When you hear “multidimensional tracking” you might think about complex databases and crunching numbers, or perhaps you are a little on the eccentric side and your mind wanders to the wormholes of the universe. Since our purpose is to explain how this tracking method can boost your accounting proficiency and provide you with more insight into your business, we will save the philosophical conversation for another time.
If you are an accountant or business owner, you’ve almost certainly considered who and where your sales revenue is coming from. Although you might “know” a lot about your customer base and the ins and outs of your business, we’d like to ask:
- Are you tracking supplementary transactional information that could increase your gross profit?
- Have key performance indicators been quantified?
- How is your chart of accounts organized?
We ask these questions because we would like you to consider the benefits of using multidimensional tracking, a systematic approach to detailing qualitative information about a transaction. This simple tracking method makes your list of G/L accounts more manageable and allows you to generate useful reports that become powerful tools as you translate your day-to-day transactions into a broader scope. Traditionally, the chart of accounts has been organized as one long list. Another way to think about this is by visualizing the chart of accounts as one vertical category. With multidimensional tracking, there are multiple lists depending on the categories you choose for each account; you are basically rearranging the chart of accounts so that there are multiple vertical categories. Both tracking methods have benefits and making the decision to use one versus the other really depends on the nature of your business and industry. Our tendency is to favor multidimensional tracking because of the manageability factor and additional benefits that we feel add more value than the traditional method.
As we mentioned before, multidimensional tracking is not overwhelmingly complex. If you already track the transactions that make up your sales income and your expenses; with multidimensional tracking, you are simply adding another layer to the information you already track. Think about these extra layers as subclasses (see figure below). The two most common subclasses, or dimensions, are class tracking, which allows you to specify a certain detail of a transaction and location tracking, which allows you to specify a certain location to a transaction.
Class tracking is a useful facet of multidimensional tracking because it allows you to organize transactions based on a specific detail you are interested in. Say you just opened a coffee shop and your ambition is to grow your business to the point where you are in competition with Starbucks. You might start out by using class tracking to categorize transactions for different types of coffee. After a month of tracking this information, you will undoubtedly have a better, and more importantly, a measurable idea of your consumer’s preferences.
Sticking with the coffee shop example, maybe class tracking has enabled you to earn and spend money in such a meaningful way that you are able to open up three more shops. With four coffee shops to manage, you might want to track transactions by each shop. Implementing location tracking allows you to do this. This is just one example of how class and location tracking can be used. Another example of using class tracking might be different departments in a retail store. Another example of using location tracking might be a specific region or designated market area. As a best practice, we recommend classifying each transaction at the time you post to the GL. If you forget to classify a transaction you will have unclassified transactions or you might have an unbalanced balance sheet (if you are looking at a balance sheet by class). This isn’t tragic; you just have to retroactively classify the transaction. If this occurs in QuickBooks Online (QBO), the beauty is that you can classify, or re-classify, multiple transactions at once.
There are numerous benefits to using multidimensional tracking. The most impactful however, is the extra level of detail when it comes to reporting — having the ability to pull reports that are unique to your business, like a P&L report by class and/or location, is extremely useful in understanding your business’s cash flow. If you have identified certain sales goals or benchmarks, multidimensional tracking enables you to measure key performance indicators that will help you strategize to meet those goals or re-evaluate if necessary. Most accounting software has some degree of multidimensional tracking and reporting. The Plus version of QBO has class and location tracking features and allows you to generate a number of invaluable reports. Whatever system you use, multidimensional tracking will enable you to see the whole picture and better determine how to allocate your budget, while simultaneously tracking your expenses at the level of detail that can be pivotal for your business.