Setting the Standard....Chart of Accounts
In this series of articles we want to take a look at the RTC Standard Chart of Accounts for the Home Inspection Industry. This structure is a foundational building block of our Accounting Service. We will discuss why we set up the chart of accounts the way we did and what we do with it.
Part 1 - Overview
What is a Chart of Accounts?
The chart of accounts is simply how your books are organized. Think of it like a file cabinet. It is a way to segment and organize to enable concise, consistent, and accurate financials and analysis. If you just dump everything into a file cabinet and only track cash in the door and cash out, how can you be sure anything is accurate? How do you run a business that way?
Conversely, you can have too many folders in your file cabinet, or just poor organization. Too much detail complicates analysis and wastes time.
Ultimately the goal is to find that happy medium to facilitate the most meaningful financial analysis.
Even though we only operate in the home inspection industry, each and every clients' business is unique. One of the value-additions we provide is analysis of the industry averages and trends. Simply, aligning our chart of accounts at a level detailed enough to accommodate every business, but high-level enough to obtain comparability is the sweet spot from our perspective.
You can think of our chart of accounts as being layered. A cake, an onion, the paint in a 100 year old house, whatever analogy you will. I know which one I am choosing.
The top layer is comprised of Marketing, Administration, Service, and Other.
We can glean a lot from looking at the high level trends. We commonly analyze each expense category as a percentage of revenue for the period.
Maybe we're moving beyond bottom-line business strategy and just starting to engage in that financial tuning to get your business running optimally. Am I spending more than I should on marketing? Not enough? What happened this month that my Admin percentage spiked? It goes on and on. Commonly we use this high-level analysis to peel back another layer, to dig deeper.
The next layer down, we have subcategories. Here we group together associated accounts. Payroll and benefits, professional fees, utilities, etc.
As we drill down in subcategories we can look at payroll across the three categories. What is my service payroll? Is my compensation structure working as intended? Am I seeing the returns on investment I am aiming for advertising and marketing?
And finally we have the account-level detail. Now we're starting to get into the trees (the weeds is transaction detail). How are the advertising dollars allocated? Is my digital marketing where it should be related to the returns? Does it make sense to invest in outside services to free up administrative time?
These are just some examples of course and we aim to engage every business owner into the deepest level of detail on the financials.