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Invoice deposit for Management

(light music) - [Trisha] Hello everyone, and thank you for joining me today. My name is Trisha Thomas. I'm a partner here at Fourlane. And for today's session, we're gonna talk to you about customer deposits and inventory prepayments, and some mistakes that we see our clients make when it comes to their workflows. So before I get started, I always like to remind you guys that we do have a YouTube channel. So if you've missed any of our webinars, you can always find them on our channel at youtube.com/Fourlane. Also, remember, you can subscribe to that channel. And by subscribing, then you'll get notifications anytime we upload a new video. You can also connect with us through Facebook. So our Facebook group name is Fourlane QuickBooks Enterprise. There's always lots of great information. You can ask questions. So please feel free to join that group. We would love to have you on there. Also, let me tell you a little bit about our technical on-demand support that we offer. 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So any more information you guys interested in that, please just reach out to us and we can get you set up with that. Okay, so let's get started. As I told you guys for this series, we're gonna talk about customer payments and vendor payments. So everybody knows QuickBooks is great at being user-friendly and customizable. Sometimes we see clients that create workarounds, and those workarounds impact the health of the file. And inventory is a really big one. So yes, you can allow your accounting file to maintain negative inventory quantities, but it doesn't mean that that is a good process. And this will cause issues, not only in the database of that file, but also with your financial reporting. So one of those processes that we see that clients have in place is collecting a percentage of payment upfront, also called a customer deposit. So a customer deposit is put in place when you require a payment upfront for goods or services that you're providing them. Now, when it comes to inventory goods, you wanna ensure that when you accept this upfront payment, your inventory is not affected by this transaction. So what I'm gonna do, I've got a sample file open, I'm gonna walk you through an example of how one of my clients were handling their customer payments. They were using the progress invoice function, and I wanna show you guys the effect it had on their financials. And then in turn I'll walk you through what we would recommend on how we can keep track in our accounting file for tracking those customer deposits. Okay? So this customer was starting out, and they would create an estimate as their starting point and they would invoice from there. Now, when it comes to any company that's maintaining inventory, you can start at an estimate. But if we want to be able to have inventory reporting opportunities once that quote or estimate or proposal is accepted, we want to in turn create a sales order from that estimate, because that's where our inventory reporting is driven from. Of course, that's a whole other topic. I won't get to it in this session, but we will be covering more inventory topics in 2023. Okay, so let's kinda walk through what this client was doing. So first we're gonna create a quote. And you know in QuickBooks, an estimate, you can customize those templates, call it a quote, call it a proposal. You can change different templates. So all of this is all customizable. And I'm just gonna pick a couple of items. I'm gonna pick two of my widgets here, okay? And let's pick our quantity. Okay, so very simple. An estimate, once we save this, what this is saying is this is a contract between our customer. This is no financial impact at this time. We call this a non-posting transaction. But from this point, what the customer's doing, we're gonna go ahead and we're gonna add a little customization to our quote here, and we're gonna say that they are required to pay 50% upfront on this order. So what they were doing is they were now taking and they were creating an invoice off of this quote. So using that progress invoice function. So we'll go ahead and go there. We're gonna create an invoice and we're gonna choose where it says Create an invoice for a percentage. So we're gonna choose that option and we're gonna pick 50%. And now QuickBooks is gonna do all the work for us and create that invoice in the background. So one, I have it set up in my file to tell me when I don't have enough inventory. So hopefully this would be a red flag to say, "Hey, I shouldn't be creating this invoice yet." But lets just say that we're in a hurry and we just say, "Okay, no problem, QuickBooks. Thank you." So you can see here that our invoice created and did exactly what we asked it to do. It took our quantities that we had on our quote and broke 'em into two. Same thing, it's showing the total amount that they're invoicing, and it's showing the total amount that that's gonna be. I wanna go ahead and save this. This, once I save that, is now my financial impact. So I want to show you what happens with my financial file by creating this. So coming on down to my inventory evaluation, you can see now I have a negative quantity for my widget 5 and widget 6, which is also resulting in a negative asset value. So when you think about, one, you've got to where we're creating an invoice before receiving any inventory, and that's creating our negative quantity. So if we were to report as of today what our inventory asset value was, you can see it's understated by this negative value because that's not true. None of this is actually taking place. We didn't fulfill any order. So now we've got that financial impact that is not accurate. And so someone trying to, you know, create our financials, they're not gonna have our accurate financials. So I'm gonna go in, I'm gonna go back, I'm just gonna delete this. We wanna talk through what we would recommend. So when it comes to a customer deposit, you're not