Creatures of Habit
Eileen Reppenhagen, QuickBooks ProAdvisor.
We are all creatures of habit. We have the same customers. We have the same suppliers. Most days when we get up, we go to the same coffee shops. And, when it comes to business, we all have to create proof of reasonable kilometers.
Clients, also being creatures of habit, typically do not show up with a km log. The ones that do are those salesmen who were audited in the 1980’s. All of their vehicle expenses were denied back then. I can always tell who they are because they come in with a typed km log and each day itemized. Common client attitudes run like this, well you used a % that I gave you last year and it worked, so what is wrong with doing that again?
Auditors, on the other hand, have a different attitude. Produce a km log or I will deny your entire claim of vehicle use for business. Prove it’s reasonable.
Even if your client does come with a km log, how are you going to know if it is reasonable or not? As the accounting professionals, we are supposed to check for reasonability - why wouldn’t that include the claim for vehicle expenses?
Is there a way to meet in the middle? I think that there is and it only takes a couple of hours and a good attitude.
Let’s start with a premise. Eighty percent of the time your clients go to the same twenty places. This is a variation on Pareto’s 80/20 Rule. Another two premises I find are often true are: 80% of the client’s revenue comes from 20% of their customers; and 80% of supplies come from 20% of their suppliers:
If we take the first premise and run a QuickBooks Sales by Customer Report; export it into Excel; add three columns (the first, number of visits, the second, km’s and the third, a total of the first column times the second column) to the right of the figures,
I will wager that your client can, with a few minutes of thought, tell you how often they visited each customer’s place of business. Using maps.google.ca Maps and Directions, you can find out the km’s from your client’s business to their customer’s location.
If we take the second premise about suppliers, and pull up an Income Statement for the year; click on the total expenses; sort the expenses by payee; take out the columns you won’t need, leaving the Date, Memo and Amount columns (the Payee name will be at the top of each set of data),
Just a quick note about why to sort by Payee: if you sort this report by Vendor and have used another type of name other than vendor or no vendor at all in a general journal entry, you may not get the entire expense report. Check that the total agrees to your summary before proceeding.
Export the Expenses sorted by Payee Report to Excel; put the same three columns, as in the first bullet above, to the right of the report; ask your client to complete how many times he went to each of these vendors and how far it was. Once again, we are creatures of habit. We shop at the same stores.
There are some other checks of reasonability you can do just as quickly and easily. Run the balance sheet and add these items to your summaries of sales and expenses:
Bank trips. Count the number of trips to the bank by the number of deposits.
Review inventory purchases, same procedure as expense purchases. How many times did your client visit their suppliers? Were the goods delivered or did the client pick them up? Did the client visit once or twice or more than that for each purchase?
Review capital transactions, same procedure.
Check the flipside. Examine personal driving habits. Ask about vacations, trips to the shop, school, entertainment, dining out, visits to see family members, churches and hospitals. Do a quick tally of the two to see how much you can’t account for.
If your client uses a Day Timer or a calendar, or if they put their appointments in Outlook, ask them to produce these records to put them with the calculations.
I can tell you from 18 years of experience that this process, with assistance to keep it on track, rarely takes more than two hours.
Why would your client pay you for this? Consider that you are justifying what could be as much as a $10,000 expense. Why would your client not find this valuable? I think a couple of hours of investment is worth the effort to document the claim. The alternative, an outright denial and demand for proof of driving habits years after the fact. Who needs it?
In the end, a km log is a matter of attitude. Either you have it or you don’t…a good attitude, that is, and oh yes, a km log
Eileen Reppenhagen, Certified QuickBooks ProAdvisor
Tel: 1 604 943.7414