Subscribe
Share
Share
Embed
Your chart of accounts is the backbone of your business's financial system. In this episode, learn how to create and customize a chart of accounts that provides the visibility you need to make informed decisions. Discover tips for keeping it clean and simple while still capturing the right level of detail for your business.
Connect with Keila!
LinkedIn - https://www.linkedin.com/in/keilahilltrawick
Website - http://www.hellokeila.com
RESOURCES:
- (00:00) - Introduction and Podcast Updates
- (01:17) - Understanding the Chart of Accounts
- (02:30) - Simplifying vs. Detailing Your Chart of Accounts
- (07:36) - Enhancing Financial Visibility
- (11:23) - Practical Tips for Managing Your Chart of Accounts
- (13:35) - Conclusion and Final Thoughts
Connect with Keila!
LinkedIn - https://www.linkedin.com/in/keilahilltrawick
Website - http://www.hellokeila.com
RESOURCES:
Learn more about Little Fish’s suite of services and sign up for our newsletter at www.littlefishaccounting.com
Follow Little Fish Accounting on social media!
Creators & Guests
What is Build to Enough ?
Little Fish Accounting presents Build To Enough. The pursuit of endless growth and scaling can leave entrepreneurs feeling burned out and unfulfilled. This podcast explores how to build sustainable, purpose-driven businesses that align with your lifestyle and values, rather than defined by rapid expansion alone. On this show, we’ll reframe definitions of success, provide strategies for structuring companies around desired lifestyles, and share stories of entrepreneurs finding deeper fulfillment by focusing on “enough.” Join us as we discuss moving off the hamster wheel and building businesses with balance and meaning.
There may be errors in spelling, grammar, and accuracy in this machine-generated transcript.
[00:00:06] Keila Hill-Trawick: Hello, you're listening to Build to Enough, a podcast for [00:00:10] entrepreneurs who want to scale at their own pace. I'm your host, Keyla Hill Traywick, and I'll be your chief storyteller and cheerleader in a world that glorifies endless expansion, we're tuning [00:00:20] out the noise and discussing the beauty of enough. Each episode will dive into inspiring stories, practical insights, and strategies to cultivate sustainable success on your [00:00:30] own terms. So whether you're a solopreneur, small business owner, or aspiring entrepreneur, get ready for a refreshing take on the entrepreneurial journey. This is build to enough. [00:00:40] By now, you've been with us for a minute. If you've been listening to these new episodes since we made the shift to build to enough, and we would love to hear from you. [00:00:50] If you've been enjoying the episodes, please rate, subscribe, give us a review, let us know how you're enjoying these episodes. We really love being able to bring them to you, and I'm [00:01:00] excited about the direction with which we've made so that we're able to really give you some more broad perspective around small businesses, especially when you're a very tiny one. [00:01:10] And regardless of the size of your business, you need a good accounting system that is supported by a great chart of accounts. So that's what we're going to go over today. We're going [00:01:20] to talk about your chart of accounts, why it's so foundational really to everything that you'll do with your bookkeeping and accounting, and what to think about when you're creating or adjusting [00:01:30] the one that you have.
[00:01:30] Keila Hill-Trawick: So let's dig in okay, so think of your chart of accounts as your list. It's really all of the buckets that you can choose from when you're categorizing transactions to [00:01:40] say where they should go. This is everything from the assets and liabilities on your balance sheet. So your accounts receivable or inventory, even your [00:01:50] loans and credit cards to your PNL accounts. So any revenue accounts or expense accounts, that's really where the bulk of your changes are going to come in. But ultimately, you want [00:02:00] to make sure that this is a list that you can use really reasonably to do your own bookkeeping or to put it in someone else's hands and recognize that it is [00:02:10] important. It is really the backbone of your financial system. It provides a standardized framework so that every time you record or categorize a transaction, it always [00:02:20] looks the same. You are comparing apples to apples when you're comparing periods over each other, and when you're looking at a specific account, you know exactly what should be going in there. [00:02:30] Now, chart of accounts can be simple, or it can be complex, right? So you can have some chart of accounts that are the baseline of what goes into an accounting [00:02:40] system. They will set that up for you. And that's kind of the default to get you started. And it's usually a very, uh, brief list of all of the accounts [00:02:50] that you can choose from with no frills.
[00:02:52] Keila Hill-Trawick: There's no sub accounts. It's kind of just all bank fees, office supplies, marketing. Nothing wrong there. In fact, I [00:03:00] prefer a simplified chart of accounts. You can also get more detailed. So we have clients who have specific types of revenue that they want to capture, not have it all in one line, [00:03:10] but instead be able to see what types of revenue that they're making. So those would be sub accounts to the revenue account. You might also have things like professional services [00:03:20] as a top line and subaccounts being like legal accounting, um, graphic design, depending on how much you use them and how you want to break that out. All of those could [00:03:30] potentially be sub accounts on your chart of accounts. So like I said, I really do prefer a simplified chart of accounts. But one thing to keep in mind is that it doesn't have [00:03:40] to be the way that it came. You don't have to use the standard that comes with your accounting system to use for your business. Every business is a little bit different, and so you want to customize where you [00:03:50] can or where you feel it's most necessary. So why might you want to customize your chart of accounts? The first reason is when I [00:04:00] explain financial statements to clients, or even just small businesses in general. What I bring up a lot of times about your chart of accounts is that it should answer [00:04:10] questions that you would ask it, right.
