Why a Chart of Accounts Is a Must-Have for Business Owners
Imagine having access to an organization tool that makes it easy for both you and (anyone that looks at your books) to locate and digest every transaction that’s happening in your company.
This, my friend, is the function of a chart of accounts.
Simply put, a chart of accounts is a well-organized list of every account in your business, from liabilities and assets to income, equity, and expenses. By structuring this information in an easy-to-digest manner, your finance team will be able to efficiently manage your books without having to dig through piles of information to get to all the important stuff.
Here are a few expert tips for organizing a chart of accounts that will promote sound financial decisions . . . Without losing your sanity in the process.
Don’t Just Rely on Your Software’s Chart of Accounts (COA)
One of the biggest mistakes I see business owners make is blindly relying on the chart of accounts that’s included in their financial software.
Here’s the problem with this: each business is unique, featuring a distinct organizational structure.
The goal is to build a COA that expresses the financial infrastructure of your business, and not to build your infrastructure around a templated COA.
Otherwise, you could end up trying to fit a square peg into a round hole . . . And just like a bad relationship, you’ll get nothing but a headache for the time and effort you put into making it work.
Like Everything in Life, Balance is Key
A good chart of accounts features the right balance between how many accounts are listed.
Think about your last supermarket run.
The store greeted you with neatly labeled categories, including a bakery, produce section, deli, and frozen aisles. If you walked in to buy an apple, you’d never expect the overhead sign to explicitly spell it out.
Instead, you’d look for the produce signage, and intuitively know your fruit was there waiting for you.
Now, within those sections, the supermarket may break down the categories even further. For example, the frozen section will likely have signs for vegetables, microwavable entrees, and everyone’s favorite, dessert.
Your chart of accounts functions almost the exact same way. First, you’ve got your general sections: income, expenses, assets, liabilities, and equity.
Look a little closer, and you’ll discover some sub-sections . . . But only where it helps you to find what you’re looking for. As an example, liabilities might break down into current liabilities and long-term liabilities, while income might break down into direct sales or wholesale customers.
There’s Danger in Too Much Detail
Just like in the supermarket, you need to understand what information needs further elaboration, and what’s better left alone.
I often see business owners who have a tendency to get too granular on their chart of accounts . . .
And then they wonder why they can’t understand anything that’s going on in their financial realm.
For example, there may be some benefit in breaking out different categories for office expenses. But you don’t need to create separate accounts for pens, staplers, and post-its.
Now on the flip side, you’ll also want to consider . . .
The Risks In Remaining Too General
Remember, the point of your chart of accounts is to get a crystal-clear and easy to manage picture of your financial infrastructure. And if you find yourself having to go back and recategorize transactions late in the game, you’re in for a massive headache.
A good rule of thumb is to start building out your charts of accounts with broader categories and then create sub-sections as it relates to the context of your business. Then, don’t touch it. The less you have to change your COA, the happier you’ll be in the long run.
At the end of the day, a strong COA holds the same objective as all business finance: it should help you to recognize patterns so you can make sound decisions that drive your bottom line.
If you’re still not sure exactly what to include, don’t worry! You can hire a professional to build a simple, meaningful, and scalable COA for your team today.