When it comes to an organization’s accounting system, many companies and non-profit organizations have become victims of their own growth and don’t realize it. Over the years, new income and expense codes get added to the accounting system for a variety of reasons, some good and some not so good. The result is that the accounting system grows and grows and becomes less and less useful. In other words, it becomes bloated and loses its ability to convey information about the business as clearly, concisely, and effectively as it should.
That trend is hard to see when you are dealing with the system day in and day out. It’s kind of like putting on weight; it’s easy for the weight to creep up on you until one day you say, “Whoa, what happened?” That moment is good in a way because it represents the recognition that things have gotten out of control.
In my consulting practice I have seen very small organizations that have accumulated well over 100 different General Ledger codes where half as many would do. And that is while not using, over-using, or misusing other functions as well.
QuickBooks is a very popular accounting system and for good reason. It’s a good program. The more advanced versions of QuickBooks offer a function called ‘classes’ which enable a user to keep track of income and expense in a dimension other than just by the total organization. Classes are often used to track income and expense by department, by region or by sales person, etc. It’s a neat feature but has one caveat. All the classes must be of the same kind or the feature won’t work. For example, you might like to be able to see a profit and loss statement for each department in your organization in addition to seeing the P&L for the organization in total. That would be a great use of the class function. The sum of all the departments would then represent the profit and loss of the entire organization. But, it is not workable to have a few classes that are departments and a few that are warehouse locations and still others that represent events or anything else. Doing so is mixing apples and oranges and doesn’t work.
Another misuse of general ledger income and expense codes and, also of QuickBooks classes, is the over use of codes and classes to track minutia or to track things by using GL codes that could be tracked more effectively using classes.
Here are some examples:
a) A company might be interested in tracking travel expenses for its employees and, to do that has created a separate set of travel expense codes for each person (an airfare account for each person, meals and lodging expense codes for each person, etc.). In this case, if the company had five travelers it would have created five separate airfare GL expense codes etc. The better solution is to have only one set of travel related expense codes and use the report function to see costs by traveler when you need to. Or, create a class for each traveler if it is deemed that that is the best use of the class function in your company
b) Here’s another example, a company wants to drill down on phone expense so it continually adds new GL codes for every possible telephone charge until the list becomes counter-productive; better to track at a much higher level then, conduct analyses of phone bills when phone costs start rising seemingly without explanation.
c) Here is one last example that is similar to “a)’ above but in this case the company has a lot of expense codes for each traveler but has also created classes for the travelers. In this case there is duplication of effort in tracking unique codes and unique classes.
In order to fix the problem, it is important to first recognize that a problem exists. A business owner may recognize it himself or herself. Or, a banker may refuse to grant a loan because the accounting records are a mess. An outside expert can also be a great resource to review an accounting system and determine if there is an opportunity to streamline it.
As a last thought, it is important to keep in mind that one of the key reasons organizations rely on an accounting system is because it provides an authoritative measure of where the organization stands with regard to; profit and loss, cash flow, and the business owner’s goals. It you are a business owner and you have to wade through a lot of data in your accounting system before you get some comfort in where your organization stands financially or, if you are getting negative feedback from your CPA, your banker or your B2B CFO partner about the state of your accounting system setup then there is a good chance your system could (and maybe should) be streamlined.