We trace this dangerous practice to its root cause.
We know that better decisions require better information. Yet, none of live us in that perfect world.
Most small business owners have had to make decisions based on nothing more than a hunch. ‘Gut feel’, as they say. And that’s because they lack the information needed to make an informed decision.
Why does this happen?
It begins with a lack of clarity about the decisions you will need to make, and it cascades all the way down to the data. Collecting and sorting the data in useful ways, to ultimately inform the decisions you will need to make.
And that’s why your chart of accounts deserves your attention. It’s a foundation block to having useful financial information* available for your decision-making.
What is your chart of accounts? In simple terms, it is the list of accounts your bookkeeper can allocate entries to.
In an extreme example, imagine your chart of accounts only has three items: ‘sales’, ‘cost of sales’ and ‘all other expenses’. In this example, your rent, repairs and maintenance, white collar wages, interest, depreciation, insurances, power and telephone are all going to be lumped together in that soup called ‘all other expenses’ because there is no more granular account in the ‘chart of accounts’ to allocate them to.
Now, that’s fine if you never want to make a decision about overhead efficiency. ‘Keep it simple’ is a good philosophy, until and unless a little complexity is justified.
For example, let’s say you now want to know how efficiently you are using labour in field. Or how efficiently you are using labour in the factory. You have the transactional data, but because you’ve lumped it all together, you have lost the informational value of that data.
So, what are our 3 top tips for getting the chart of accounts right?
- Begin with the end in mind. Most important decisions are linked to your critical success factors (CSF). If you have identified KPIs associated with each CSF, you will need to collect and sort data that informs you about how you are performing against those KPIs.
- Introduce the right amount of complexity. Just as it’s possible to lose informational value as a result of having too few accounts to choose from, it’s also possible to lose informational value by having too many. For example, as the Managing Director, you may want to understand your total fuel spend but do you really want to know that Car A uses fuel at a rate of 7l/100km whilst Car B is using 7.4l/100km?
- Challenge your accountant to help. We sit in the privileged position of seeing the financials for hundreds of businesses each year. And the good ones amongst us understand CSFs, KPIs and the flow of information that’s necessary to your decision-making. There’s no-one better to help you to harness the value of your financial data.
We know that having access to the right information drives business performance. If you need help to get started, e-mail us today or call 1300 656 141 for an initial conversation.
*Balanced decision-making should also embrace non-financial information. Whilst this article focuses on financial information, applying a similar approach to the collection and sorting of non-financial data will also serve you well.