Introduction

This blog is the first in a series I will produce once a week.  There are many topics we can discuss under Corporate Finance.  This series will include a subset of topics, including the following:

• Chart of Accounts
• Project Costing
• Reporting
• Model Set Up
• Forecasting
• Budgeting
• Program Based Fixed Asset Management

In another blog series, I talk about data analysis.  I can’t urge enough the importance of a proper set-up and process to improve the efficiency, integrity, and value of the data to the organization.  So, in this blog series we will start with the set-up of the chart of account structure.

Through my employment and consulting, I am amazed at how many cost tracking systems are set up incorrectly.  I was naïve about the proper set-up until I was attached to a system conversion team (migrating from MAS200 to SAP) in the automotive industry.  This experience showed me how to properly set up a chart of accounts.  I am going to share with you what I learned from that project and beyond, hope to transfer some knowledge to help others like you!

My approach is based on my experience, what is yours?  I write these blogs in hopes that it may help others.  I prefer to blog what I have learned from experience, not just a rewrite of what I found on the internet.  I also prefer collaboration over critique, so please comment only if you have something constructive to add.

Chart of Accounts

To start I would like to remind us all the purpose of the chart of accounts.  As money flows through the system, we want to organize the allocation to help us make business decisions.  These are typically segmented for general ledger, departments, regions, and possibly projects.  Each of these are a segment of the account string, aka Chart of Accounts. 

• General Ledger: contains the account numbers for classification of the transaction.
• Groups: I organize these based on categories like the following:
  • 1000’s: Assets - Group between current and long-term
  • 2000’s: Liabilities - Group between current and long-term
  • 3000’s: Equity
  • 4000’s: Sales - Group by product categories
  • 5000’s: COGS
  • 6000’s: Employee Costs (payroll, contractors, benefits, employee events, and I like to include office supplies)
  • 7000’s: Operational Costs (insurance, legal, building, maintenance, equipment under asset threshold, and any other operating expense)
  • 8000’s: Transfers (includes allocations of support departments to direct operations)
  • 9000’s: Other Costs (interest, tax, depreciation, amortization, suspense)
• Creation: Be careful not to over-create or under-create. The biggest mistakes I see are too few accounts.  With too few it gets very difficult to know where the problems are.  Example time:

Travel Expense: I have seen GL’s that collect ALL travel under one account.  So when reviewing budget vs actuals you can’t see what part of traveling is over or under.  Let’s say you have a major overrun of travel; how quickly can you find the problem.  Yes, you can run some reports out of Accounts Payable IF the information was entered split out, but if there is only one GL account then Accounts Payable would have likely taken the quick route and group the entire entry in one line item, so now you need to dive into the physical invoices (UGH!)

                               

Using the above example, if the accounts were split by travel categories, then you can easily identify where the cost issue is.  You need to figure out the best level of details for the chart of accounts without unnecessary work for input into the system.  As an example, I would split Travel to the following level of detail:

• Airfare (air, luggage or any other flight fees)
• Hotel
• Transportation (includes rental, taxi, uber, and I include parking here)
• Meals (per diem or actual, not entertainment)

Note: for reporting you can always group account numbers for a consolidated view of travel.  You can also start with budgeting at a higher level (like ‘Travel’), then get more granular later but still have the actuals history already split out.

 

• Cost Centers: typically associated to a department for expenses. As it relates to chart of accounts for Revenue or Balance Sheet, the cost centers are 0’s.  Some companies have used the segment for Profit Centers, which I am not discussing in this blog.
  • Groups: When possible, I like to group based on department type. That way related areas print next to each other, and easier to remember.  Here is an example of how I like to group:
    • 10’s: Accounting, HR, Legal and Finance
    • 20’s: Sales, PR and Marketing
    • 30’s: R&D, Design, Engineering
    • 40’s: Production, Facility Management
    • 50’s: Quality, Testing
    • 60’s: Program Management
    • 70’s: Unassigned
    • 80’s: Executive
    • 90’s: Specialty, General

 

• Owner: I can’t emphasize enough…the cost center needs an owner! This is important for loading budgets, running reports and DoA (delegation of authority) by the responsible decision maker.  Anyone who is responsible for a budget needs to have a cost center.  Here is why:
  • Budgets: For each area of fiduciary responsibility, the owner of the numbers budgets the spend. A GL number doesn’t have an owner, but a cost center does.  When loading budgets into the system, the owner of those numbers is assigned using one or more cost centers (more cost centers if a person is managing multiple areas and wants the numbers split out, or plan to hire someone later to manage).
  • Reporting: When running reports for budget and/or actuals, the cost center makes it easy to run reports for a specific manager, director, or executive. Not only does it help to split out the numbers for manually ran reports, but this is also required for automated reports that can be part of an internal secured dashboard for the ‘owner’ of the cost center.  Cost centers can be grouped to show higher level managers how each area under them is performing, plus a consolidated view of their areas for their own performance review.
  • Approvals: Assignment of cost centers to an owner is required for DoA automation into the system. PO’s or invoices can then work through approvals based on the cost centers assigned from the chart of accounts.  For example, if a buyer supporting the R&D department creates a PO with chart of account assigned to cost center for the Accounting department, then the system will require approval from the Accounting area before PO can be approved.  These controls help prevent errors and cross charging that was not approved.

 

• Other Account Segments: Some systems allow for more segments within the account structures.
  • Region: If you have multiple locations or branches, then using a segment to identify helps a lot for reporting. You may have New York and Los Angeles branches and may need to show each of these financials separately, especially if there is an ‘owner’ of the numbers for each region.

 

• Projects: In companies with few projects and where WBS is not implemented, then you can create a segment to gather costs by project within the GL. Anything that is not related to a project can have all 0’s in this segment, otherwise you can assign a number and create the chart of accounts with budgets for that project.

 

• Allocations: In any of these segments of the chart of accounts, if a transaction needs to be allocated, then there are a couple ways to handle this:
  • Allocate on entry: Break out the amounts at entry (billing, accounts payable, journal entry). This method is best when there are few allocations.
  • Allocate at month close: Create a number in each segment that is general pool for allocation (like a series of 9’s). At month end then run report on those and create an allocation for journal entry.  This method is best when there are collectively a lot of allocations, so at month end can be consolidated for a single allocation entry.

 

• Master Sheet: to be sure people use the correct accounts, after I set-up the accounts and block any we no longer will use, then I publish on a company portal a template with all approved GL and Cost accounts with definition of what belongs in each account and what does NOT belong. That master sheet eliminated errors into the accounts and got people in the habit of asking before transacting.

 

If you have other methods for setting up a chart of accounts, please share.

As always, Contact Us for more information!