In the United States today, a full 8 out of 10 small business owners rely on one version or another of Intuit’s QuickBooks software to run their business. It is by far the market leader, and the product makes possible effective accounting and operations management for more than 15 million small businesses nationwide.

Of course, just because everyone’s using it, doesn’t mean everyone is using it correctly. In fact, most estimates suggest that nearly three-quarters of small businesses are fundamentally misusing one or more major components in the application in the course of their daily, weekly and monthly accounting activities.

This is in part due to the complexity of the product. With the exception of the newer, web-based online version, QuickBooks desktop has been around in one form or another since the days of Microsoft DOS in the 1980s. As a result, different versions often have more than one option or pathway available for completing a task, and users often become confused.

It may also be due to the fundamental lack of accounting knowledge that many small business owners and QuickBooks users possess. You wouldn’t sit down and intend to use a word processing application if you were not literate in written English, yet many businesspeople sit down in front of QuickBooks and expect it to work correctly even though they may know little to nothing about small business accounting.

To that end, it’s important to know where you stand and whether or not your own configuration and daily utilization of QuickBooks is correct, incorrect or just plain dead-wrong.

Here are three critical functions that many QuickBooks users like you should be using correctly…and probably aren’t:

1. Receiving and Paying Bills

One of the core functions of any accounting system is to enable the business to pay its bills. But paying bills is not the same as writing checks, and this distinction is often ignored (or just plain not understood) by small business owners.

As a result, some small business owners will skip most or all of the entire vendor management process and just enter a company name and address, write a check and be done with the whole thing. After all, you cut a check so it’s obvious that the money was spent, and you recorded to whom you sent the money. As long as the amount on the vendor’s bill equals the amount on your check, we’re all good, right?

Unfortunately, no. It’s imperative to use the full process properly, which means:

1. Setting up a fully filled-out vendor record.
2. Establishing and entering payment terms you have with the vendor.
3. Using the purchase order process to record what orders you’ve placed with the vendor.
4. Recording the receipt of a bill on the day that you received it, and marking the payment terms.
5. Noting the purchases that the bill was for (after all, one bill can cover multiple transactions).
6. Linking the purchases to the bill so that they are connected in the system (otherwise, you can’t track what you’ve paid or what you have or have not received — or returned).
7. Using the system to schedule the date upon which the payment should be made.
8. Executing the payment itself.
9. Then…and only then…cutting a check (which may be for more than one payment, of course!).

2. Bank Account Reconciliation

This function is right at the top of the critical priorities list. If your accounting system and your bank account are not in sync, then it renders your accounting system essentially useless. What happens next is that you begin to stop trusting the accounting system and you run your affairs purely off of your bank account records, which is a quick ticket to disaster.

The real problem here isn’t so much using the function incorrectly as it is just not using the function at all, or not using it regularly. Today, most banks support online reconciliation with QuickBooks, but online does not mean automatic. You still need to take the time to review transactions, verify each link and resolve any discrepancies.

3. Chart of Accounts Structure and Use

The chart of accounts is a critical resource, both for tax and compliance matters, as well as for management decision-making. If your accounts don’t make sense or are not being accurately used, the value of your entire accounting system starts to disintegrate.

That means not falling into the trap of randomly assigning one expenditure to the “Advertising” account and the next identical one to the “Marketing” account. It also means not building up a stockpile of transactions tied to the miscellaneous account or to the “Ask my Accountant” code either.

If your chart of accounts makes sense on paper but doesn’t work effectively in practice, you need to start with a clean sheet of paper and rethink how you want to use QuickBooks. Otherwise, you’re just piling inconsistency on top of confusion.

We’ve only covered three common problem areas in how small businesses use QuickBooks, but we could have just as easily written about thirty of them. If any one of these issues is a reality in your small business (or if these examples remind you of other, similar problems that are just smoldering away in the background), then it’s time to call your small business CPA immediately and schedule a full consultation and review of your accounting systems.

For thousands of small business owners, a healthy QuickBooks database and a consistent processes for using it are the difference between smooth sailing and serious trouble. Make sure your business is ready for success by working with your CPA to configure and implement QuickBooks effectively for your company.

Image Credit: BradyRenner CPAs