COGS) deserves special attention.

If the cost of the products or materials required to generate your revenue increases, your gross profit can shrink even if your sales remain steady.

QuickBooks can help you look at historical information and see how your numbers are changing over time.

Don’t just ask, “How much did we sell?”

Also ask:

“How much did it cost us to generate those sales?”

Understanding your gross profit gives you a better picture of whether your pricing is actually working.

Compare Expenses by Period

Another useful strategy is to compare your expenses from one period to another.

For example, compare your Profit and Loss reports by month.

Look for the five largest increases.

You don’t necessarily need to investigate every single expense at once. Start with the areas that have changed the most.

A significant increase might be completely reasonable. Perhaps you hired someone, purchased new equipment, or experienced a seasonal expense.

But it could also reveal something you didn’t realize had changed.

The important thing is to ask why.

Review Your Expenses Annually

At a minimum, business owners should conduct a thorough expense review every year.

Look at your vendors, subscriptions, insurance, services, supplies, and other recurring costs.

Ask:

Are we still using this?
Is the price still reasonable?
Has the vendor increased the price?
Are we getting the quality we need?
Can we negotiate a better rate?
Is there a better option?
Does this expense still support the business?

Small expenses are easy to ignore. Recurring expenses are especially easy to overlook because they become part of the routine.

But a recurring expense that increases by even a small amount can become significant over a year.

Use Purchase Orders to Stay Ahead of Price Increases

Purchase orders can also help businesses stay organized and monitor product costs.

Creating a purchase order establishes what you intend to purchase and the price you expect to pay.

When the bill arrives, you can match it against the purchase order.

This gives you another opportunity to catch unexpected price changes.

If you expected to pay $X for a product and the bill comes in higher, you now have a reason to ask questions.

Without that comparison, an increase may simply disappear into your expenses.

Negotiation Doesn’t Have to Be Confrontational

If a vendor raises a price, you don’t necessarily have to become combative.

Start a conversation.

Ask questions.

“I noticed our price increased. Can you help me understand why?”

“Is there anything you can do about this rate?”

“Are there other options available?”

Simply bringing up the conversation can make a difference.

Your vendors want your business. Business relationships are partnerships, and a good vendor should be willing to have a conversation about pricing, service, and value.

Be curious.

You may discover a discount, a different pricing structure, a better product, or another solution you didn’t know was available.

And if you need to push back, push back professionally.

Look at Overtime Carefully

Payroll is another significant business cost that deserves attention.

Overtime may be necessary in some situations, but business owners should understand whether the additional hours are actually producing additional value.

Look at your overtime costs and ask:

Is this expense actually moving the needle in the business?

If overtime is increasing but revenue, productivity, or customer satisfaction isn’t improving accordingly, it may be time to look at staffing, scheduling, processes, or workload.

The purpose isn’t necessarily to eliminate overtime.

It’s to understand what you’re paying for and whether you’re getting the result you need.

Use QuickBooks to Find the Increases

QuickBooks becomes much more useful when you use your historical information to identify trends.

One helpful step is to run a Product and Service report and look at increases by percentage.

This can help you identify products or services whose costs have changed significantly.

You can then investigate those changes instead of allowing them to quietly reduce your margins.

Your QuickBooks data should help you ask better business questions.

If a cost has increased, find out why.

If a vendor’s price has changed, ask about it.

If gross profit is shrinking, investigate your COGS.

If overtime is increasing, determine whether it is producing results.

If insurance costs have changed, review the policy.

Clean Up Your Books to Understand the Whole Story

You can’t manage costs effectively when your books aren’t accurate.

That doesn’t mean you need to fix everything overnight.

Take small steps.

Make sure expenses are being entered correctly. Use the right forms. Keep your Chart of Accounts organized. Reconcile your accounts. Review your financial statements regularly.

The cleaner your books are, the easier it becomes to see the whole story.

And when you can see the whole story, you can make better decisions.

Steps to Take Control of Your Costs

Controlling costs doesn’t require one dramatic change. It starts with consistently paying attention.

