Over the last couple of months, we’ve discussed how vital a clear picture of your costs and correct pricing are for maximizing profits. Another piece of that puzzle is having a way to effectively track your revenues and expenses to make it easier to understand and analyze your financial statements as a whole. That tool is a chart of accounts, and organized well, it provides the valuable insight your business needs.
A good chart of accounts provides both a birds-eye view of your revenues and expenses and a detailed breakdown of all your line items. It contains the building blocks for your balance sheet and profit and loss statements, which then provide a clear view of your business’s overall financial health. It also makes budgeting easier when that time rolls around.
But maybe you are unsure how to glean the full value your chart of accounts has to offer. Perhaps you’ve wondered what it can really do for you because it seems pretty basic and boring. If so, let me ask you something – did you simply accept the chart of accounts suggested by your bookkeeping software? Or did you tweak and tune the standard set to come up with a structure that makes the most sense for your business? If you accepted the standard as it came to you, it likely isn’t as helpful as it could be.
Without the proper structure in your chart of accounts, your financial statements will be difficult to understand. You won’t be able to see trends, and it will not be helpful to you. If you’ve been struggling to gain a solid understanding of your financial statements, follow the tips below for restructuring your chart of accounts to make it work better for you.
How to Restructure Your Chart of Accounts So It Works For You
A disordered chart of accounts leads to frustration and confusion, but a well-organized one will be a valuable guide for your business. Here are three ways to restructure your chart of accounts so it works for you:
1. Use account numbers
When you consider and prioritize your expenses, do you think about them alphabetically? Of course not! You don’t think about your expenses alphabetically, so why are you allowing them to be listed that way? Yet, that is the default organizational system in accounting software such as QuickBooks and Xero. What you end up with, then, is a relatively small and inconsequential expense such as “Bank Fees” at the top of your expense section rather than at the bottom, where it belongs.
How do you get around that? In order to force the software to arrange your expenses how you want, assign them account numbers in addition to account names. They will then be arranged in numerical order, and you can make sure your accounts are ordered by your chosen groupings and priority level. This will allow you to create the organizational system that makes the most sense for you, and will transform your chart of accounts from a confusing list of expenses into a financial tool that works for you.
2. Group related items together
Once you have assigned numbers to the accounts, you can arrange them in a more logical, helpful way. How should you order them? If your chart of accounts is a mystery to you, one of the best ways to decode it is to group related items together.
When I was young, I would group all my M&Ms by color before eating them. Did you do the same? This is pretty common for kids, but for some reason, many of us don’t give heed to that natural inclination to create order out of chaos as we get older, especially in business. Imagine the standard chart of accounts from your bookkeeping software as an upended bag of M&Ms. Rather than accepting the resulting mix of random “colors,” you can channel that sorting proclivity from your childhood and create order out of your various accounts. (By the way, have you ever tried to alphabetize your M&Ms? Of course not, because that doesn’t make sense! Neither does alphabetizing your chart of accounts. 😆)
How should you group your accounts? There is no one right way to group your accounts, but your chosen method of organization should be helpful to you, so do what makes sense for your business. One example of a helpful grouping is Occupancy Expenses. Grouping expenses such as rent and utilities together in this subtype allows you to see at a glance how much it costs you to occupy your brick and mortar space. This is just one example of how grouping related items together can provide valuable insight into your business costs.
3. Create accounts that provide the necessary information without being too specific
As you create your structure, accounts will be most helpful to you if they are not too general, but not too detailed, either. For example, rather than listing each utility separately (gas, electric, etc.), record all utilities together as a single expense in your chart of accounts. This prevents losing the forest for the trees, providing you with the information you need to make sound business decisions without muddying the waters with the minutiae.
The great thing about these tips is that they apply to every kind of business. Everyone, from large corporations to small businesses, uses a chart of accounts and can benefit from good structuring. It doesn’t only pertain to the for-profit sector, either! Nonprofit businesses need a well-organized chart of accounts, as well. This advice is universal for every size, type, and industry.
Organizing your chart of accounts in this way will give you a giant leap forward in understanding your finances, but it won’t solve all your financial mysteries. If you need further help restructuring your chart of accounts or solving any of your financial mysteries, I’m ready to assist! Give me a call or book an appointment today!