Cleaning up Chart of Accounts
Nick Jefferies:
Hi Dave.
David Hewitt:
Hi, Nick.
Nick Jefferies:
Welcome to the Westcourt Masterclass Series. This week, we’re talking about cleaning up your chart of accounts.
David Hewitt:
Yes. So chart of accounts is your list of accounts that you have in your accounting software that all transactions will flow through to, and this ends up populating important things like your financial reports that you use for banks, your owners, user shareholders. So it’s quite an important list of accounts as per se.
Nick Jefferies:
Yeah. I mean, it’s quite a simple concept, but because it is the basis of every report that you get out of your software, if you get it wrong, then it gets most things wrong.
David Hewitt:
It gets very messy very quickly, and especially when you’re starting out as a small business, it can be quite simple. But when you start to grow, maybe that five year, 10 year period, things can start to get bigger and bigger and bigger. And that’s where we’re seeing a lot of noise. So that’s why we want to clean it up, make it easy to read and be really specific.
Nick Jefferies:
Your business grows and develops. And so should your accounting software with it. What was relevant when you started out is not going to be relevant five, 10 years down the track. So you need to keep reviewing it and need to keep developing that with it, which is super important, because like I said, your financials, they go to the bank, they go to owners. They go to prospective owners and in some situations that’s the only snapshot of the business that they get. So you want it to be nice. You want it to be tidy. You want it to be clean and easy to read.
David Hewitt:
So one of the tips we have for cleaning up your chart of accounts is be specific. So when we talk about being specific, we’re talking about what the transaction or what the account relates to. So if it’s sales, that can be quite a generic account at the end of the day. It could have if you’re a building company, you could have some residential, you could have certain commercial, could have some maintenance income in there. So it’s just breaking it down into what income for that case relates to what account. So if it’s sales, it’d be sales, residential, and then sales, commercial, sales, maintenance. That way you can see the specific incomes for each account.
Nick Jefferies:
Yeah. And obviously that way you can actually say within your business, what’s producing a solid return or might be lacking. And if you’re specific, in all your accounts all through expenses and the cost of sales as well, then you’ll actually be able to have a quick glance at, which industry within your business is actually successful and what might need a bit of work need to be reviewed.
David Hewitt:
And that flows through also through the family group. So there’s a lot of times where we have a family business entities that might have eight entities or 20 entities. So it’s about having a snapshot. You can see quickly. So if the income is flowing, it’s dividends, where are those dividends coming from? So as accountants, we would then want to know, where’s that coming from? Is it coming from entity A, entity B, entity C, dividends received, Nick Jeffries corporation. So that way we know it’s coming from that entity and we can flow that income through instead of…
Nick Jefferies:
Yeah. Similarly with loans, you want to know who owes you money, who you owe money, you want to be able to see that you want to be able to track that. And you don’t want to have to go dig into every transaction for the past 20 years to find out who owes what and when and where.
David Hewitt:
Very messy.
Nick Jefferies:
So just keeping it simple with the titles, but effective is super important. And on the flip side of that as well is you want to be specific, but you want to be relevant. So there’s no point creating a different income account for every single bit of income you have. You can sometimes go a bit over the top and you’re not having a hundred counts for income. And each of them has got a hundred dollars each a month. And it’s just an absolute nightmare. Your financial statements end up running for about a hundred pages. And I can guarantee if you give that to someone at the bank, they’ll look at how thick the stack is, and probably just throw it in the bin.
David Hewitt:
That’s why we would want to see a profit and loss that can be condensed into one page, balance sheet into one page as well. We don’t want to see profit and loss with six pages. Because you just get bored quite quickly, to be honest.
Nick Jefferies:
Yeah. So be specific, but be relevant is the first tip.
David Hewitt:
Next tip?
