Categorize Your Billing
Posted by Sean MacKenzie on Thu, Sep 17, 2009
Making a Good Set of Categories
One of the most important things you can do when setting up your business on any kind of project management, expensing, or time-tracking software is to make sure you categorize your billing and expenses.
If you create a good set of categories in the beginning, your small business will really benefit down the road. You will be able to see important trends on how you ran your business in the past, and these will help you plan for the future. They will also help to simplify management of your general ledger (GL) and accounts receivable (AR).
Business Items
The first set of categories you create should include a set of items for the overall operation of your small business. These will not be related to projects you are working on, but generally account for "everything that is not a project". Usually, these will include some major categories such as Marketing, Finance, or Accounting. Within these areas, you might split the category into a few more, but generally that is where you would stop.
For example, you might add a few sub-categories like Market Research or Ad Design to the Marketing category.
Project Items
The second set of billing areas you can create will include your projects that you are working on for customers over time. Each project should have its own set of items and sub-items or categories. Your billing system should allow for projects to have multiple versions over time.
For example, you might write a small piece of software one year and then two years later do development to enhance the same software. If you do many versions over time, it is much easier to see statistics over the long run.
You should determine the kind of billing your project will need before you set it up. While some projects may have a standard set of items, others may need to have specific defined items created before you put your time and expenses against them. Make sure your system can do both.
A general contractor might simply put all his time against general items like Carpentry and Electrical, and this may be enough for his reporting purposes. Another contractor might need to specify exact items to bill against, like Breaker Box F, Switch Setup. A lawyer might set up project items for each contract or set of meetings they have been asked to do.
Get Advice
It may seem overly cautious to ask advice about which categories to set up, but it is also a good idea to talk with your accountant when setting up categories the first time. They will have good advice on how to set things up the first time, for both Business Items and Project Items.