fulfilling the order at the time. You're taking the funds. I'm gonna take us back to that estimate. We're taking the funds upfront and we're saying this is what we require before we will process and complete this order. So there are a couple of ways that you can record the receipt of this payment. So one way that you can is you can go to your payment module, and you can just go ahead and accept that 50%. I'm gonna choose Trisha, and half of that is 2812.50. Very important. Depending on how your QuickBooks is set up, when I hit Tab, it automatically selected my open invoices. Since we're saying that we are not invoicing at this time, we just want the payment to sit on their account. We need to make sure we uncheck those so it is not applied to any invoice, okay? So I'm gonna show you guys once I save this, save and close, of course it's saying, "Hey, how do you want us to handle this?" And we're just gonna say, "Just leave it on our account." So if I go back to that customer and I look at their open balance, you can see now that they have a payment sitting on their account for that amount that we took in. Okay? Now, there's some pros and cons by doing it this way. Pros are the customer can clearly see that they made a payment. It's sitting out on the account. It's not applied to anything. And if we go back to our inventory evaluation, there's no effect on our inventory. So our widgets are back down to zero. We don't have to worry about our financials being impacted. Everything is accurate as is. Okay? Some cons are, you know, this is gonna come up in negative AR, you know. so if you don't like to see negative AR in your open AR, you might not wanna do this. The other issue, to me the bigger con is that when you go and fulfill this invoice, to actually offset this payment to the invoice, you have to go to the original payment and then go select those invoices. So you run into a situation of if I collect a payment in this period but I don't invoice to the next period, you're gonna have a financial change. Because when you go and offset these two, it's gonna change what was open in AR. Okay? So I'm gonna just kind of back up what we did so that we can talk about a different way to do this. So I'm gonna just delete this. Okay? So back to Home. So another way that you can record customer deposits is having the payment reside on the balance sheet as a liability until the order is fulfilled. So you think about that you're taking in cash and you're saying, "I'm going to provide you with this service or I'm gonna provide you with the goods, and until that's done, that is a liability to your company." So to go that route, we have to set up two things in our accounting file. We have to actually create a GL account. It's gonna be an other current liability. I just named it Customer Deposits. And then we have to go and create an item that's also customer deposits, and it's mapped to that customer deposit GL account. So remember that everything on the AR side is driven by item. So we have to create the item to be able to create that payment to where we can see it on our balance sheet. Okay? from this point, now we wanna record the payment. You can create an invoice and then post the payment. But an easier way is to record a sales receipt. So the sales receipt actually will record the cash and the liability in the same transaction instead of having to do two transactions. So let's go through that, and then we'll look at the results together. So choose our customer again. We're gonna choose that item that we created called Customer Deposits. We can even if you wanna add a little note that what this was for, we can put that in the body. Okay? That was at 50% on that quote. We can put the amount. Okay, once I save this, this is my financial impact. So now taking a look, one, look at our inventory evaluation, we are still at zero. We did not affect our inventory because we have not fulfilled this order. But now let's take a look at our balance sheet. Our balance sheet now has a liability of customer deposits. In this case it's higher because I created a few more to kind of show you guys. Why I really like this process is because now you can see, especially if you are a company that accepts and requires customer deposits for every order that you fulfill, this would allow you to actually track 'em all. And by drilling into that account, I'm gonna change it and say Show All. And I'm gonna say I want to show it by name. So now I can list all of my customer deposits by name. And we can take it a step further by reconciling this account every month. And that way we can have customized, memorized reports of all of our customer deposits of what still is open and we haven't fulfilled. Okay? So of course, final step would be, we'll go ahead and do that. I'm just gonna create an invoice just so that you guys can see. Of course, if I was doing this in my accounting file, I would take my estimate, I would create a sales order. I would then go and order those items that we need so that I can fulfill it and then invoice. I'm gonna bypass all that since we're just focusing on our financial impact for our customer deposits. And I'm gonna say (faintly speaking). And I'm just going to put in my two widgets so you guys can see. And of course my file is saying, "You just told us don't do negative inventory and you're doing it?" No, I'm showing you guys, so at this point, this is us fulfilling the order. And now the key piece is we want to reduce what our customer owes from the customer deposit that they already paid. So I'm gonna choose that same item for my customer deposit. I'm gonna enter the amount at a negative value for what they've already paid. And once I save that, you can now see, let's look at our journal entry. So you can see that our income, it hit the total amount of what we sold. Our inventory was reduced by the cost of those items, and then our customer deposit was reduced by that amount. So now if we go back to our details on our inventory, we can now see that T. Thomas paid a customer deposit on 