Here are a few practical steps:

Review your expenses annually.
Compare Profit and Loss reports by month.
Investigate your five largest expense increases.
Monitor Cost of Goods Sold and gross profit.
Use historical QuickBooks information to identify trends.
Create purchase orders and match them to bills.
Enter bills and checks instead of relying entirely on the bank feed.
Review vendor pricing and negotiate when appropriate.
Review insurance coverage and pricing.
Analyze overtime to determine whether it is producing results.
Run Product and Service reports to identify significant increases.
Make purchases intentionally rather than automatically.

Know What You’re Spending

Business owners don’t have to become accountants to become better at controlling costs.

They do, however, need to know where their money is going.

QuickBooks can help you compare prices, identify increases, review historical information, and understand how expenses affect profitability.

The key is to use the information rather than simply record it.

Know what you’re spending. Ask questions. Review your vendors. Watch your margins.

And when something doesn’t make sense, investigate it.

The Bottom Line

Costs rarely announce themselves all at once.

They creep.

A small vendor increase here. A lost discount there. Higher insurance premiums. Rising product costs. More overtime. Additional subscriptions.

Over time, those increases can significantly reduce your profit.

The good news is that you can take control by paying attention to your numbers.

Use QuickBooks to understand your costs, compare periods, identify increases, and ask better questions. Take small steps to keep your books accurate, and use that information to make intentional purchasing and pricing decisions.

Because sometimes the answer to “Why am I not making more money?” isn’t that you need more sales.

It may be that you need to take a closer look at what you’re spending.

Don’t let costs creep up unnoticed.

If you liked the podcast, you will like our training course. Click on the link below to join our upcoming course.

Join our Zoom Class

Payroll Is More Than One Expense in QuickBooks

In Episode 39 of QuickBooks Mastery for Small Business Success, Erica Northrup and Lee Davis discuss an area of QuickBooks that can easily become confusing for business owners: payroll.

Payroll may look like one large expense when money leaves your bank account, but that’s not actually how payroll works from an accounting perspective.

Payroll is not one transaction.

It involves multiple expenses, liabilities, and accounts—and understanding the difference is essential if you want your financial statements to accurately reflect what your business is spending.

Listen to Episode 39!

Payroll Is Not Just Payroll Expense

One of the biggest misconceptions about payroll is that the entire amount that leaves your bank account should be categorized as a payroll expense.

That’s not correct.

Some of the money associated with payroll represents actual expenses, while other amounts are liabilities that the business is responsible for paying to government agencies, employees, or retirement plans.

If you want to understand how much your business is actually spending on payroll, you need to look at the breakdown.

Payroll Involves Multiple Accounts

Depending on your business and payroll setup, payroll can involve several different accounts.

These may include:

Wage expense
Payroll tax expense
Federal payroll liabilities
State payroll liabilities
State and federal unemployment liabilities
Medicare liabilities
Social Security liabilities
Retirement contributions

Each of these accounts has a different purpose.

That’s why simply looking at the amount that came out of your bank account doesn’t necessarily tell you how much payroll actually cost your business.

Why Do Payroll Liabilities Matter?

Payroll liabilities represent money that your business has collected or owes but has not yet paid to the appropriate party.

For example, payroll may include amounts withheld from an employee’s paycheck that need to be sent to the government.

Those amounts aren’t additional business expenses.

They are liabilities.

Eventually, when those liabilities are paid, the liability account should be reduced.

This distinction is important because incorrectly categorizing payroll can make your Profit & Loss and Balance Sheet inaccurate.

Two Payroll Reports That Can Help

QuickBooks provides payroll reports that can help business owners understand what is happening with payroll.

Payroll Register

The Payroll Register provides information about employee wages, including gross wages.

It can help you verify what employees were paid.

Payroll Summary

The Payroll Summary provides a broader breakdown of payroll information and can help you understand the different payroll expenses and liabilities involved.

These reports give you more information than simply looking at the amount that left your bank account.

A Common Problem: Too Much Payroll Expense

One of the problems Lee and Erica see is businesses overstating their payroll expense while understating their payroll liabilities.

This can happen when the entire payroll transaction is recorded as an expense.

