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5 Best Practices for Working with Contractors Using QuickBooks Desktop

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FIVE BEST PRACTICESFor Working with Contractors Using QuickBooks Desktop

Leslie Shiner@TheShinerGroup

@LeslieShiner

Leslie Shiner

• Owner of The ShinerGroup• Financial & management consultant for over 25 years

• MBA in Accounting and Finance from U.C. Berkeley• Advanced QuickBooks ProAdvisor• Sage Certified Consultant

• Contributing Columnist• Remodeling Magazine

• CPA Practice Advisor Top Thought Leader• CEDIA Fellow• Author

• A Simple Guide to Turning a Profit as a Contractor• (www.MoneyMazeBooks.com)



• 1 – Using the proper chart of accounts: what is parallelism?

• 2 – Creating and using the perfect Item List

• 3 – Using estimates in all their glory

• 4 – Good job costing practices

• 5 – Tracking and accounting for all labor costs

Agenda

More Learning Objectives

WSIC? Or: W(tf)SIC?



We only have 50 minutes!

The notes have more information than we can cover today

Multi‐Step Financial StatementFor 12 Months Ended 12/31/XX

Income $XXX 100%

(COGS) $(XX) xx%

Gross Profit $XXX Gross Margin

(Overhead Expenses) $(XX) xx%

Net Income $XXX xx%

Basic Income Statement (P&L)

The Line

Dollars Percentage



What is Parallelism?

Revenue from Materials

Revenue from Labor

Revenue from Subcontract

Cost of Goods Sold

COGS – Materials

COGS – Labor

COGS ‐ Subcontract

Determine Gross Margin

Determine Gross Margin by Cost Type!

Parallelism – Why Bother?

• What type of work provides the largest source of profit?• The least profitable?

• If all profit is built into one source, what happens when that mix changes?

• How do your clients estimate?• How do they account for overhead?• How do they account for profit?



Typical P&L

Gross Profit = $350,000

Gross Margin = 35%

% of Income

(Margin)

Income 1,000,000$ 100%

(less) Cost of Goods Sold 650,000

Gross Profit 350,000 35%

(less) Expenses 250,000

Net Profit 100,000 10%

P&L with ParallelismDo the math

• What do you learn?

• Are you charging enough for labor? Permits? Other costs?

Production Income

% of Income

(Margin)

Labor Income 325,000$

Material Income 275,000

Subcontract Income 350,000

Other Direct Income 50,000

Total Income 1,000,000 100%

Production Costs

Achieved

Margin

Labor Costs 250,000 23%

Material Costs 150,000 45%

Subcontract Costs 200,000 43%

Other Direct Costs 50,000 0%

Total Production Costs 650,000 35%

Gross Profit 350,000 35%



Steps to Creating Parallelism

• Change Chart of Accounts• Be sure all production labor points above the line

• Change the items

• Consider when to make the change to Chart of Accounts • Consider affect on prior years

Example:








Five Best Practices

The Perfect Item List:

Doesn’t exist!But you can make a pretty

good one!



The Item List is the Key

• Items are used for:• Estimates/Proposals

• Job Costing• Purchase Orders• Invoicing

• Use the same items to compare apples to apples• You may need to change the item description in PO’s

• You may need to use group items to hide the detail on the estimates or invoices

• Goal: get good estimate vs. actual reporting!

Items – Check Your Priorities

Anything your company buys, sells, or builds

• Most users think in this order:

1. Required on all invoices

2. Provides pre‐entered descriptions on invoices

3. Basis for tracking all inventory

4. Links sales and purchases to your Chart of Accounts

5. Show up on job cost reports

6. Optional for all bills and checks

• Priority should be:

1. Links sales and purchases to your Chart of Accounts

2. Items should be the basis of all job cost reports



Create the ‘Best Practice’ Items

• Customize your items list to see:• Account (Income account from invoices)

• COGS Account (Cost of Goods Sold) • Asset Account (inventory items only)

• Create as two‐sided items• Almost every items should be two‐sided

• Use “This Should Be Zero” account to find errors • Map all heading accounts to “This Should Be Zero” and make headings in all caps



Some Items Are Only Used On Invoices

Still needs to be two‐sided

For Better Job Cost Reporting

• Use types correctly – order in reports:• Inventory• Parts (non‐inventory items)

• Service (items and linked payroll items)

• Other charges

• Use subitems for ease of use and clarity



Less is More!