[00:04:12] Keila Hill-Trawick: So if you are looking at your PNL and you're wondering how much did I spend on travel last year? And that's the only thing that you [00:04:20] care about having one line that says travel is more than sufficient, but you might do on sites or travel directly to your clients or [00:04:30] conferences or speaking engagements, and it might be helpful to know the difference between travel that I only incurred as part of a project, or client work versus [00:04:40] travel that I am doing internally. So trainings that I am just attending because I need them to run my business or things that are helpful for our business internally. [00:04:50] If that's the case, you may want to have two separate lines one that has client or project travel and one that has internal travel. Another example is marketing. [00:05:00] I don't necessarily always know the difference. We're going to get an expert on here to talk to you all, but let's say that you want to see how much I have spent on marketing overall, [00:05:10] and I define that as any money that you spend to put your name, reputation and what you do out into the world. Well, the more savvy among us might say, well, in addition to marketing, [00:05:20] I want to know the difference between what I spent on marketing, advertising and PR.
[00:05:25] Keila Hill-Trawick: Those might be subaccounts that you want to see more detailed because you're investing a lot in them, [00:05:30] or because you just want more information about where you should be putting money and backing off in other areas. In bigger scales, you can see this being down to, [00:05:40] um, office supplies versus software or putting that in one combined account. The idea is that there's really no wrong answer to this. What you want is a couple of things. [00:05:50] One, customizing it so that it's easy for you or your accountant to be able to categorize on your behalf in order for you not to always have to remember to look. Where did I [00:06:00] put this last time? Where would I put it this time? You want it just broad, but also specific enough that it is easy for you to put it into the right category. This is especially helpful when [00:06:10] you have someone working for you, like a bookkeeper or an accountant, so that they don't have to ask you every time. What's the difference between this and this? The other reason that you want customization is [00:06:20] that when you start looking at reports over a period, so what I have made and spent or what is going on on my balance sheet year to date or quarter to date, or just for [00:06:30] this month, you want to make sure that it is easy for you to say. As I compare periods, I am looking at the same type of transaction in each of those buckets.
[00:06:39] Keila Hill-Trawick: If [00:06:40] you kind of move those around every time you categorize things, it's really hard to see where you're over or under spending or where you might need to make changes in your business. Another [00:06:50] thing is the complexity of your business. I have seen small businesses who do very straightforward work have chart of accounts that are what feels like a million [00:07:00] lines long, and it's unnecessary. If you don't have that much going on in your business, you don't have a ton of transactions. Being able to easily categorize them starts with a really [00:07:10] simple chart of accounts. Your industry matters, too. If you're in something like construction or e-commerce, you need a lot more detail than someone is doing who is doing professional services. [00:07:20] And so your chart of accounts may need those million lines. Again, the idea is that there's no wrong way to do it, but you do want to make sure that when you set your chart [00:07:30] of accounts, you set it in a way that works best for your business and the way that you want to see information on your reports. That leads directly into the ways that your chart of accounts [00:07:40] enhances financial visibility. Right. So a lot of times we hear the question, where did my money go? Right. A lot of small businesses will have questions [00:07:50] around what did I spend it on? Should I cut back in expenses? What are the areas that are over budget versus those that are under? And when you have a good, strong chart [00:08:00] of accounts, you can look across the board to be able to see what we just talked about, what are the buckets where I'm seeing an increase, or I'm seeing a trend that [00:08:10] that is consistently over budget.
[00:08:12] Keila Hill-Trawick: Doing that will help you to logically provide insights into different aspects of the business. So if you have [00:08:20] questions around what lines of revenue are actually making me money, that can be everything from the actual income that's coming in to the gross profit, that revenue minus [00:08:30] cost of goods sold or cost of sales. The money that I get in minus what I spend just to deliver that work, what do I actually have left over that can [00:08:40] give you some good insight as to how much you have available to spend on operating expenses, those baseline costs that you're going to have to pay regardless, like software that's [00:08:50] not dependent generally on the work that. That you do. We're gonna have to pay for those anyway. And how much is left over when I take out what I'm only spending because I'm delivering. When [00:09:00] you take that even further, by organizing your accounts, by things like function department classes, you have space to really expand how [00:09:10] you're looking at that data. Maybe you have specific projects that you're working on, and you want to be able to see what I'm making and spending in each project versus just overall [00:09:20] for the business.
