Everything You Ever Wanted To Know About Class Tracking
Here at StartLightSoft, one of the questions we get asked over and over is how to set up class tracking—and if it’s worth it.
Our response? Class tracking is a handy feature of accounting that helps business owners get a more detailed view of their finances. It’s a little tricky to set up at first, but once you’ve identified the categories you want to track, it will be a big help later on when you want to determine which areas of your business are doing well and which need help.
What Exactly is Class Tracking?
Class tracking shows you income and expenses, broken down by different areas of the business, like department, product line, service type, or overhead. This can be especially helpful if your business is in the retail, service, distribution, or manufacturing industry where you have many different product types and offerings.
For example, if you own a brewery, you will want to track your taproom sales separately than your wholesale sales to restaurants around town. This means that sales made through the taproom are tagged and categorized in your accounting system separate from wholesale. The same goes for taproom-specific expenses, like buying pint glasses.
At the end of the year, you may look back at your financial reports and realize that, while the wholesale side of your business is growing like crazy, the taproom is actually losing money. This leaves you with a decision: scale back on the taproom or find a way to help it out.
But without class tracking, you would only see the positive overall number and draw the conclusion that all aspects of your business must be doing just fine.
Benefits of Class Tracking
Class tracking allows you to identify business opportunities you might have otherwise missed. For instance, you might notice that a beer type you had low expectations for is selling surprisingly well and decide to produce more, capitalizing on the demand you see.
Likewise, it allows you to get ahead of potential issues, like your struggling tap room. If you can identify those issues early on, you can make changes before they become serious problems.
These insights are usually gained by looking at your Profit and Loss (P&L) and Balance Sheet reports at the end of each month (or your preferred accounting period). Basic P&L’s and Balance Sheets don’t give very much detail, but class tracking helps you to use these reports to paint a clearer picture of your business. In other words, when used wisely, these reports can empower you to make smart decisions about your business. The more detailed they are, the better.
And if you plan to seek funding or apply for a loan, those reviewing your financials will likely want to see detailed financial reports before signing off.
Why Do People Avoid It?
With all of those benefits, why do some business owners still put off implementing class tracking?
Like most things related to accounting, the practice of class tracking is more difficult to understand than the concept of it. Tracking the right categories early on will save you a lot of time, money, and headaches as your business grows and it becomes increasingly difficult to implement these kinds of projects. Setting up your accounting processes for long-term success requires spending a substantial amount of time in preparation—preferably with the help of a knowledgeable accountant.
Other Tracking Types to Consider
Class tracking refers only to keeping tabs on specific categories within the business, usually relating to a product or service line. But what if you work in construction and want to make sure your individual jobs are profitable? In addition to class tracking, there are two other tracking types to consider: job tracking and location tracking.
Job tracking allows you to get specific reporting on each project your teams are working on or for specific events you’re planning. This kind of reporting is especially helpful if your business is in construction, service, or real estate.
Location tracking allows you to see the profitability of each individual location operating under your entity. For example, your profitability reports will be separated so you can see how your Texas location is doing compared to your New York location. This is applicable to all industries but especially to franchisees and brick-and-mortar businesses with multiple locations.
You can track any one or a combination of these categories. The goal is to track all the specific details that are important to your business and to leave out anything that wouldn’t be useful. That way, when you look at your books down the road, you will have all the information you need to make thoughtful decisions about the future of your business. There is power in your financial reports. Tracking the right details will help you harness it!