There are many areas of business finance that are complicated: complicated enough that business owners struggle to understand them and leave them for the finance team to handle. While a good accountant will help ensure you do have a firm grasp on your financial data, there is one way that you can gain a more detailed, but still clear understanding of your accounts without having to become an expert.
That simple way is to have an organised and detailed – but not too detailed – Chart of Accounts (COA).
A detailed COA will help you keep track of financial transactions. It will also support your need to have a clear picture of the financial health of your business. In turn, this will ensure making decisions is easier and based on solid data.
In this blog, we will take this key point, highlighted in our recent webinar, to explore the advantages of a more granular COA. We show how it can unlock some critical insights into your service lines’ profitability without having to spend hours surrounded by reports.
Before we get started, remember that it doesn’t matter where you are with your current Chart of Accounts – adding in more detail is useful at any time in your business growth plans.
Understanding the Chart of Accounts
Your Chart of Accounts is your list that provides a complete categorisation of every financial transaction that takes place in your business. It ensures that all income, expenses, assets, and liabilities are clearly defined and tracked. For SMEs, a detailed COA can serve as a roadmap of financial activities, showing what works, where issues might lie and helps support strategic decision-making.
Benefits of a granular Chart of Accounts for business growth
Increased Financial Visibility
A more granular COA allows you to go deeper into different aspects of your business by breaking down financial data into specific service lines or departments. This gives you a clearer understanding of where revenue is generated and where expenses are incurred. Rather than just ‘sales’, you can break income down further to show which sales are most profitable. This level of detail allows for more precise budgeting and forecasting. It enables you to allocate resources more effectively to those areas that need the focus.
Improved Cost Management
With a detailed COA, you can track expenses more accurately. When you identify the costs associated with each service line, you’ll be able to see inefficiencies or areas where cost-saving measures can be implemented. You’ll also be able to see where the cost associated with a service line outweighs the income generated by it. You can then make better decisions over the benefit of each service line. Overall, this helps you to maintain a healthy bottom line.
Informed Decision-Making
The ability to dig into your financial data means that you can make more informed and useful decisions. Whether it’s deciding to invest in or expand a profitable service line or to ditch an under performing one, a detailed COA ensures you have the right data to make those decisions rather than relying on your gut and hoping for the best.
Transparency and Accountability as you grow
A detailed COA ensures that, as your business grows, you retain a clear overview at the same time as allowing your managers to be responsible for their team, budgets and overall performance. This fosters a culture of responsibility and encourages teams to work strategically towards financial goals.
Example: A Fictitious Business Scenario showing the benefits of a better Chart of Accounts for business growth
Consider a fictitious company, “EcoEnergy” which offers three services: solar panel installation, energy audits, and renewable energy consultations. Initially set up to install solar panels, EcoEnergy had a simple COA with broad categories for income and expenses, with little detail for each service line. As the business grew, the COA stayed more or less the same. This effectively reduced the detail available to the owner with each new service.
The owner decides to implement a more granular COA to track income and expenditure for each service separately. This new level of detail quickly shows that the three service lines are profitable. However the cost of installing solar panels reduces the profitability of this particular service. It is also clear that the energy audits are both profitable and cost very little to deliver. This doesn’t mean the company will stop providing solar panels. Instead, it will focus marketing resources into the energy audits as this service line can easily be expanded and will increase profits. This in turn will allow EcoEnergy find ways to reduce inefficiencies in the solar panel installation in a considered fashion as their profits will continue to grow.
This strategic shift both improves overall profitability and aligns the company’s resources with its most profitable offerings.
Not too much detail
The trick with a more granular Chart of Accounts is finding the balance between not enough detail and too much. Finding that balance itself can be hard. Naturally we suggest hiring a great Fractional Finance Director to help you ensure that your Chart of Accounts is clean and ready for your growth plans.
Next Steps:
Optimising your Chart of Accounts for business growth can feel like trying to sort out your bookcase. You know it makes sense, but where do you start, and how do you futureproof your system?
Rather than get lost in the details, instead, work with a Fractional Finance Director who can assess the current state of your COA. They can restructure it if needed, and ensure it meets the needs of your business as you grow.
Our Fractional Finance Directors can support this as part of the work they do helping growing businesses in any sector develop the finance function they need to scale.
Get in touch to find out how a Fractional Finance Director could support your business
Thanks to Ramzi Al-Masri for inspiring this post 🙂
Photo credit: Photo by Raze Solar on Unsplash
