What is a Chart of Accounts, why do I need it and and how do I set it up?
As a start-up founder or a small or mid-sized business owner, keeping track of your finances is crucial to make informed decisions and secure financing. Accurate financial statements are essential, and a well-organized Chart of Accounts is the key to achieving this. But what exactly is a Chart of Accounts, and how do you set it up?
A Chart of Accounts is a list of all your General Ledger accounts that appear on your income statement and balance sheet. It’s a blueprint of your business’s financial structure. To ensure your financial reporting is accurate and provides meaningful insights, you need to have the right Chart of Accounts.
Here are some tips to set up a Chart of Accounts for your business:
- Understand what matters to your business: Your Chart of Accounts should reflect the unique aspects of your business. Whether you’re a SaaS startup or a Fortune 500 manufacturing business, your company has different categories that relate to your business.
- Understand who the readers of the financial statements are: The readers of the financial statements are usually the CEO, investors, shareholders, and department heads. Design your chart of accounts in a way that these readers can understand without the need for additional commentary.
- Use the right balance between detail and summary: Strike the perfect balance between providing enough detail to tell your business’s story without overwhelming the reader. This includes using appropriate “depth” in your Chart of Accounts. For example, if you have come up with a total of 20 different cost categories for your Chart of Accounts, it can make it a lot simpler to categorise these into buckets such as cost of goods sold, operating costs and personell costs, thereby creating a structure of several levels.
- Use proper ordering with numbering and sections: Numbering allows you to set a custom order for the way accounts are shown, and grouping similar expenses into specific buckets improves readability. If you are using DATEV for your accounting, the account numbers are typically already put into an ordered way like this, specified by the Standardkontorahmen applied by your tax advisor.
Other considerations include using departmental tracking, avoiding using personal information, and setting up classes/tags for additional detail. For more detail on how to set up your Chart of Accounts with the right cost classfication, check out this article.
Many start-ups wait for way too long to set up an individualised Chart of Accounts and stick to the Standardkontorahmen provided by the tax advisor for far too long, thus limiting their insights into their accounting data. As a result, start-ups often leave their accounting data untouched and instead rely on insights they get from bank account transactions. However, this leaves a whole lot of insights unused!
In conclusion, setting up a good Chart of Accounts is crucial for small and mid-sized businesses that want to make informed financial decisions. By following these tips, you can ensure that your Chart of Accounts accurately reflects the unique aspects of your business and provides meaningful insights to your readers. Use a financial planning and analysis tool to streamline the process and make it even more efficient.