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Why Your Chart of Accounts Isn’t Ready for Growth, Mergers, and Acquisitions

As the main financial master data component, the chart of accounts (COA) is the key to enabling financial reporting across an entire organization. Although the COA is the foundation of this financial master data, it is often neglected as an enterprise grows and becomes more complex. As a result, it is often the hidden cause of many challenges. These problems can become especially apparent during a growth phase:

  • Adding new product or service lines
  • Expanding to new locations, and geographies
  • Acquiring or merging with another company

Increasing financial complexity in data and reporting is a natural outcome of entrepreneurial success. But it can highlight issues that need to be addressed.

Inflexible COAs Can’t Accommodate Growth

When a Chart of Accounts is too inflexible, it can’t accommodate the business events listed above. In fact, even adding new departments and natural accounts can prove problematic. Most COAs are built when a company first sets up their general ledger or implements their ERP. It is not surprising that these charts are often designed for how an organization functioned in its early days rather than with a bigger, more complicated future structure in mind. Future controllers, accounting teams, and financial executives inherit whatever was initially created and find increasingly difficult workarounds to continue to use the existing system. 

Reporting Suffers When a COA Can’t Meet the Demands of Business Growth

Most COAs are set up to facilitate data entry instead of reporting. As a company grows and reporting requirements become more complex, it becomes imperative to design a chart that is designed to optimize reporting. This is especially true as a company expands. Full financial visibility and accountability becomes harder to achieve, introducing new levels of risk into the organization. Good data insights are the antidote to increasing complexity. The correct COA allows general ledger debit and credit data to be turned into actionable business information.

Executives and business unit leaders want reports that let them view data in multiple dimensions and at different levels of granularity. They want reports and dashboards that tell them what THEY need to know about financial information and trends by product line, distribution channel, geographic region, etc. These “alternate views” present a major challenge because the ERP system data is not organized to report these results in a way that’s useful to business decision makers.

Here are several common symptoms that surface:

  1. Users can’t generate the reports they need because they can’t find the data, there are too many data sources, or there are multiple reporting tools. It takes a long time (or help from IT or other experts) to generate even basic reports.
  2. For more complex reports, it may be impossible to organize information in a way that provides the view that business leaders require. 
  3. IT teams have to find workarounds and put in significant effort to develop custom reports or revise existing reports to meet the needs of Accounting personnel and business users. If it is taking days to implement a change in a report, this indicates an underlying issue with how the COA is designed. 
  4. Executives see that reports are conflicting, inaccurate, incomplete, or inconsistent depending on how data is organized and used for different purposes across the organization.

This final issue is perhaps the most troubling. At every level and across each division or unit, companies need to know if they are operating efficiently, making money, or losing money. When leaders can’t trust their financial information, they can’t make confident decisions about business operations. 

Three More Signs Your COA Must Be Modernized to Be Growth-Ready

  1. Excel Is Not a Substitute for the ERP
    Accounting teams that are forced to work with an outdated, inflexible, and confusing COA often extract data from their ERP into Excel so they can classify items line by line. It’s the only way they can get the job done, and it requires a great deal of tedious effort and expense to complete. Not only is this incredibly time consuming, the risk of losing data integrity by making Excel the system of record is real. 

    The truth is that it shouldn’t take more than 5 days of effort to close the books each month. If that’s happening, there’s an underlying problem that needs to be fixed. And the financial master data in the ERP, not Excel,  should be THE financial system of record for the organization.

  2. Categorization Is Not Analysis
    Finance and accounting professionals are often frustrated by the fact that they spend more time collecting and compiling data than they do analyzing it. A well-designed COA system should do all categorization for the Accounting team (without the need for a data warehouse just to sort the data into a reportable format). Time spent on manipulating data and creating spreadsheets can be reallocated to value-add activities that help turn financial data into actionable information. 

  3. A Reporting Tool Won’t Fix a Messy COA
    Tools like Cetova do a fantastic job of making it easy to slice and dice data for everything from dashboards to in-depth analysis. But even the best reporting software can’t deliver clear insights from a disorganized COA. Getting reporting software to work with a poorly designed COA requires extensive manipulation to map tables from the ERP into the reporting tool. This type of project can cost hundreds of thousands of dollars. It is FAR less expensive to untangle the underlying chart of accounts and then layer on a BI or reporting tool that can easily pull and present the well-organized data beneath. 

    As a bonus, a well-designed COA means that once a report is designed it will automatically pick up new accounts within the selected range. In contrast, with a hard-coded report a developer may need to update the code in potentially hundreds of places to add in the new hard coded account, then test it to make sure it works correctly. 

  4. Mergers and Acquisitions Make COA Woes Worse
    Organizations that grow through M&A activity often face the challenge of dealing with multiple ERP system instances and COAs. This makes it difficult to consolidate basic financial results, let alone perform important management analyses. With variations in accounts and organization structures between COAs, it’s not easy to create comparable financial reports for all business, product lines, locations, etc. There may be only one person within an organization who can fully understand how the different COAs map onto one another. Or this may be based on a best guess or approximation.

When Is the Right Time to Fix Your Chart of Accounts?

The best time to fix a COA is before it begins to cause problems in the ease and accuracy of financial information reporting. However, another good time to take on this project is in preparation for a major growth step. A truly well-designed COA allows for almost unlimited expansion, so investing in an overhaul is well worth the effort. After that, a check up once every few years to ensure it still meets the needs of the business is a good idea. In the interim, your Accounting team will be enjoying a MUCH faster, more accurate close cycle each month and business users will get the benefit of easier access to the reports they need.

A COA redesign takes less time, money, and effort than you think! Contact our team at ACBM to learn more.

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