• Determine the level of detail needed • Too much detail provides useless reports!

• Apples to apples comparison

• To improve focus, limit number of items on list

• Start with the outcome:• How do you want your job cost reports to look?• Then create the list backward from there

• Instead of starting with the detail on bills

More Items List Tips

• Inventory items – use only if you carefully track specific items• Must track both purchase and sale of every item by quantity and price• Can you do that? Should you need to do that?

• Most contractors who set up inventory shouldn’t have!

• There is a difference between inventory and consumables

• Consider using numbers in part of the item title• Organizes lists and reports in order of use instead of alphabetical order



Example:






Five Best Practices



Estimates as Basis for:

• Progress Invoices (Fixed price job)

• Milestone Invoices (Fixed price job)

• Job Cost Reports• Job Estimates vs. Actuals Detail

• Job Estimates vs. Actuals Summary

• Basis of Work In Process (WIP) adjustments

Always Create Estimates with Markup

Allows you to compare estimates to actuals for

costs and revenue



Est. Revenue Should Not Equal Est. Cost

• Which Jobs Were Set Up Correctly?

What About Fixed Price Jobs?

• Estimate for job cost reports needs detail

• Estimate for progress invoices needs different detail

• Include both Cost and Sale price on same estimate

• Enter all Cost information• Enter total cost (or use quantity times cost) in Cost column

• Enter Markup = <100%> in Markup column

• Enter all Sales information• Enter cost = 0

• Enter total sales price in Markup column



Costs and Sales in One Estimate






Five Best Practices



QuickBooks for Job Management

• It’s not just a check writing or invoicing program!

• Create a rule for items or expenses• For jobs: always use items

• For overhead: always use expenses

• Do not job cost inside your income statement• Provide detail of job costs through items, not through Chart of Accounts

• Value: ability to compare estimate to actual costs by line item

Keep Costs Under Control

• Use Purchase Orders for subcontracts• Run Estimate vs. Actual from day one

• Make corrections regularly

• Manage Worker’s Comp and Liability Insurance through vendors

• Enter Credit Card charges immediately

• Create item called “Unknown”• You might even need to create “Unknown” job

• Better to overstate job costs than to be surprised later








Five Best Practices

Payroll & Job Costing in QuickBooks

• Payroll expenses, by default, are set up wrong• Separate out Gross Payroll from Labor Burden

• Payroll liabilities, by default, are set up wrong• Use subaccounts to track different payroll liabilities by agency

• Set up Payroll Compensation items• Determines where wages will appear on financial reports



Payroll Options

• Inside QuickBooks

• Outside PR Service options:• Replicated payroll

• Duplicate every paycheck, but why bother?

• Shadow payroll – automatic net zero paycheck

• Payroll as Vendor through a zero dollar check

Be sure to turn on Manual Payroll (see Help)

Use Standard Costing for Payroll

• Step 1 – Process payroll through QuickBooks• Create all payroll items and burdens below the line

• Step 2 –Job Cost by including a standard burdened labor costs to each job• Payroll item called “Burdened Labor Costs”

• Posted to COGS account

• Offset to “Less Burdened Labor Costs”• Posted to Expense account



Create Payroll Item to Job Cost

• Addition: Track Expenses by Job

Post to COGS account for Labor



Create Payroll Item to Offset

• Deduction: Do not Track Expenses by Job

Post to Expense account



Set up Employees to Track Labor Costs

• To “convert” hours into dollars

• Need to run payroll based on timesheet

• Set up option for each employee






Five Best Practices



Leslie C. Shiner, MBA

[email protected]

(415) 383‐6255

www.ShinerGroup.com

www.facebook.com/TheShinerGroup

Twitter: @TheShinerGroup

Questions and Thank You

Don’t forget to join Leslie on Thursday for Hiring Right!

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