Financial statements in chaos? Review your chart of accounts.

Avoid financial chaos

As with many things in life and especially money, organization is essential to keeping things running smoothly and in a profitable direction. A chart of accounts is a system of categorizing your business’s income, expenses, assets, and liabilities. If you have a good one, it’s easier to know where money is coming from and where it’s going. If you don’t have a good one, you’ll be in trouble.

Here are a few tips on planning your chart of accounts so that you don’t wind up trying to organize a huge pile of un-categorized financial records.

1. Decide what categories you want to see before you begin. Create meaningful accounts for income and expenses based on the needs of your business. If you own a DNA analysis lab, then a lab coat is a lab coat. If you sell lab coats, then you’ll need to know if light weight coats outsell the heavier weight ones.

2. Err on the side of more categorization. “Sales” is perfectly fine for tax returns, but if you want to know if the puce widgets sell better than the green ones, you need sub categories. It follows, then, to have corresponding subcategories in costs, i.e., expenses. Moreover, it’s much easier to add related categories together than go back and determine that puce outsells green eight to one.

3. Base your categories on business decisions. Knowing that puce widgets are wildly popular is vital information when faced with a significant price increase in that color of dye.

If you’ve been in business a while, chances are you have figured out your needs. But are you spending hours creating spreadsheets to the answers you want? Some of those hours could be saved by rethinking accounts based on the examples above.

However, if you’re just starting out, you may be wondering, “What’s the big deal? I just want to know if I’m making money!” Here’s my answer: How are you going to know if you’re making money? Watching your bank balance doesn’t give you enough information to make sound business decisions, but good financial statements can.

Categorizing sounds simple, but in reality can be daunting. Should you categorize first by widgets then by color or by all green products then by widgets and whatchamacallits?

If you want help answering those questions, my accounting systems coaching sessions may be a good fit for you. If you’re looking for some dependable accounting help, let's talk.

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