Your COA = Your Secret Weapon
CEOs know it’s important to study their Financials. They look at their balance sheet and everything looks great. Margins are increasing! Debt is low! Then they recall the famous quote, “It’s a write off, just write it off” without thinking about their COA. And before they know it, they‘ve set off a dreadful nightmare for their accountant, one that will be expensive and tedious to fix.
Maintaining a Chart of Accounts (COA) is boring. No one ever asks, how is the COA? Was it created appropriately? Are we following the correct procedures?
Some may hire a professional or use the default setup with their accounting software. However, as the COA is not required by the IRS, most small business owners just move past it, without creating unique accounts for their business.
Maybe you don’t need to? You have a business bank account – you put in all the money you made and take it out to pay all your bills. What could possibly be wrong with that? How could it possibly be any clearer?
However, without a COA, you could be making decisions based on unclear, or worse, mis-information!
I ask you - how do you know if you are making a profit? How much were your sales versus your expenses? Who still owes you money? Who do you need to pay? Do you know why you bought your car in cash? The COA has all these answers and more.
By my definition, the Chart of Accounts is the encyclopedia of your business. It builds an index of all accounting items (with a respective number and description) categorized in a summary called a General Ledger, which is then applied to every accounting transaction.
The COA is the base of all financial statements and fundamental to planning and analysis. To develop the COA you need to define all account transactions and categorize them as one of the following:
Assets (Bank Accounts, Properties, Vehicles, Receivables)
Liabilities (Payables. Mortgages, Notes, Loans)
Revenues
Cost of Goods Sold
Expenses
Owners Equity
Sure, it is a lot, and may seem daunting, but without setting these account types any decision based on the financials of the company can be made in error.
The strongest businesses use their COA to define product lines, revenue streams, product expenses, and asset listings, some with their respective depreciations. These help to make financial statements more detailed; fine tuning business decisions based on relevant facts about earning, spending, and holding. A strong COA provides the basis for further analysis and calculations including EBITDA, Gross profit Margin, LTV, and ROI.
Mitesh Gandhi
Advisor
Once you see a proper COA you’ll wonder how you functioned without it. I encourage all business owners to demand a clean, organized, and properly created COA.
Interested? Reach out, I can help you forge your secret weapon.