Class Tracking: Find Out Which Part of Your Business Actually Makes Money

A bakery turns over $1,000,000 in a year and keeps $62,000 of it. Three quite different businesses sit inside that figure: two retail counters, a wholesale round supplying cafés, and a weekend catering trade. Class tracking is how you stop reading them as one business — and the first time the owner did, the result pointed straight at the wrong decision.

This walkthrough follows that bakery from an empty class list to a working profit and loss by class: choosing the classes, tagging costs as carefully as sales, the overhead question that trips nearly everyone, the journal entry that records a split, and the habits that keep the report honest.

What Class Tracking Adds to Your Books

Every account in your chart of accounts describes the nature of a transaction — flour, wages, packaging, sales. That is exactly what tax returns and lenders need, and it is why the chart should stay compact. The trouble starts when you want to know which channel used the flour. Without classes, the only answer is more accounts: “Flour — Wholesale”, “Flour — Catering”, multiplied across every cost line you have.

Classes add a second label instead. One account, one class, on every line. The ledger itself is untouched — debits still equal credits, and the ordinary P&L totals are identical to the penny. You have simply gained the ability to cut the same figures another way.

How is a class different from an account?

The account tells you what was bought or sold; the class tells you which part of the business it was for. A $620 flour delivery for the wholesale round goes to Ingredients (account) and Wholesale (class). Keep the two jobs separate and you get a short chart of accounts with far richer reporting.

Should I use classes, locations, or both?

Classes suit the type of activity — retail, wholesale, catering. Locations suit the place — the downtown shop, the riverside shop. Begin with whichever answers your most frequent question. The bakery added locations later, when it wanted to compare the two counters’ retail trade side by side; using both meant it never needed a class called “Retail — Riverside”.

Choosing Classes That Will Still Work Next Year

Class lists built on the fly, one awkward bill at a time, decay quickly. A list designed before the first tag holds up. Check each candidate against these questions:

1. Would you act on it? If its numbers would never change a price, a rota or a plan, it doesn’t need to be a class.
2. Is it exclusive? Every transaction should belong to precisely one class. “Wholesale” and “Café Customers” overlap, and overlapping classes guarantee two people will tag the same bill differently.
3. Is there a place for shared costs? Give rent, insurance, accounting fees and the owner’s salary a Shared or Overhead class, so nothing gets pushed into a channel it doesn’t belong to.
4. Will it last? Comparing this year with last only works if the list stays put.

How many classes is too many?

Once the person entering bills has to pause and think about which class applies, you have passed the limit — for most small firms, somewhere beyond eight. If you need more detail, nest it: Retail → Bread, Retail → Pastry, with the parent totalling its children, rather than adding more top-level classes.

The Bakery’s Year, Column by Column

For twelve months, every sale, supplier bill, payroll line and card charge carries Retail, Wholesale, Catering or Shared. The ordinary P&L reads $1,000,000 of sales and $62,000 of profit — a 6.2% margin. Split by class, before touching shared costs, it reads:

Now the shape is visible. Wholesale brings in nearly three dollars in ten but keeps only twenty cents of each. Catering, the smallest line, keeps almost half of every dollar it takes. The owner had been planning to add a second wholesale van; the report suggests the weekend catering trade deserves the attention first. (The arithmetic of margin percentages is covered in markup vs margin.)

Shared Costs: Splitting Them Without Misleading Yourself

The $318,500 of shared costs — the kitchen lease, insurance, the accountant, the owner’s pay — serves all three channels. Whether, and how, to divide it is where most segment reports go astray.

How should shared costs be split between departments?

Start by not splitting them. Contribution, as above, shows what each channel adds toward the fixed costs without any judgement call. Bring in a split only when you need fully loaded figures — typically to price — and pick a basis that reflects how the cost is used. Here is the bakery’s overhead divided by share of sales, the most common shortcut:

Wholesale now appears to lose $34,365, and the obvious conclusion is to stop it. Run the numbers before acting. The kitchen lease, the insurance and the accountant stay exactly where they are. Close wholesale and the bakery gives up $58,000 of contribution while keeping almost all of the $318,500 — profit drops from $62,000 to around $4,000. The better question is whether wholesale prices or delivery routes can lift that 20% margin.

A split of shared costs is a choice someone made. Contribution is what actually happened. Decide on what happened; price with the choice.

