Many people use the accounting software in QuickBooks and forget the rest. For the most part, clients know how to use accounts receivable and accounts payable. What is often forgotten or misused in QuickBooks? That would be estimates, sales orders, sales reports and items (products and services you sell).
People misunderstand the importance of using estimates (bids, grants, proposals or quotes) for follow up and profit margin tracking. Sales people or customer service could be entering those estimates directly into QuickBooks. Worried about your employees messing up your software? Security controls can be established so that they can't go anywhere else in the software. Do you know what your profit margin is per job or are you simply making journal entries and "approximating" the profit margins? What was the estimated versus actual revenue and costs? Can you set up your company's selling workflow in the software? You should be able to.
Whether you sell products or services it is vital to set up items in QuickBooks. Why? The more detail you use for item lists the better your reports. Questions can be answered like ... Which item is my best source of income? Which items are my best sellers? Product costs and labor costs should all be set up and tracked in QuickBooks. Pricing? Set up your price levels and use those to your advantage to help control sales profit margins.
The Sales Order tool is excellent for managing partial shipments and sales order fulfillment for inventoried products and their interface to purchase orders, pick lists, and packing slips in QuickBooks.
A full or mini ERP implementation should take full advantage of the financial and business software your company purchased.
For the above metioned QuickBooks functions, it makes a difference which QuickBooks package you have ...
Is QuickBooks right for your company? Compare it to other leading software systems: Download the Software Selection Guide
There's something about profitability and margins that accountants just love. What is it exactly? Well, a margin calculation can tell you a great deal of information about the financial stability of your business.
Case in point; profit margins.
Profit margins are the easiest way to calculate your business profitablity by measuring the percentage of each sales dollar that results in net income.
Let's say your company sells coffee cups for $10 each and they cost $6 to make. Your company also has to pay $2 in tax, leaving $2 for the net income of each cup.
That means that your company is making $0.20 for every $1 or 20% chart The profit margin indicates a company's ability to control costs and pricing. The higher your company's profit margin, the more profitable your business is and it gives you better control over the pricing of the product.
Financial website Motley Fool calls pricing a product to be profitable the "holy grail of sales and marketing groups" because pricing influences sales and creates profits that is essential to a company's success.
If your company's costs increase and your sales rate can't keep up, you're in danger of having your profit margin dip. A low profit margin translates into a lower margin of safety, meaning your company is more likely to decline in sales that can result in net loss.
Profit margins play a big factor in business competition. Competitive industries that are easier to get into have much lower profit margins than less competitive industries that typically have a strong brand.
Profit margins are easy to figure out and a quick way to check your company's profitability. No wonder accountants love them so much.
In the world of accounting, ratios give and invaluable amount of information about your company and it's fiscal well being. Accountants use financial ratio analysis on a regular basis. These analyses help to evaluate the financial performance by comparing financial ratios of a business over various periods of time to other businesses in the same industry.
In his book Financial Analysis Tools and Techniques , financial expert Erich A. Helfert defines ratios analysis as
"the use of a variety of ratios in analyzing the financial performance and condition of a business from various viewpoints such as managers, owners, and creditors.
Get out your financial calculator.
There are three different types of ratios:
Liquidity
Profitability
Solvency
Liquidity
Liquidity ratios measure your business short-term ability to pay bills as they are due and let you know if you have the cash to cover and unexpected expenses. Liquidity ratios compare your most liquid assets (assets that are easily turned into cash) with your short-term liabilities. In general, the greater the ratio of liquid assets to short-term liabilities, the better off your company is. These ratios let you know that your company can pay debts that are owed and still continue to operate normally.
Current Ratios
Acid Test Ratios
Current Cash Debt Coverage
Receivables Turnover
Inventory Turnover
Profitability
Profitability ratios measure the operating success of your company for a specific period of time. They give you a better understanding of how well your company made use of its resources to generate profit.
Profitability Ratios
Profit Margin
Cash Return on sales
Asset Turnover
Return on Assets
Return of Equity
Solvency
Solvency ratios measure how well your business can survive over a long period of time by measuring your income after taxes. Solvency ratios take a look at your past financial statement analysis and let you know if your company can continue to pay its debts now and in the future by looking at your income after taxes. A ratio that is higher that 20% means that your business is financially healthy. The lower your ratio, the greater chance your company will default on its debt obligations.
Solvency Ratios
Debt to Asset
Times Interest Earned
Cash Debt Coverage
All of these ratios, liquidity, profitability, and solvency alike can provide you with useful financial information about your company. If you can get so much information from just looking at one type of ratio, imagine the invaluable knowledge you can gain to keep everything on track and guide your company to success.