[00:09:21] Keila Hill-Trawick: You may want to see it by customer and be able to say, hey, this customer is one of our largest customers. I'd love to be able to see how that breaks out. While [00:09:30] customers aren't a direct chart of accounts line, it does give you some insight as to how detailed you want your chart of accounts to be. I once had a client who wanted to have her [00:09:40] revenue broken out by customer, and when I explained to her that we could pull that information anyway, she was able to simplify her revenue chart of [00:09:50] accounts by only showing what she needed to see. You have a lot of jobs. I say that a lot. We have a lot of jobs running small businesses, and so adding an additional layer [00:10:00] of complexity around finances is just not a good look. Make sure that you can look at your financial reports based on a chart of accounts. That makes the most sense, so that you can use that information [00:10:10] to make strategic decisions. Next, you know that doing things consistently helps you to streamline reports. So [00:10:20] when you're looking at tax filings, that's a big one. Your chart of accounts aligning with what lines are going to be on your tax returns makes not just your tax [00:10:30] preparers life easier, but it also empowers you to be able to read your tax filings a lot more directly.
[00:10:37] Keila Hill-Trawick: If you understand, for example, that your S Corp return [00:10:40] the 1120 S or the schedule C on a sole proprietors tax return is really somewhat of a duplication of your PNL statement. [00:10:50] You can review it yourself and be able to see where things look off and know where to ask questions, be able to identify what things are deductible and what isn't. But it's really [00:11:00] easy to see, for example, which, uh, categories of the chart of accounts were left off or included or included improperly because, you know, people make mistakes. [00:11:10] The point is, at the end of the day, when you're reviewing your reports, you can see and interpret information better when you know what all of those lines represent. And that's [00:11:20] really hard to do when your chart of accounts is a little bit chaotic. So what do I recommend when we're thinking about a chart of accounts? First, get an accounting [00:11:30] system. Yes. That's not directly related to a chart of accounts, but it gives you a really good starting point if you don't know what you want your chart of accounts to be. If you're just starting in [00:11:40] business, or even if you've been in business and you feel like your accounts are a bit of a mess, use the standard one that comes with that accounting system. It will at least get you started. It might even get [00:11:50] your brain, um, running on other things that you want to make sure that you include.
[00:11:55] Keila Hill-Trawick: Make sure that your chart of accounts stays clean, deactivate accounts that you're no [00:12:00] longer using, whether that's bank accounts that are closed, um, expense accounts that you no longer use, loans that you paid off. You want to have as few [00:12:10] ongoing $0 accounts as you can so that you're not focused or distracted by the wrong thing. The next thing I would say is make sure [00:12:20] that you don't make it too complicated. The more subaccounts that you add, the more lines that you had, the more you have to remember how to categorize that. So you're looking at the same thing every [00:12:30] time. So don't focus on having the longest, most detailed list. Focus on having the most aligned list with your business. [00:12:40] Make sure that that chart of accounts has just enough so that it's really easy for you to drop things where you need to. Specifically, if you're doing this yourself, you want to make sure [00:12:50] that you don't have to scroll through a whole lot of accounts to get to the one that you're choosing from. Finally, make sure that you're talking to your accountant, bookkeeper, [00:13:00] or tax professional. They can really give you some insight as to what might be the best chart of accounts listing for what you do. Because they're in your books, they know about what you're doing, [00:13:10] and so they can give you some information that can help you to understand.
[00:13:13] Keila Hill-Trawick: Is it too complex or is it oversimplified? You two working together and collaboration will help [00:13:20] you to get a sense of how you can best use that information to create financial reports that really tell you what you need to know. And that's how your business is doing, what [00:13:30] changes you might need to make, and of course, where your money is going. So where does this leave us? The thing is, you need to master your chart of accounts. [00:13:40] It seems like a very small thing. A lot of people will just go in and it's set it and forget it. And I never have to think about this again. But I would caution you to really make that a part [00:13:50] of your financial hygiene, whether you put that in quarterly, annually, whatever it looks like, make sure you're reviewing your chart of accounts so that it's telling you what you need [00:14:00] to know. I've seen examples where costs get hidden, so here's a good one. We have several clients who have podcasts or [00:14:10] YouTube channels or some other kind of arm of their business that they're investing in, right? If we put all of that in business development [00:14:20] or in marketing, it may be hard to see how much you're actually investing and what is really a big part of your business. Simply separating those out into [00:14:30] their own line items gives you a sense of not just, what am I spending in the broader arena, but what am I spending specifically on this? So thinking about how [00:14:40] complex your business is, as well as the big investments or big departments of your business, will also give you a sense of how to break down your chart of accounts. [00:14:50]
[00:14:51] Keila Hill-Trawick: Finally, remember that this is yours. It is your business. They are your financials. It is your chart of accounts. Don't worry about getting it exactly [00:15:00] right the first time. Instead, focus on making sure that your financial statements will tell you what you need so that you can continue to have a growing and thriving [00:15:10] business that continuously gives you the information that you need to make sure that it stays that way. I hope that was helpful. Chart of accounts is one of my favorite things, because I think it's a very [00:15:20] easy thing to update. That makes a big impact. If you're a small business, make sure that you're doing that in your accounting system to make for the best [00:15:30] financial visibility that you can for yourself. We'll talk next week. Thank you for tuning in to another episode of Build to Enough. If you enjoyed today's episode, don't forget [00:15:40] to subscribe, rate and share the love with your fellow entrepreneur friends, and make sure to sign up for the Build to Enough newsletter. The link is in the show notes. Stay tuned for more episodes as we continue [00:15:50] to redefine success one intentional step at a time.