Modernize and Streamline Your Chart of Accounts for POWERFUL Communication!

Warren Buffet said that accounting is the language of business.  If that is true (and I believe it is) then your chart of accounts (COA) is an essential building block of communication – like the alphabet. The COA is a tool that can clearly and powerfully communicate financial information – have you given yours a check-up recently?   A cluttered chart of accounts makes financial reports harder to create and to understand. If your COA reminds you of a disorganized garage, then it might be time for a makeover!

These are some common signs that it’s time to modernize and streamline your COA:

• You’re spending time creating your financial reports in Excel, moving accounts around to get the desired results. This is a huge waste of time that compounds over time.  If you fix the problem in the COA, you can save hundreds of hours over months and years.
  
• You have duplicate accounts, often the product of trying to categorize similar items that have slight nuances.  David Allen says in his book, Getting Things Done, that trying to file things in more than one place “magnifies geometrically the number of places something isn’t when you forget where you filed it.”  And that same principle applies to the chart of accounts.  A common example of this is trying to accommodate multiple food and travel accounts such as “meals with people”, “entertainment”, “planning meeting meals” – these lend to confusion, incorrect postings, and inconsistency in reporting. 
  
• You have too many accounts – It’s not uncommon to see P&L’s for nonprofits that have over a hundred line items.  David Parmenter in his book, Winning CFO’s, says, “show me a company with fewer than 100 account codes for its profit and loss statement and I will show you a management accountant that has seen the light.”  He goes on to recommend setting dollar thresholds before adding accounts with the goal of getting the number of lines for expenses to no more than 50.
  
• You’re not using a general ledger (GL) structure that supports segments or dimensions.  Typically, we see nonprofits try to capture programmatic data in the GL.  An example of this is to have a line item called “XYZ event” in the general ledger and inside that is travel costs, food, venue, and contractor costs.  The reality is that nonprofits need reports that can show a statement of activities by natural classification (how much did we spend on salaries, consultants, travel, etc.) AND by department, project, or program.

Here are just a few of the powerful benefits you can realize by updating your COA:

• Consistent reporting produced from your accounting software which, as I mentioned, is a significant time saver for you and your team.
  
• Supports data analytics – as data analytics becomes more accessible to nonprofits it’s critical to have consistent and meaningful financial data that can be combined with non-financial metrics to show impact and trends that will help support decision making.
  
• More flexible dimensional reporting – removing dimensions or segments from your GL accounts into other lists for tagging or qualifying transactions leads to more flexible and powerful reporting, with exponentially more ways to combine and analyze data.
  
• Supercharge automation – The technology for automation is here (bill payment, expense reporting, purchasing, payroll, etc.), and it thrives on clear business rules that improve machine learning over time.  A streamlined COA and creates better accuracy and consistency with these tools. 
  
• Fewer mistakes from staff along with reduced staff training time.  A streamlined COA makes it easier to train staff and provide understanding and consistency throughout your nonprofit of the coding rules for each account, department, grant, and project.

Conclusion

As we approach the end of 2023, it’s a great time to consider overhauling your COA to make it a clear and powerful communicator of the business of your nonprofit.  We are here to help you on your journey!