Whoa! Really? Yeah, really! What do you REALLY need to know about your Chart of Accounts?
After all, you’re a construction contractor. And you have at least 3,284 things to deal with on any given day. So, what do you really need to know about an accounting tool called a Chart of Accounts?
The foundational step is understanding that you’re an entrepreneur, a construction business owner, an executive who understands how to put the numbers to work. (Check out this article, Owning a Job vs. Owning a Construction Contracting Business, if you want further insight concerning this foundational step.)
It’s a Tool
The next step you must take is to know that a Chart of Accounts is a TOOL. A valuable tool!
While you’re not out in the field turning the screwdrivers, swinging the hammer, or drilling the holes, you must know your team has the correct tools for getting the job done.
The same is true for a well-versed and savvy entrepreneur. Getting to know your financial tools and how they’re used is imperative.
It’s a Big Deal
The Chart of Accounts for your construction business is worth understanding. To that end, I recently had a conversation with three Accounting Professionals centered around the topic of a Chart of Accounts. Traci Swindle, founder of Trac-1 Solutions, Dave Kersting, CEO of Capovario, and Tonya Schulte owner of The Profit Constructors, all agreed to answer my questions concerning how they address both the complexity and the simplicity of a Chart of Accounts with their clients.
My question: What is the biggest misconception clients often have about a Chart of Accounts?
Tonya: That they should include EVERY vendor on the list or have an account for EVERY teeny-tiny category of expense.
Traci: The pendulum swings wide on this one. They either don’t understand it at all, OR they think it is a great place to get granular.
Dave: That it is not something they need to use; they think it is only for tax purposes or summary data.
My question: If the biggest problem is too many or too few accounts in a Chart of Accounts, how do you get to the “Goldilocks moment” for your clients?
Traci: Show them other ways to get what they are “looking for.” Depending on their business, that could be a barrage of other reports.
Tonya: The Chart of Accounts should accomplish a few simple things - it should be easy to read but should include enough data to make strategic plans. For our clients, we prefer to limit the COGS section to FIVE accounts and FIVE accounts only: Direct (Internal) Labor, Materials, Equipment, Subcontractors, and Other COGS. For Income, we prefer only one or, at the most, two income accounts. Also, NEVER, EVER do we recommend multiple Accounts Receivable or Accounts Payable accounts. This is RARELY necessary.
Dave: There has to be a plan for the Chart of Accounts. What does the client need to know? What do they need to make effective decisions? Many times, when I first take on a client, I expand their COA to include some of the smallest items like Uniforms, Social Media, Ride-share Expenses, and so forth. After the client has a grasp of their expenses, we might merge or make more summary headings, and then they can run reports from there.
Concerning COGS, I follow Tonya on the Five main accounts. Where I differ is that I sometimes expand Subcontractors to include workers’ compensation coding to assist in annual audits. Concerning income accounts, I want the client to see each area in which they are receiving income.
Finally, when it comes to Fixed Assets, I like to keep them in categories when possible, but with companies that have a lot of Fixed Assets, I break them down more so that they are easier to track when sold, put out of use, and so on. Many times, fixed assets get lost in summary “parent” categories and then become a huge project to clean up. I also like the more detailed Fixed Assets when having a numbered QBO, as then the CPA or Tax Professional can use the number associated with the Fixed Asset on the Tax Return – making it easy for reconciliations. I agree with Tonya that there should never be more than one AR and AP.
For example, if you utilize the Fixed Assets feature in QBO, it splits out each fixed asset with the asset itself and the depreciation of that one item. This allows you to track each item. This can be a huge advantage when tracking large assets. Many times, I use the chart of accounts as a way to detail Dues and Subscriptions to allow the clients to see each item they have at a glance when they are budgeting or when many people in the company can sign up for things that they forget to cancel. I also use the COA to track Employee Advances by Employee Name – again at a glance instead of having to run a report each payroll to determine status.
My question: What is your best strategy for creating a Chart of Accounts for a new client?
Dave: We focus on standardization whenever possible. If it is a new set of books, we create the Chart of Accounts from Scratch and do not like the QBO auto creation. We have a standard numbering system for “Parent” accounts, and we try to set up all clients to the same COA. Then, we customize it by the client as needed. In addition, we put in the COA all items, even if they may not apply at the moment. For example, ADVERTISING as “Parent,” with a “Child” of Social Media, or VEHICLE EXPENSE as “Parent” with a “Child” of Parking and Fuel.
