This is one of my favorite kind of projects, because it requires a few different types of expertise. One is obviously accounting. You're going to need to understand accounting to do this kind of work. Two, you need to understand QuickBooks, its features, and also its limitations. Three, you need to have a strong idea of business operations. And you need all three of these to understand what are the best practices for all three. So let's dive right into the scenario.
The scenario is there's a coffee retail chain named Tattoo Coffee. They would like a fresh redesign on its financial statements. They need their books to be consolidated into one clean set of financials, which means one QuickBooks account.
This is heartbreaking for me. It pains my heart, actually. As a cheerleader for small businesses, I really believe small business owners make the world go round. They create jobs, opportunities, by making new products and services that help all of us out, their neighborhoods, the local economy, and so forth.
But it hurts me almost on an emotional level to know that there are insufficient amount of good people advising them or giving them good knowledge, good advice. And they don't even know that it's possible to have different locations under one business and to have one set of books. And that's how it should be. They don't know that it should be. And for me, it's not a matter of being like scoffing or belittling their ignorance, how they could they have known? No, they're doing business. They're selling coffee, and that's all they should know, is how to run a coffee business. They shouldn't know accounting. That's why I am here. I am here to serve accounting to businesses. They exist to serve really good coffee.
And for me, I am so excited to tell them, to teach them that no, the proper way for you to consume accounting information, financial information of your business, is to have one set of reports and to see quote unquote the global aspect of your business, not like what each location is doing, how much it's coming in. No, you need to start from the top, the bird's eye view. And a lot of them don't even realize that it's possible on QuickBooks, on just one QuickBooks account, to have this all consolidate. It's just a matter of having it well organized and well structured.
So I'm not a lawyer. I'm not an attorney. I'm not even a CPA. But in my experience, just getting into the thick of things and just setting things up in a way that makes sense in multiple ways is first of all, this is the kind of legal entity setup that I've seen that makes sense both legally and both financially, because you want to have a parent company on the tippy top, on the mountain, on the peak, that owns each location outright 100%. You have the parent company, you have subsidiaries. And because that way, money going up and down vertically makes sense. And also, if need be, you can have the money go horizontally side to side, if necessary. Not ideal, but if it needs to happen, that can be done, because the parent company owns each company outright, then money can go any which way, and it doesn't really matter because it's all really the parent company's money. But we'll get into that, the more of the directional of the funds, right now, actually, on this slide.
On the balance sheet side, these are kind of the setup that I recommend for a business like this. Obviously each location, the location, the bank accounts will follow, will mimic, the legal setup, because if a location has its own legal entity, there should be a bank account for that entity. So each location will have its own bank account, maybe even two accounts, one for revenue, one for operating expenses, but let's make it simple. It's just one operating bank account for each location. The HQ, the parent company, will have its own operating account. The HQ will have its own savings account. And the HQ will have a payroll account. That payroll account is actually the payroll for every employee in all four locations, in the HQ, for everyone involved.
So how this is going to work out in terms of treasury is that there should be a regular draw, whether it's weekly or biweekly, probably somewhere between weekly and biweekly, because I'm assuming payroll for this company, overall, once again, payroll just as there is a parent company owning each company and each location outright, there is one payroll for each location and all the employees. There's not four different payroll services going on. There's not four different payroll things going on. It's just one payroll. And if you're an employee in location A, you get paid by the same payroll pay date as is with location D. So there's a regular draw or transfer, a bank transfer from each location, that gets pulled up to the HQ operating account, and from there, whatever the money is designated for the payroll account to go into the payroll, HQ payroll bank account. And this happens on a regular basis, and the draws are all forecasted, budgeted out for however much money it is.
Another thing that I'd like to go over is that because this is a retail business, it's not drowning in money, right? It's not having too much funds in a bank account. There's going to be a fluidity, almost, a constant art form of borrowing money from whomever, wherever, however possible. So let's say that it's the first of the month, and after you pay rent for each location from the location bank accounts, it's pretty low on cash, to the point that these bank accounts might be overdrawn. So the parent company from the HQ reserves can lend money to each location. Or let's say one location is doing much better than another location. You don't want to borrow money from location to location, because that's going to be screwy, because you want to have a due to/from account, basically a bucket that keeps track of money being lent from one location to another, from the parent company to a location account.
So all loans are made from the HQ, not from location to location, not from sister company to sister company. The only intercompany transactions you want to have is from subsidiary to parent. So let's say one location has a lot more money than the other. Location A has more money than location B. Location A wants to lend money to location B. It doesn't go side to side. It goes up and down. Why? Because that's so much easier to track, and it's ... I'm sorry. I just spit into the camera lens. I'm getting excited by this. This is a very important thing to have set up, and it's very important to follow. You want to have it up and down relation like that, because the more inner company transaction that flows you have, the messier it gets and the harder it is to track, because location A lends money to location B. Location A lends money to location C, so on and so forth. Then you're just going to populate the balance sheet with all these different monies, all these monies [inaudible 00:09:21], and you don't know what's going on.
And in some ways, do you really care, because the parent company and everything, no, you do care, because you want to track the performance of each location and not just sales and expenses, but also the balance sheet, as well. If you're not going to track it, then why do financials? Why do accounting overall? My thing is, you have to do it all the way or do none of it. It's either a hundred percent or nothing, and there is a right way to do this. And I believe that this is the right way, to have each location to each subsidiary borrow money from the parent, and the parent lends it to the locations.
Credit cards. Credit cards has become not just what you use for certain expenses. Credit cards actually has become an accounts payable, a slick way of doing accounts payable and expense management for small business now. So if you hand out, if you assign credit cards for each location manager, of course with spending limits, and of course to the general manager, I think accounts payable has become much more simplified and much more modernized and much more faster, if you have a [inaudible 00:10:41], if you have a credit card, because even if you pay off the accounts payable balance at the end of each month, that still is, what, 30 days or maybe a week, maybe a few days, or if you carry a balance and you pay the interest on that, then it's still a form of having cashflow management, which is what the purpose of the AP is.
So that's a tool that I've mentioned to business owners, and they're just blown away, because they didn't understand that there are great companies out there like Divvy, D-I-V-V-Y, that are actually, they have their own credit cards. You can get points on them, and you can easily assign your staff to have their own credit cards, and there will be limits, and there's protection and security and all that good modern stuff that you really need to check out, because it's so cool. Not sponsored by them, but I feel like it's worth mentioning.
Take a look at this new income statement. This is the last month's P&L for this hypothetical company called Tattoo Coffee, with four locations and the HQ. You can see here that I've, in terms of the columns, you'll see that there's four locations and the HQ in the company in its entirety. And this is the reason why you need to have consolidated financials. You shouldn't be working with, if you have four locations, four QuickBooks accounts and four sets of P&Ls, not to mention how to keep track of the HQ expenses as well. And then you have to consolidate and round that all up outside of Quickbooks in Excel. There's so much room for error. It's still so time consuming. It takes so much coffee to do all this, but I show clients this consolidated P&L, this is just hypothetical, but their eyes get big. They get so excited, because they don't realize that this is a possibility, but I tell them, this is how things should be done. This is how it should be done. And it's very possible. It's not that hard to have it set up in QuickBooks, and you should be able to track the income and expenses by location.
Remember, financials is business performance tracking. You want to see the health of each location, of how it's doing, you want to see where it's done well, and where it can improve.
So I hope that this has been helpful. My name is Thomas Kim. I'm a bookkeeper based here in New York City. If you have any questions, please feel free to drop me a line. Thank you very much. Cheers.