02/08, and then we fulfilled it on 02/08, and we reduced our invoice by that amount. And again, that reconciling process would allow us to basically offset and close out this because it's been totally fulfilled. Okay? So that's on the customer side, one example of things that we see clients do that really affects their financials and their health of their file by allowing negative inventory. So now I wanna show you on the opposite side, let's talk about the purchasing. Okay? So sometimes when companies purchase inventory, the vendor requires a percentage of payment upfront. So I'm gonna walk you through an example that we see clients make mistakes on when it comes to making that payment. And then we'll do the same thing and walk through that recommended workflow. Okay? So we're gonna start at purchase order. So I'm gonna create a purchase order and I'm gonna create it to my widget vendor. We'll go ahead, and let me delete this invoice. Actually, we'll just do it for our widget 5 and 6 and we'll cover, and we're just gonna say we're gonna do it for 1,000 so that we can put some healthy inventory numbers in our file. Okay? So the first thing here, we create our purchase order to our vendor. When we save this same thing as an estimate and sales order, it's a non-posting transaction. It means there's no financial impact. This is a contract between you and the vendor saying I would like to order these and for you to fulfill this order. So once we email that order to the vendor, the vendor comes back and says, "I require a 25% deposit on that order." Okay? So here's where the mistake that we find that clients do. So in their mind, I need to create a vendor bill so that we can pay that 25%. So what they'll do is they'll go ahead and receive these items in the system. And my accounting file's being silly today. And we're gonna choose that purchase order. Okay, so you can see here that we're saying, "Okay, here's what we're ordering. It's going to be a vendor bill. We'll just give it a bill number." Now they say, "Okay, well, we only have to pay 25%. So we're gonna take in, we're gonna change this and we're gonna pay 25% of this." So here's a fun thing in case you didn't know that you can do in QuickBooks: some easy calculations. So I'm gonna just say 0.25. It's gonna calculate for me what that would be. I'm gonna do the same thing over here. So you can see now that it changed for the amount of the 25% that we owe the vendor, which is great, that's what we owe. But the big issues in this is two very big issues. One, these items haven't been received. We haven't even received our packing slip. We haven't gotten anything. The order hasn't been fulfilled from the vendor. So when you think about by creating that item receipt, now what we've changed in our accounting file is inventory report saying that we have these widgets available to sell. So when someone goes into the accounting file and they go to create invoices or a sales order against these, they go in the warehouse and they say, "Wait a minute, these aren't here." So now we've, you know, told a customer we have availability that we actually don't. The other biggest issue is look how it changed the cost. So each one of these widgets cost $125. But by adjusting this for just that percentage, it actually changed the cost of these widgets, and that's gonna affect our asset value on these. So this is a really big problem that we see. And now, again, we're in that same financial impact of my asset value is understated by this value. Okay? I'm gonna just delete this so we can back out of here. And no, I do not wanna receive. Okay. And so when you think about making a prepayment on inventory, you do have an asset value in that payment. But since you haven't received the goods, you don't want that asset reflected in our inventory values. What we wanna do is we wanna create a GL account that will hold that asset value so we can see that payment made until the goods are received. And then when we create our vendor bill, we can reduce it by the amount that's already been paid. So I'm back at my purchase order. Our vendor says, "I require that 25% upfront." So what we wanna do is we wanna create at our chart of accounts, we wanna create a GL account. And I just called mine Prepaid Inventory. Now, different on customer and vendor side. Customer side is all item driven, but on your vendor side you can create your bills with GL accounts or with the items. So just depending on how you wanna handle, if you want all transactions at item levels, we can create an item called Prepaid Inventory, or we can just allow the transaction to be at our GL account for our prepaid inventory. So whatever works best for you. And again, that's something that we can help you, you know, make that decision. So when we have our GL account set up in the system, we can now create a separate vendor bill just for that 25% and we can pay it. Or the most simplest thing is we could just write a check to that vendor. So we can write a check to that vendor for that amount. And I'm just gonna say no. And this is where I was talking to you about you decide. Do you wanna use your GL side and post the payment against your expenses, or do we wanna use our item and post it against there? And it's really a preference of how you wanna see things in your accounting file, of which tab that you wanna use. But what'll happen is the same thing that happened. I'm just gonna put an amount just so that we can see it. And I'm just putting in 5,000 just so that you can see it. So now what happens when we go to our balance sheet, you can now see that you have a prepaid amount of that 5,000 that we just paid. And we can do the same thing that we did for our customer deposits, is we can run it, open. We can say, "Sort it by the name." And then if we have multiple vendor payments, it will show all of those. Once we offset, the same exact process as we did with reconciling, we can do. So I'll go ahead and enter the vendor bill just so that you can see this offset. And then I'll turn it over to any