Is Your Financial Account Chart Excessively Lengthy? - Monthly Metric Analysis
Managing a bloated chart of accounts (COA) can be a real pain for finance teams. An overstuffed COA leads to longer review times, more reconciliations, extra system maintenance, and a higher risk of coding errors. After analyzing data across various industries, we've discovered that the issue is quite common.
Let's dive into why your COA might be growing like a rampant weed and how top organizations keep it under control.
According to APQC, organizations in the 25th percentile maintain 180 or fewer accounts, while those in the 75th percentile have more than triple that number, with 680 or more. But what about the unfortunate souls in our ranks who are well above the 75th-percentile mark? Yep, you guessed it - we're talking about us!
The root of our COA inflation isn't a mystery. In the past, for instance, we might've catered to ad hoc reporting requests by hastily adding new accounts, sub-accounts, and project numbers without considering the consequences. Comparing numbers to prior periods is one of accounting's fundamental techniques, so eliminating accounts wasn't a common practice. This sloppy habit allowed our COA to swell rapidly over the years.
An oversized COA can also extend your monthly and year-end close cycles. Spending endless hours reconciling and investigating potential variances from a bloated COA is no picnic - it drives up the time needed to close the accounting period and delays reporting on the corresponding period's financials.
To avoid these accounting headaches down the road, it's crucial to keep your COA as trim as a beach-ready physique. Regular COA maintenance is key to preventing proliferation. Instead of waiting for a project requiring COA cleanup, perform periodic (at least annual) reviews of the COA and eliminate inactive accounts as appropriate.
Looking at APQC's COA, I found that around 4,500 of the 5,000 accounts had little activity and a balance of ten dollars or less. These inactive accounts may have initially been needed for reporting on a new project or business line, but after some initial period, they were no longer active. If a significant percentage of the accounts in your COA have little activity or a low balance, you might need to trim the fat.
Establish governance mechanisms for how transactions need to be categorized and reported to internal and external stakeholders. Any additions, deletions, or modifications made to the COA should be the result of a thorough, disciplined process with oversight from a process owner. In larger organizations, this is usually handled by the corporate controller.
To keep your stakeholders happy, let their reporting needs drive the changes you make to your COA. If the current categorization of transactions doesn't allow for clear reporting to stakeholders, then it's time to consider changes that'll help them gain better information from internal and external reports.
In conclusion, taming your overgrown COA is essential for maintaining financial management efficiency and accuracy. Regular reviews, eliminating inactive accounts, and maintaining order will help keep your COA trim. By implementing these strategies, you can make finance team life a little less like running a marathon in a hectic city and a whole lot more like strolling in a peaceful park! 😄
Perry D. Wiggins, CPA, serves as APQC's secretary, treasurer, and website manager. APQC is a nonprofit organization based in Houston, Texas, that specializes in benchmarking and best practices research.
- To prevent unnecessary growth in the chart of accounts (COA), it's essential to establish strict governance mechanisms for transactions, ensuring all additions, deletions, or modifications are made through a thorough and disciplined process.
- Regular analysis of the COA is crucial to identifying inactive accounts and trimming them, reducing the risk of accounting errors and streamlining financial management.
- While comparing numbers to prior periods is a fundamental technique in accounting, this should not prevent organizations from pruning their COA to maintain accuracy and efficiency in financial management.
