Ready To Graduate To Class Tracking in QuickBooks?

A Q&A with Jeff Heybruck, CEO, Lucrum Consulting

Q: What is Class Tracking In QuickBooks?

A: In QuickBooks, “Class Tracking” is a feature that allows the categorization of financial transactions. For those not familiar with the accounting jargon, just think “business segment” or “customer segment” when you hear “class.” Businesses might track classes by Department (e.g. Sales vs. Ops vs. Marketing), Location (e.g. Store 1, Store 2,…), Service Line (e.g. Service 1, Service 2, …), Vertical Market or Project (Project A, Project B, …). With Class Tracking enabled, a “class” is assigned to each transaction (invoice, expenses, etc.). As a result, financial performance will be able to be pulled by class in QuickBooks reports.

Q: Why is it important to set up Class Tracking correctly the first time, or why do you really only have “one shot”?

A: Putting a good bit of thought into how Class Tracking should be set up before it is implemented can save the business a considerable amount of work down the road. Class tracking is one of those setup options that can potentially paint you into a corner down the road. Once you make the choice about how to set up Class Tracking in QuickBooks, it’s difficult to backtrack. You “could” change this setup in theory, but that would require quite a bit of retroactive work and “undoing” of the data that has been organized by Class over a period of time. The longer QuickBooks is managed under a Class Tracking system, the harder it is going to be to change or undo the segmentation of the data moving forward.

Q: How should you use Class Tracking to segment financial data about the business?

A: Class Tracking should be set up in a way that allows leadership to understand the financial metrics for the customer or client segments that matter most for that particular business. For some businesses that might be by brick and mortar location, it might be by state, it might be by line of business. Others could need to see the metrics by specific project (e.g. in the construction industry). What really matters is how the business is managed, organized and talked about in leadership meetings. This should inform how classes are set up.

What really matters is how the business is managed, organized and talked about in leadership meetings. This should inform how classes are set up.

Q: How many “Classes” can you set up in QuickBooks? What is the best practice?

A: While it is possible to set up many classes in QuickBooks, it is not always wise. When Class Tracking is enabled, a list of classes is created. There is no one answer for how many classes should be set up – it all boils down to business complexity. However, we would generally recommend implementing a small number of very clear classes. Otherwise, the set up could become burdensome or run the risk of being used incorrectly. It’s better to have very few easily used and understood classes, rather than many classes that aren’t always assigned, used or understood by the team. My advice is to find the right balance between the detailed reporting *actually* needed and manageability.

Those familiar with using tags (in other applications) might confuse that approach with classes. It is important to realize classes are very different. A closer analogy might be: Putting everything in each class in a separate filing cabinet. They are separated by default, but can still be rolled up into broader company analysis.

Tip: The number of classes that can be set up depends on the QuickBooks version. Make sure to check if your subscription or version has a limit for classes.

Q: What are some examples of how the team at Lucrum has used Class Tracking in QuickBooks for clients?

A: We worked with one tree company that also decided to get into the Plant Healthcare and Landscape Maintenance spaces. Once this happened, they needed to be able to see things like profitability by the three business lines, versus one rolled-up metric across the business. This allowed them to better understand how profitable each business was and work on improving the financials separately – especially since each was run by a different team.

Working in Charlotte, North Carolina, (which is close to the border of SC), we work with a good number of businesses that have divisions or locations across state lines. In some cases, it’s good to be able to split out the numbers between how the business is doing in North vs. South Carolina.

For one paving company we work with, they wanted to be able to see the profit and financials for jobs done in-house vs. jobs subcontracted out. This helped the business to make key decisions about whether to scale up in-house employees and equipment or continue to let certain jobs go to outsourced partners.

In another case, a local homebuilder wanted to understand BOTH the subdivision and phase of the construction build out for their projects. In this case, we set up more than one class inside of QuickBooks so they could slice the data both ways.

A developer we were working with had different mall locations in a metropolitan area, but wanted to understand their financials by location. The same went for a local hairdresser.
A real estate investment firm wanted to segment by contract deposits vs. development start up costs. I could go on.

As you can see, in just 5 minutes, I’ve rattled off quite a few applications of Class Tracking. Really the possibilities are endless depending on how the business is set up. But given that the setup of classes can cause unexpected future headaches, this is an area where experience offers great wisdom. Working with a firm or resource who has done the setup of Class Tracking across many different business is recommended. They’ll be able to recommend the best way to set things up to get the detailed data you need without overcomplicating things.

We hope this Q&A has been helpful. Class Tracking is a key aspect of giving business leaders Confidence in the Numbers. If you’d like to speak with a strategic financial resource about how to set up Class Tracking in QuickBooks, please don’t hesitate to schedule a consultation.