The result is a financial statement that doesn’t accurately reflect what’s happening in the business.

If you suspect this is happening in your QuickBooks file, go back to your payroll records and compare them with the way the transactions are being recorded.

The goal is to make sure the payroll information is flowing into the correct accounts.

Warning Signs Your Payroll Needs Attention

There are several red flags that can indicate a payroll accounting problem.

1. The Entire Payroll Is Classified as an Expense

If every dollar associated with payroll is being recorded as an expense, it’s worth taking a closer look.

Some portions of payroll may belong in liability accounts rather than expense accounts.

2. Payroll Liabilities Keep Growing

If your payroll liability accounts continue to grow month after month, you need to find out why.

Liabilities should generally be paid down as the associated obligations are remitted.

A growing balance that no one can explain is a warning sign.

3. Old Payroll Liabilities Can’t Be Explained

Look at the age of your payroll liabilities.

If you have old balances sitting in your accounts and nobody knows what they represent, it’s time to investigate.

Don’t simply ignore them because the numbers are on the Balance Sheet.

4. Multiple Wage Accounts Serve the Same Purpose

Another warning sign is having multiple wage accounts that essentially represent the same thing.

Too many duplicate or unnecessary accounts can make your financial statements confusing and make it harder to understand your true payroll costs.

5. Retirement Payments Don’t Reduce the Retirement Liability

If your business makes retirement plan contributions but the corresponding retirement liability isn’t being reduced, something may not be recorded correctly.

The liability should reflect what the business actually owes.

When the payment is made, the liability should be properly accounted for.

6. Payroll Reconciles to the Bank—but the Financial Statements Don’t Make Sense

This is an especially important warning sign.

You might reconcile your bank account and see that everything appears to match.

But that doesn’t necessarily mean your payroll accounting is correct.

Your financial statements also need to make sense.

A transaction can match the bank and still be categorized incorrectly.

Payroll Affects Both Major Financial Statements

Payroll accounting affects both the Profit & Loss Statement and the Balance Sheet.

The Profit & Loss needs to accurately show the expenses associated with payroll.

The Balance Sheet needs to accurately show outstanding payroll liabilities.

If either side is wrong, your overall financial picture can be misleading.

That’s why business owners shouldn’t stop at asking:

“Did the payroll clear the bank?”

A better question is:

“Was the payroll recorded correctly?”

How Do You Know What Your Payroll Is Really Costing?

If you want to understand your true payroll costs, don’t simply look at the bank account.

Review your payroll reports.

Look at:

Gross wages
Employer payroll taxes
Employee withholdings
Payroll liabilities
Retirement contributions
Other payroll-related costs

Then compare those figures to what’s appearing in your financial statements.

This gives you a much clearer picture of what your employees actually cost the business.

Payroll Should Be Reviewed Regularly

Payroll is one of the largest expenses for many businesses.

That makes it especially important to review it regularly.

Don’t wait until tax time to discover that your payroll liabilities have been sitting on your Balance Sheet for months or that your Profit & Loss doesn’t accurately reflect your payroll costs.

A regular review can help you catch problems while they’re still relatively easy to correct.

Final Thoughts

Payroll can be complicated because it involves much more than wages.

There are expenses, liabilities, taxes, withholdings, retirement contributions, and payments that all need to be recorded correctly.

The key takeaway from Episode 39 is simple:

Payroll is not one transaction.

If your entire payroll is being treated as an expense, if liabilities are growing without explanation, or if your payroll numbers don’t make sense on your financial statements, it’s time to take a closer look.

Use your Payroll Register and Payroll Summary to understand the details. Reconcile your accounts, review your liabilities, and make sure the information on your Profit & Loss and Balance Sheet tells the right story.

And if you aren’t sure what you’re looking at, don’t guess. Getting help from someone who understands both payroll and QuickBooks can save you from much bigger cleanup problems later.

Accurate payroll accounting isn’t just about getting the numbers into QuickBooks. It’s about knowing what those numbers mean—and making sure they accurately represent your business.

If you liked the podcast, you will like our training course. Click on the link below to join our upcoming course.

Join our Zoom Class

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