Strategically Setting Up Your Expenses

Many small business owners, even many accountants for those small businesses, are of the belief that you don't need to go boiling the ocean when it comes to creating your 'chart of accounts.' Your chart of accounts is essentially Accountant talk for the accounts names (typically focused on expense accounts) you plan to use. Well, I fundamentally disagree, and while I would never suggest that anyone attempts to boil an ocean, I'm a big believer in taking the time to strategically think about your business and the expense categories that are worth tracking as a business owner.

This belief is totally unrelated to what your eventual year end financial statements with look like. By all means, if the Bank and the CRA are the most likely stakeholders to ever be looking at your financial statements, go ahead and lump everything into a handful of basic expense categories like Rent, Wages, Advertising, Utilities, and the fan-favourite... Mighty Miscellaneous! Quite frankly, I think your expenses SHOULD get consolidated at this high level for year end purposes, regardless of whether you follow my below advice. Not many people other than yourself, as the owner, truly requires or cares about the details.

However, a traditional Accountant who, not-so-dissimilar to the bank, takes little interest in the details - she/he won't ever push for you to make that smart decision to expand your horizons when determining your chart of accounts. In fact, they might push the opposite and try to convince you that you are over-complicating it.

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Sound familiar? Well, take a guess at why they don't want you to 'over-complicate' things.

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There are so many ways to skin a cat (sorry for the visual), so don't just settle for the easy way, because this will ultimately lead to you getting lazy with your books, especially if it provides you no value with how it is organized. This is your own business after all!! Being strategic about your Accounting is referred to as Managerial Accounting, and if you're stuck in a world where you follow the 'Standards of Accounting' as your traditional Accountant will tell you (again, to make their lives easier) you'll never get any value from having a keen eye on your books. It becomes a waste of time, a bunch of gibberish, and holds no value at your decision-making table.

I'm not just an Accountant, I'm also a Business Owner like you. And the reason I firmly believe that time and thoughtfulness is key when creating your chart of accounts is so that YOU can eventually make enlightened decisions for YOUR business. No, you don't have a crystal ball to predict what kind of analysis you might desire after 7 months or 1 and a half years of running your business. But you can probably make some educated assumptions on the kinds of expenses that are smart to break up into smaller slices of this expense pizza you're staring at.

As a quick example, Wages aren't just Wages, and for a lot of businesses, this is one of their heaviest expenses. Why settle for looking at a massive 'Salary and Wages' expense line item every single month? What do you do when you see big fluctuations, or when you want to figure out how to be more efficient in this area. Think about breaking this up into Full Time vs Part Time, Salary vs Hourly, Contractor vs Employee, Management vs Front-Line, or maybe a mixture of any of those. And Utilities, why not break out your Utilities into Gas, Hydro, Water? There will more than likely come a day where you want to dive into the details of any one of those, and you really don't want to be wasting time rummaging through past monthly bills on your Hydro account... or hopefully not rummaging through your shoe box...

There are also certain Receivables that are very worth detailing separately. Sure they will all get rolled up to AR when being shown on the Balance Sheet, but remember - Accounting for an owner's purposes has no boundaries, particularly when it's a privately held business. So break up some of your key receivables into their own account. For my business, I quickly realized that money owing from the payment processing company I was hooked up with was going to become critical. Customer's lay down their credit card, and for 2 days, a week, sometimes longer, this money is accumulating and paid out to you in a lump sum minus fees. You have to stay on top of that! Always have a close eye on that account, as it just gives you a clearer idea of where you stand at any point in time, especially if there are glitches and the payouts all of a sudden stop following the usual pattern. And trust me, it will also come in handy to detect any 'funny-business' in these payouts.

There you have it, don't just settle for what seems like the easy way, because you will either have headaches in your future when you realize the power of your financials, and now you need to re-do your work, or you will realize you can't make any financial based decisions for your business. Either way, no business owner should want that in their life. Take a minute, think about what you will want to know at different stages in your business maturity, and build chart of accounts that makes sense for you, or just talk with us as that is where we can help!