Get intimate with your chart of accounts

Your chart of accounts is a wealth of information and should be your go-to for any data. In our financial based, transactional world, there is a reason why financials are so often referred to as the bottom line. We ignore triple line accounting or other health check measurements at our peril, but we cannot deny the wealth of information that sits in our financial accounts.

There is not much that doesn’t go through an accounting system. Your chart of accounts can tell you a lot more about the culture of your organisation than you realise. You will be amazed at how much your accounts can even provide on the wellbeing of your staff: are you spending enough on training, development and care?

In an episode of The Good Wife where a firm is being scrutinized, the wise auditor advises his young colleague to always check the footnotes, because that is where the detail is hidden. In this episode, which was how the baddies were found out, the writers understood the richness of that data captured in the chart of accounts.

This is a bit of a tangent but in his essay entitled Poetics, Aristotle states that poetry (he means fiction) is better than history in giving insight into a culture as ‘poetry tends to express the universal, history the particular’. Poetry or fiction doesn’t just tell you the facts, it tells you how people think about details or events. Poetry keeps the bigger picture in mind, in this instance we can see how The Good Wife has captured the knowledge and practice of auditors and presented it as the populist thinking of the industry.

In his book, Turn the Ship Around, L. David Marquet differentiates questioning from curiosity and advocates being truly curious about your operations, ensuring your staff are not just comfortable but empowered by your questions. (Socrates introduced this style of questioning teaching, known as Socratic method as a way of prompting individuals to think through implications, rather than just follow orders). In the same way, we should be genuinely curious about our chart of accounts, who are we paying, and for what? 

Managers and Directors often only have access to management accounts, which provide the overall health of an entity and whether it is a going concern (AASB 110), but the financial accounts hold the detail. One of the big differences between Management Accounts and Financial Accounts is:

·       Financial Accounts are historical – they tell it like it was.

·       Management Accounts through forecasting and the like - tell it like it will be.

An important part of any board meeting is to interrogate the chart of accounts. It’s not the place of board members to get stuck in the minutia, their job is to look forward, not backwards, and keep the big picture in mind. Being alert to the trends and warning signs, means some analysis of the past though. If there is a healthy surplus but wage expenses are down, it is only a matter of time before your business is in crisis mode as a result of staff burnout. The same happens with plant and equipment if depreciation, impairment and other asset management expenses are down. A healthy surplus but high liability could mean too much borrowing from Peter to pay Paul, and NFP’s in particular have to monitor their grant efficiencies.

At an operational level, managers do need to get into the weeds to ensure good fiscal management. They need to get intimate with their chart of accounts, identifying the overspends as well as the underspends. 

Financial Accounts hold the data. Be warned though, there usually is A LOT OF detail. Many of your asset registers can be created or maintained by the information held in your chart of accounts. Your payees are a great source of information. Check your suppliers list to see who you pay money to, and how often you pay them. Look at who you pay subscriptions to, and drill into the details on your invoices. This is even easier if you use accounting software that allows you to upload your invoices.

A word of advice though. Don’t get heavy handed or bit off more than you can chew, always fight off your first inkling to scrap an arrangement or supplier. If something looks like it needs further investigation, then do so before making a rash decisions or accusations. 

I did make some decisions within a couple of months of taking over management of an entity, and some thought they were rash, but I can assure you I did my calculations and gave serious consideration to the implications before making the decisions. One involved ditching a supplier only to see that supplier on the news being arrested a matter of a few weeks later. My questioning and actions were justified. 

I still recommend hastening slowly though before you ditch suppliers, and cost alone is never enough of a justification. You especially need to consider the impact on your workforce: too radical a change may place too much of a burden on your staff. My article How we shape culture further addresses the different approaches needed depending on whether your entity is asset poor or time poor (as a result of a depleted or weary workforce).

Budget preparation is outside of the scope of this article and despite some very good arguments for us all creating strategic budgets rather than bottom-up budgets based on actuals, most of us have to start with the actuals. This means analysing your spends and knowing your accounts. (Strategic budgeting is however important and can be done alongside actual based budgeting, I’d be happy to discuss this further).

Be curious about your chart of accounts and ask your staff as many questions as you need to. Don’t immediately default to judgement in your questioning, make sure you start with just wanting to collect the information. In his book, L. David Marquet speaks about ensuring your staff don’t feel intimidated by your curiosity, so explain yourself well. But do seek to develop an intimacy with the numbers. Regularly interrogate your accounts, it will help you to understand your operations better.