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Unleashing the Power of Your Chart of Accounts
Hi there. Welcome to Better Business Insights. My name is Liz Jarvis. And today we're going to be talking about one of my passions. “Your chart of accounts.”
Now the chart of accounts is simply the list of names and numbers, the words that make up the story of your business! The words that end up printed on your profit and loss statement and your balance sheet.
Now the problem is if those words are not meaningful to you, how the hell are you supposed to interpret them? How are you supposed to use that information for better business decisions? I’ve realised in some of the research that I've done.
In trying to work out how it is that business owners got so behind. In my passion that I want to] find the way to get business owners back to good relationships with their numbers. I worked out that one of the problems is these standard charts of accounts. Now ages ago, cash books were written up and the business owner was the one that decided what the label on the top of that column might've been.
So they decided: What things they wanted to track in their business. They wrote that into their cash book and their accountant then took that information and converted it into words that the tax office wanted to know about and produced financial statements that way so that they could fill the 10 or 15 or so fields in the tax return.
Then we had all this, “do it yourself, accounting” came in. Then we started to get some standard charts of accounts. But those charts of accounts might not be right for you. It's your story. You can change the words to be meaningful to you. Let me give you an example from farming, in the standard chart of accounts, that seems to be used all the time.
Here is a code for seed fodder and fertiliser, one code for those three things. And if you look at how detailed that can be for some farmers, the Dairy Australia standard chart of accounts is actually a good example. There could be up to 20 different categories that should be used for what is often one line, because we need more detail to make decisions.
We probably need to know how much the seed was, compared to the fodder, compared to the fertiliser. And yet they're generally lumped into one line.
So I won't go into great amounts of detail here, but I want you to have some curiosity. Profit and Loss and your Balance Sheet. What do those words mean?
How are those things being described? Does it mean anything to you? and if it doesn't, can you just change the names of those accounts? It's good to talk to your professional about whether or not that's okay. But I can guarantee you, if you use words that are meaningful to you in your chart of accounts, suddenly the story becomes clearer, your curiosity is more confident and you'll start to enjoy looking behind the scenes of what's going on in your business.
Now you can have more or less detail depending on how you like to work. I have clients that work with masses of detail. It works for them. It works with their brain and how it works. Sometimes we summarize that up for other analysis.
I have clients that don't want much detail at all.
There's no right. There's no wrong. It's not black and white - It's all a bit grey; But that's what we're here for to help you get good relationships with your financial information so that you can read it and find out your own story and then take your business to where you want it to be.
Thanks for joining me today. See you next time.
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