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What does a good Chart of Accounts look like?

In Financial Transformation by Tamara

Reading Time: 5 minutes

The bedrock of a great accounting system is an awesome Chart of Accounts (CoA) but what does that look like in practice?

One of the things we tend to get involved with the most is working with clients on their CoA because that often forms a key to getting a transformation project moving.

This blog is inspired by a podcast in our popular Financial Transformation Live series that our MD Hannah recently delivered and you can view it here.

We’ve found that there are some key attributes for a great CoA and in this post, we are going to go through them and give you the top things to look out for as well as our favourite top 6 tips for getting it right.

Here’s the TLDR version:

  • It meets the needs of multiple stakeholders
  • It is flexible
  • It is consistent
  • It is easy to understand and learn
  • It is well maintained
  • It is compliant
  • 6 top tips for a great Chart of Accounts

It meets the needs of multiple stakeholders

One of the things that accountants often forget is that although it is owned by the finance team, the chart of accounts belongs to a much wider stakeholder group.

The reason that the CoA is so important is that it is the foundation for much of the reporting that goes on in your organisation, so considering what people will want to see in terms of reports is a great place to start.

A good illustration of this is marketing.

You can imagine that your CEO might only want to see what has been spent on marketing across the whole company, but the Head of Marketing will most likely want to drill down to find out what their spend is on LinkedIn, Facebook, Google etc. separately.

This means that you need to build in a way to report on those elements individually.

It is flexible

An inflexible CoA is the bane of every accountant’s life.

Businesses change and with comes new requirements and needs. A Chart of accounts may be perfect for today but what if your CEO goes out and buys a new company, or the production team come up with a new product?

Flexibility must be built in by design so that as your company develops, your Chart of Accounts can move with it.

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It is consistent

If you have ever tried to consolidate the accounts of different companies, then you will know why consistency is important.

In an ideal world, the account for mobile phone spending in one company will be the same as in another, but if that isn’t possible then you need similar things to fall within the same range.

For example, all your sales and revenue accounts will be in the 1000 range, the cost of sales will be 2000 etc.

What you don’t want is one company to be using the 1000 range for sales and another using it for fixed assets!

It is easy to understand and learn

Having an easy-to-understand CoA makes life so much easier when it comes to onboarding new staff.

If they know that the first two digits of an account number relate to the entity, the second to the cost centre etc. then they can work out the answers to their questions really easily.

But if you have no consistency and the accounts are all over the place then the learning curve is so much steeper and longer as a result.

There’s another helpful side effect of an understandable Chart of Accounts too.

As a CFO, FD, or FC you’ll find that the number of questions you get about where to post things becomes smaller because people instinctively understand what goes weather, in essence, your CoA is answering the questions on your behalf.

It is well maintained

Often, we will find companies that have a dreadful CoA in place, but it never started out that way.

The people that set up the accounts had good intentions but what has happened over the years is that there was no discipline attached to the maintenance.

This means that people have been setting up accounts out of the correct range or setting up duplicate accounts or setting up accounts that weren’t justified by the volume of transactions and only have one or two items in there from three years ago.

A good chart of accounts is cared for like the plants on your windowsill. It is loved and nurtured, and woe betide anyone who breaks the rules.

It is compliant

One of the best reasons for having an ordered and disciplined Chart of Accounts is that it makes reporting so much easier and that goes double for regulatory reporting.

If you have multiple entities, some of which fall in scope and some out, or specific ways that you must present your information, then a well-designed CoA makes that so much easier.

If you have accountants who absolutely dread regulatory reporting because it is such a hassle, then you have a clear sign that your CoA is hindering and not helping.

6 top tips for a great Chart of Accounts

So, if you are working on transformation then it is a good bet that at some point you are going to be looking at your CoA.

To help, here are our top tips for producing a world-class CoA.

  1. Don’t create a monster – If it feels like you are creating a monster then you probably are. Challenge hard when people want to add things in and make sure you have a feedback loop. Remember the acronym KISS, Keep It Simple Stupid.
  2. Use each structure for one thing and one thing only – don’t combine elements of your CoA. For example, don’t use a dimension for project and cost centres. Separate them out to make reporting much easier.
  3. If you are constantly adding accounts, then something is wrong – If you find that you are always being asked to create new accounts then that’s a sign that you haven’t got a CoA that is doing what your business needs.
  4. Your nominal accounts lines should be the lowest level you will want to drill down to – remember you can always roll these up through reporting, but you can’t go to a lower leve
  5. Think ahead – produce the CoA you’ll need in a year’s time, not the one you need now.
  6. Discipline is the key – make sure that everyone understands and sticks to the rules in the future. This will stop your CoA from getting out of hand too quickly and forcing you to go through the same project again.

Need help with your Chart of Accounts?

As experts in the field of finance transformation, the Chart of Accounts is meat and drink to us.

If you need any help and advice, then why not get in touch and let’s talk about how we can help.

Remember that you can view the whole Financial Transformation Live series on our website and also the thought-provoking CFO 4.0 Podcast series too.

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