Your Chart of Accounts can be an important tool to help you monitor your business and make intelligent decisions. Or not. It all depends on how things are set up.
The “generic accounts setup” should just be a starting point
Every business’ Chart of Accounts will include some of the same general accounts, such as cash, accounts receivable, assets, equity (hopefully), accounts payable, income, expenses, cost of goods sold (COGS), payroll taxes, etc.
However, I recommend that businesses never operate with just a generic Chart of Accounts, particularly when it comes to income and expenses. To really make your Chart of Accounts work for you, take the time to set up the accounts that are specific to your industry and how you want to monitor and manage your business.
What exactly would you like to be able to track and analyze? What level of granularity will help you determine how different aspects of your business are really doing? You need accounts that track this information
Example: Structural Concrete Contractor
Say you’re running a construction contracting business specializing in structural concrete services. To set up your Chart of Accounts, start with the “generic” recommendations for construction contractors and then customize from there. Some of the things you may want to track include:
• Labor costs by pay category – To give you an understanding of your regular time pay, overtime pay and fringe benefits costs.
• Materials expenses by material type – Ideally your Chart of Accounts will mirror the details in the “Schedule of Values” (i.e. a breakdown of what it will cost to complete the job) that you use to create your bids.
In other words, don’t just lump rebar, concrete, wood and other materials into one “materials” account. If you do, then if you go over on materials, figuring out why will take a lot of work. Tracking materials expenses based on the same line items that are on the Schedule of Values lets you easily make an item-by-item comparison of actual to plan and quickly pinpoint the problem area.
Having this information available is helpful even if you don’t have any overages. When you’re three months into a six-month project, this data will help you determine if you’re ahead of the game or behind.
• Indirect costs – Think about how indirect costs impact how you want to track the performance of the job, and set the accounts up accordingly.
Need help getting your Chart of Accounts set up right? Give me a call and put my broad experience to work for you.
Pity the poor accounting department.
When business is booming and everyone is high-fiving that sales went up 25%, management starts to think about hiring more production staff to handle the extra volume. But the impact of the extra sales volume on the accounting staff is often ignored.
However, when revenue drop off, the staff reductions often hit the accounting department first. With optimism running high that sales will get back on target, no one wants to cut sales, customer service or production staff. So the accounting team takes the hit…even though they still have a great deal of work (such as processing payroll and ensuring the lights stay on) that’s not tied to sales volume at all.
Inadequate accounting staffing levels can hinder your company
Consequently, whether their company is growing or shrinking, many Controllers and Accounting Managers feel like they’re just treading water. With staffing levels inadequate for the volume of work to be done, analysis and other high-level tasks take a back seat to keeping up with the basics, such as creating invoices and paying bills.
In situations like these, there’s a lot that may be falling through the cracks. For example:
• No one is looking at the likely impact of shrinking sales on projected cash flow, and how this will affect operations. Will you run into a problem with your bank on your loan covenants? Will you be able to continue taking advantage of “early pay” discounts from your vendors? Will you make payroll?
• Internal control processes are not being followed. When something doesn’t look quite right, no one is taking the time to investigate why the numbers are what they are. Or even worse, perhaps no one is taking the time to look at the numbers closely enough to even notice that they don’t look right.
• You’re in danger of growing yourself out of business . No one is looking at how increased sales volumes will affect your staffing and working capital needs.
The solution: bring in a part-time CFO
A part-time CFO can help right-size your accounting department, working on an hourly or project basis to get all of those high-level accounting tasks handled. They can create and review the reports, do the analysis, provide oversight, help the Controller prioritize tasks, address projects that are important to senior management, and much more.
Want to learn more about the difference a part-time CFO can make? Give me a call! I’m here for you.