In 2004, I was engaged to fix up an advertising business. They had plenty of revenue, but at the end of the financial year, the cupboard was always bare.
Coming in wearing a general manager’s hat, I had a whole series of questions to ask, including “why are we using these spreadsheets to tell us what is going on, rather than the accounting system”. Of course the owners had a whole lot of reasons, some valid, but the majority were complete bullsh*t.
One of the valid reasons was that the profit and loss statement wasn’t particularly useful.
Now having set up lots of accounting systems in my time as an accountant, I’d have to say that 99% of small businesses stick with the default installation because they don’t know what they can do and the power of a well-thought-through chart of accounts.
Packages like MYOB and Quicken always offer default charts of accounts for business types, but I would argue that you shouldn’t let yourself be seduced into using them as anything but an initial guide.
Take, for instance, your expenses. Most accounting systems come with a whole lot of default line items such as stationery, legal fees, rent, advertising and travel.
These types of classifications aren’t really useful as they only let you have a detailed view of your business, “hmm… stationery expense up last month, we’d better use less paper!”
What I like to do is take a more macro view of the business, to determine the top categories of expense, then populate each of those top categories with the line items appropriate to the business.
For instance the Churchill Club uses the following categories:
* Startup expenses.
* Financial expenses.
* Information technology.
* Marketing expenses.
* Office expenses.
* Professional services expenses.
* R&D expenses.
* Staff expenses.
* Telecommunications expense.
* Travel and accommodation expenses.
Inside each of theses categories, I have line items that reflect how the Churchill Club operates.
For instance, inside my professional services expenses category, I have line items for accounting fees and legal fees. Inside my marketing category I have line items for promotional materials, signage, website expenses and discounts given. (The website expense is there rather than in IT, because it’s a marketing activity, not an infrastructure activity.)
Because I have structured my expenses like this, I can simply compare things like, “Am I spending more on professional services than marketing?” Whoa – warning flags if that’s happening! But I can still drill down to determine how much I am spending on individual line items – for example, bloody accountant is costing me a fortune.
Also, by separating out my startup costs as a category, I can ensure that one off costs such as logo design don’t confuse my thinking about how much I am spending on marketing.
Plus, my line items are very specific to my business, rather than an attempt to use generic accounting words in an attempt to sound professional. For example, I have no staff amenities; however I do feed my advisory board once a quarter.
Those expenses are included in a line item called “advisory board amenities” listed under the staff expenses category. This is much more useful to me than thinking maybe we are going through too much coffee, or not enough!!.
Finally, I remove all those line items that always have zero values. Ask yourself; what’s the point of having a category for “overseas travel” if you never do it. Instead create line items for things you actually do, rather than shoving them somewhere they don’t fit.
If you spend lots of money on taxis and a little bit on parking and rental cars, why not have taxis as a separate line item from rental cars and parking. They can all sit under local travel so you know what this area of your business costs you.
Now the best thing about computerised accounting systems is that all is not lost. You can reorder your chart of accounts and change the names of line items, without losing all your data.
Go on; see how you can tweak your accoutning system to actually help you manage your business, not just track debtors.