Tonya: We like to use a standard set of accounts.
Traci: We also have a standard Chart of Accounts that is our starting point for all customers.
My question: What is your best strategy for “fixing” a Chart of Accounts for a new client?
Tonya: Sweep, sweep, sweep. Simplify, simplify, simplify. If ANYONE needs to remember more than ten account codes or account names in the office or out in the field to tell you what a purchase was for, that’s probably too much.
Traci: Where possible, and it’s always possible, minimize and simplify.
Dave: All new clients that have an established Chart of Accounts we review and then move towards “standardized and numbered.” This helps my team do the data entry if the numbers are the same and helps the client see we want them organized in a fashion that best suits tracking and reporting. A great example is the COGS accounts. Many times, they have too many, so we simplify them to the five standard and then, if needed, add in the workers’ compensation child accounts that pertain to their industry.
My question: Can you name a time when a client had an “aha” moment concerning a Chart of Accounts?
Tonya: Most of our clients who have had prior accounting help other than us have had accountants who like A LOT of accounts because they think it helps to give actionable data. Our approach is the opposite, so most of our clients (once they wrap their heads around WHY we want to simplify - which is to make their lives and their employees’ lives easier) really start to love the simplified system.
Dave: Our clients have “Aha” moments after we have organized their Chart of Accounts. Again, since we do some additional details with Child accounts, many times they notice it right away, the “at a glance” answer they are looking for.
Sometimes, if you have to run a report and then sort it to find something, things get missed based on how they were entered. For example, did the memo explain what it was, or was it missing? We try to make the Chart of Accounts the “go-to place” for details on their business in both a summary format and, in some areas, in a detailed format.
I have many clients who overspend in Dues and Subscriptions or just do not know what they are paying for. When we detail them out at the beginning of our engagement, they can now see (and budget for) each line item instead of an overall. Many times, clients can cut expenses dramatically just by doing budgets that show this detail.
I love Tonya’s approach to simplification, and I also believe this works in many cases. Still, I differ in the fact that “IF detailed strategically,” our clients find the information at their fingertips without having to run a ton of reports or have meetings.
Traci: We actually added more accounts to simplify FAR Reporting. Once the modifications were made, a light bulb went off for the client at how much easier the annual FAR reporting would be. These modifications shaved hours off of the reporting.
My question: Wait, Traci. What is FAR Reporting?
Traci: FAR stands for Federal Acquisition Regulation, and it is an audit of architectural and engineering consulting firms. The standards are set by the American Association of State Highway and Transportation Officials (AASHTO). Needless to say, this client’s Chart of Accounts goes more in-depth than actually necessary, but it eases the process of completing the audit report each year.
My question: What is your best advice concerning setting up or maintaining a Chart of Accounts?
Dave: SIMPLE equals SUCCESS! Some detail is important if strategic and important for budgeting or showing the budgeting process to a client and having to ask something like, “Last year you spent $20,000.00 on Starbucks; so what do you want that budget to be this year?” We do that instead of having it all mixed in with Meals that often get overlooked as an acceptable or needed expense.
Maintenance of the Chart of Accounts includes once the client “gets” the things they need from detailed areas, transitioning to a more simplified version such as merging Starbucks back into Meals once they have a true understanding and control of the budget line item. Maintenance also includes making MY FIRM control all adding of COA items and not the client. When the client feels that they can just add whatever, this is when things get out of control.
Traci: Keep it short and simple. Financial reports are challenging enough for some to read – we don’t want to overcomplicate it.
Tonya: KISS - Keep it Simple and Straightforward!
There you have it! Without oversimplifying (yes, this pun is intended,) simplify your Chart of Accounts.
And remember – that can mean different things for different construction contractors, just as these Accounting Professionals showed us. Meeting governmental regulations, discovering “the how much” and “the where” of overspending, or simply getting to the bottom of things – a Chart of Accounts is a tool for building your construction business strategically and profitably.
I want to thank Dave, Traci, and Tonya for sharing their knowledge and expertise concerning how to get the most out of a Chart of Accounts! They rock, and I’m happy to know them!
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