For those not inclined to be organized, the idea of doing your own accounting beyond balancing your checkbook may make you a little queasy. However, you’ve managed to keep your lunch this far, and guess what? You’re almost done! Over the past three weeks, we’ve discussed balance sheets, income statements, and cash flow statements; today, we will be discussing the linchpin that allows the financial statements to communicate in a clear and logical manner… the chart of accounts.
Week 4: Do You Have the Right Chart of Accounts?
Well if you don’t, then you should, and hopefully after this, you will. Your business life has the chance to become incredibly more coherent once you implement the right one. In layman’s terms, a chart of accounts (COA) is just that — a chart, made by you, listing each of your General Ledger account names that describe the nature of the account; all your financial transactions get recorded by coding the transaction following the COA . SmallBusiness.com refers to it as “an accounting term that describes a list of common ways money is used by a business so that its owners and managers can organize revenues, costs, and assets into categories.” It is, for any business, an invaluable tool. Remember, the coherency of financial statements is all in the coding.
Below is a basic format for setting up the COA.
|Income Tax Expense||900-999||9000-9999|
The 3-digit coding can accommodate two product lines; if you have more than two, use 4-digit coding which considerably expands the coding universe. Please note that service lines may be substituted for product lines.
Direct Costs may be defined as costs directly associated with the cost to manufacture, warehouse, distribute, deliver, or to consult, for a “line of business”. Direct Costs exclude selling, general and administrative expenses. These are Operating Expenses, or Overhead.
A chart of accounts is made to be adaptable to each business’ unique needs, so go ahead and tailor it! This is a system made to make your life and the running of your business easier, not to add more stress. Keep it simple. That is the best way to keep it focused, and keeping yourself focused means that you allow yourself more time to explore opportunities that will grow your business profitably by having coherent financial statements.
When is it time to step away from your business? Have you achieved all the goals you had in mind? Are you able to retire and pass the torch onto a trusted advisor? These are questions you may want to consider early on in your entrepreneurial career.
When business owners have less than a year to prepare for the sale or transition of their company, some decisions may be made hastily. By looking ahead, you can position your businesses correctly, find the best person to take over and train them appropriately. Whether you need to bring in a salesperson to attract new clientele, jump into a new market niche, cut down on your overhead or acquire another company, it is best to begin your initiatives now.
A corporation can survive without the original owner or founder if there are processes and details outlined in advance. This month, I will feature the questions you should ask yourself when putting together a succession plan.
Week 1 – How Much Are You Worth?
Owners pour their heart, soul, and all their resources into growing their business. This means that their company is going to be their biggest retirement asset.
The value of your business extends above and beyond your sales revenue. Many owners start their companies from scratch and work for decades to establish a successful operation. As a result, they need to do everything they can to protect the value of their brand and take care of their long-term relationships with their customers and clients.
The total value of your company is comprised of:
- Your company’s reputation
- Your employees’ capabilities and qualifications, and past performance
- Your advantages over competitors in key regions
- The profit contribution of your major clients to the firm
Planning is paramount for long-term financial security. At what age do you plan to transition your business to someone else?