questions that might have come in. So let's go. And I'm gonna go through our same thing where we received our purchase order. So we're gonna do it again. We're gonna create our item receipt. And we're gonna do it against our purchase order. Okay, so I'm gonna go ahead, I'm gonna flip it to a bill. Now, the key point here is I do not touch my items at all. This is what my asset value is. This is what my quantity I'm receiving. And this is what I want to see on my balance sheet. But I also don't owe the vendor 250,000 because I've already paid 5,000. So I can either use that item here and reduce, or I can choose my expense side. I can choose my prepaid inventory, and I can reduce what I owe my vendor by 5,000. And now you can see it saved the amount of what we owe our vendor. Our items were not affected. So let's go ahead and save that. We'll do like we did before. let's look at our transaction journal. So you can see that our accounts payable shows exactly what we owe that vendor. We reduced our prepaid inventory account by the 5,000, and our inventory asset was increased by our quantity that we purchased. We come back, same thing, our balance sheet, you will see that that account is no longer there because we paid it in full. If we look at the details, we can see that that is now zero. Okay? And last piece, we always talk about reconciling balance sheet accounts. So the reason why we wanna do this is for reports such as this. I'm gonna just show you really easy, simple reconciling, and I wanna show you this report so that you can see the difference. So we recommend every month reconciling our accounts. And by doing that it allows us to customize our detailed reports. You can do this with prepaid expenses, deferred revenue, any of your balance sheet accounts. You can keep that detail of what makes up that balance by using this feature inside of QuickBooks. So we'll go and just easy reconcile that account. So you can see I have all of my balance sheet accounts I can reconcile. We're gonna do the prepaid inventory. I'm gonna do it as of March just because I know my transactions were in February. Non-statement accounts always have an ending balance of zero. Our end goal is just to remove the transactions that offset each other. I'm gonna choose those two that offset each other. I'm gonna choose this one. There was a zero, just to clear it out. You can see my balance is zero. And I'm gonna choose to reconcile now. Now, I wanna take you back to that report, that transaction detail. And now you can see that you have that check mark. And I'm gonna show you, I'm gonna reconcile the same thing and I'm gonna do it in our prepaid customer deposits because I wanna show you right now, it's all of our ins and outs. Everything that's ever happened from when we started this file is there. And I'm gonna do the same process for reconciling with this account so you guys can see. So this is my customer deposits. Now ,I'm gonna do it as of March again. Zero. In the same exact process, I'm going to offset our debits and credits. One of the fun things is we can customize this to make it easier to offset. So I'm gonna add my payees on both sides so that I can see payee to payee in case it was the same amount. So I've got 500, 500. I've got 2812, 2812. And I've got nos and nos. Okay, so again, my balance is zero. I'm gonna reconcile. And then when we go back to that report, we've got all of our debits and credit. And I'm gonna customize, and I'm gonna say," Just show me what hasn't cleared." Now it removed all the noise 'cause everything is cleared. And now it shows me that I have one outstanding customer deposit that I still need to fulfill the order on. So this would allow you to really keep track every single month of what is outstanding. That way we can keep track of what still needs to be fulfilled. Okay? So this is kind of two different kind of workflows that we see customers make a mistake with. If you need help with any of these, please reach out. We can help you with any kind of workflows when it comes to, you know, managing that inventory, any kind of specialized processes you are doing. Or even if you just see some numbers in your file that just don't make sense, please reach out to us and we can help you get everything back in alignment and create workflows for your team to make sure that you can trust your financials and everything looks good and we're keeping that file healthy. Okay, so we've got a couple of minutes left. I'm gonna look over and see if we have any questions before we end our session today. And we do. So we've got here, our first question says, "How would you match these that are imported from the bank feed?" So really great thing with bank feed is it tries to match for you. So it's gonna go and look for that transaction and it's gonna match it for you. If it can't find the match, you can manually post it where it needs to go. So if you didn't post that customer deposit on the front end, you can choose that GL account and you can post it from there so that you can still have that same workflow. And next question is: "Some customers will not pay a deposit without an invoice. How do we get around that?" So by creating that item, we can create the invoice to send to our customer that shows it's that percentage of payment that is owed on the order. So that way you can email that directly to them and for them to pay. And then the final question: "Would this work in the service industry such as a law firm accepting a retainer?" 100%. So by using this detailed report, you can have it separated by each of your customers. And when you are invoicing against those, you can reduce it by a certain amount so that they never owe. But you can always see that running balance of what each customer still owes you. Or in that case, what they still have open on their retainer balance. Okay, you guys, so we are right at time. If you have any other questions, please reach out. Thank you all for joining me today. I really appreciate it. And you guys have a great rest of your day. (light music)