Nick Jefferies:
Next one would be just consistency. So a lot of businesses have a few different entities…
David Hewitt:
A few different sites, perhaps. So if you’re a restaurant, you might have a restaurant in Northbridge, you might have a restaurant in Leederville, South Perth… You don’t want to be chopping and changing between different sets of accounts, chart of accounts, because then it’s hard to make comparison at the end of the day, if they’re not consistent across the group at the end of the day.
Nick Jefferies:
Yeah. So you want to be able to, you want to do the hard work in setting up your accounts properly first, so that down the track it’s, everything’s easy. So you can within a matter of a minute…
David Hewitt:
Make a decision.
Nick Jefferies:
You’ll be able to compare you compare Leederville through to South Perth. And it would be a side by side comparison. You won’t have to start digging around and looking for what, and whether that’s actually the same sort of income or the same expense, it will be right there. You’ll be able to see it. And when it comes down to selling the business or potentially getting a new buyer on board, some more income into it, that’s what you need to just be able to show someone so they can just see quick and easy that it’s all relevant and it’s all comparable. We want to be able to track these entities. You want to be able to track the components.
David Hewitt:
Tracking is important if again, for that consistency, just in terms of having those sites, the programs these days. So Xero, for example, QuickBooks, you’ll be able to choose one chart of account. So say that’s sales for food. And then you’ll be able to track that between Northbridge and Leederville or South Perth. So, you can set up those location branches tracking, but it’s just important to have that chart of accounts. The next tip would probably be seek professional help. It’s a big, important one. Especially because it can get very complicated.
Nick Jefferies:
Again, because a lot of it, it seems like your chart of accounts, a lot of it is just labeling the account itself. Titling with the correct heading, something you like, something that’s specific, something that’s relevant, something that’s consistent. However, within these accounts, you also have things like your GST rates, your tax rates, when it comes to employment, which account you use actually does matter. So setting these up correctly at the start is super important because it saves having to go back and fix years of errors. And that does lead in to what you actually lodge with the ATO as well. So it is super important.
David Hewitt:
Yeah, it can start to snowball, especially with the GST. If you get that wrong at the start, it might be 12 months before you see your accountant or you’re doing your BAS, and a big error, there’s $10,000 going each month into that account. And there’s incorrectly recorded from GST. You might be missing out on $10,000, possibly $12,000 of cashflow by the end of the year.
Nick Jefferies:
It’s also one of those things that, what takes an hour to do correctly now, if you do not do it correctly now, it will take weeks in a year or two or three just to fix that issue.
David Hewitt:
And it’s easy enough to get on the phone to your accountant and just question what you’re doing or how you’re setting it up. And just getting that sounding board at the end of the day. It’s easier to do that than to make those errors, and then they snowball. As we all know, small leaks sink big ships. So…
Nick Jefferies:
Very true.
David Hewitt:
And the last tip that we have is tracking numbers is important. So basically we want to be able to see our earnings. We want to be able to see our expenses in an easy format, because that helps us make those decisions from a business perspective and make real change in a timely manner. We don’t want to be sorting through reconciling or just rearranging where things should be. We want to be able to go into an account, drill down, question why it’s too high or what’s been there and that will help the business in the longterm.
Nick Jefferies:
Yeah. At the end of the day, it’s your business, it’s your livelihood most of the time, you’re responsible for it. So you want to keep your finger on the pulse of what’s happening within your business. And this is step one, to being able to do so.
David Hewitt:
So cleaning up your chart of accounts, we want to be specific and relevant…
Nick Jefferies:
Consistent.
David Hewitt:
We want to seek professional help. And remember that tracking numbers is important. So they’re the four tips that we give to cleaning up your chart of accounts and helping you to move forward.
Nick Jefferies:
That was quite a broad overview but, you can always drill deeper into this and could spend hours on it. But if you do need help, give us a call. There’s no dumb questions. So, always happy to help.
David Hewitt:
Always happy to chat. Thanks Nick.
Nick Jefferies:
Thanks Dave.
David Hewitt:
It’s been a pleasure.
Nick Jefferies:
See you next time.