How do you record the split in the books?

With a journal entry that moves cost between classes and leaves the total alone. Suppose the kitchen lease is $8,000 a month, entered under Shared, and the bakery divides it by production hours — 50% Retail, 35% Wholesale, 15% Catering:

The lease line on the ordinary P&L still reads $8,000; only its distribution across classes has moved. Make it a recurring entry in your month-end routine and review the percentages once a year, not every month.

Habits That Quietly Ruin a P&L by Class

1. Classifying sales but not costs. Every channel then looks wonderfully profitable. Supplier bills, wages and card spend need classes just as much.
2. Ignoring the Unclassified figure. Untagged money still belongs somewhere; it is simply hidden.
3. Classes that are really accounts. “Wages” or “Advertising” as a class is a type of spending in disguise. Classes describe parts of the business.
4. Reshuffling the list mid-year. Merging classes in the summer leaves the first half incomparable with the second. Make changes at year end.
5. Splitting shared bills by feel. When one invoice serves two channels, divide it into two lines on a written basis, and use the same basis every time.

What does Unclassified mean on a P&L by class?

It is everything saved without a class. A little in the first month is normal; a meaningful amount undermines every other column. Clear it during the close, then make the class mandatory so it cannot build up again — the same discipline as categorising expenses properly, applied to a second label.

How Kantivo Handles Classes and Locations

Segment figures are only as good as the tagging behind them, so the software has to make tagging quick and hard to skip.

• Class tracking comes with every paid plan; Pro and above add location tracking and up to five custom dimensions of your own — Project, Region, Event, whatever you need.
• Tag once per document. A class set on an invoice, bill or journal entry flows to every line, with per-line overrides when a single bill covers two channels. Converting an estimate into an invoice keeps its tags.
• Mandatory dimensions. Switch Class to required and Kantivo won’t save a new transaction without it, so Unclassified stays at zero.
• Nested classes up to three levels, each parent totalling its children.
• Purpose-built reports — Profit & Loss by Class, Profit & Loss by Location and Balance Sheet by Location — plus dimension filters on the P&L, balance sheet, trial balance, general ledger, receivables and payables aging and cash flow statement.
• QuickBooks Desktop class lists import directly, parent and sub-class structure intact. More on class and location tracking.

Frequently Asked Questions

What does class tracking do?

It labels each sale and cost with the part of the business it belongs to — a department, sales channel or branch — alongside the normal account. The ordinary P&L totals don’t change. You can now run that P&L with one column per class and see what each part contributes, instead of a single blended figure.

Should I use classes, locations, or both?

Classes suit the type of activity, such as retail, wholesale or catering; locations suit the place, such as a shop, branch or region. Start with whichever answers the question you ask most. Add the second only when you need both views at once, because each dimension is one more field on every transaction.

How many classes is too many?

Once whoever enters bills has to stop and think about which class applies — for most small businesses, somewhere past eight. Tie each class to a decision you would actually make, give shared costs a class of their own, and use sub-classes for detail rather than lengthening the top-level list.

How should shared costs be split between departments?

First, don’t split them: read each department’s contribution margin, meaning sales less the costs it directly causes. When you need a fully loaded view, choose a basis that reflects how the cost is used, like production hours or floor area, write it down and stick to it. Treat the result as a pricing guide, not proof a department should close.

What does Unclassified mean on a P&L by class?

It is the total of every sale or cost saved without a class. Those amounts still belong to a real part of the business, so a sizeable figure makes every other column less reliable. Review it during the month-end close, tag what’s missing, and make the class mandatory so new transactions can’t be saved without one.

Should each job or project be its own class?

No. Jobs start and finish constantly, and a class list built from them becomes too long to tag accurately and impossible to compare year on year. Keep classes for the lasting parts of the business, and follow individual jobs with job costing or a separate project dimension that sits alongside your classes.

Where This Leaves You

One profit figure tells you whether the year went well. Class tracking tells you which part of the business made it go well — provided the list is short and stable, costs are tagged as carefully as sales, and contribution is read before any overhead is shared out.

Expect the first P&L by class to surprise you; the busiest channel is rarely the most profitable one. That surprise is cheap in a report and expensive in a bank statement. With the segments in view, setting a budget against actuals for each one is the natural next move.

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