Financial advisory firm owners often rely on their firms’ financial data to make decisions for their businesses. But the quality of that data – how it is organized and how much detail it provides about the firm’s activities – can greatly affect the firm owner’s ability to make good, informed decisions. The firm’s Chart of Accounts is a categorized list of every type of transaction that the firm encounters and provides the foundation on which the firm’s accounting and bookkeeping systems are organized. It is the key for consistent and accessible data that gives a clear picture of the firm’s financial health. A good Chart of Accounts, therefore, can provide the firm owner with insightful data, enabling better decision-making about the firm’s future.
The first step towards building an effective Chart of Accounts is to understand how different types of business transactions are accounted for. All business transactions can be sorted into one of five different categories: Assets, Liabilities, Equity, Income, or Expenses. These high-level categories are further divided into subcategories – the “Accounts” in the Chart of Accounts – that are specific to the individual firm’s operations. Which means that firm owners have a great deal of flexibility when deciding how many (and which) Accounts should be used to track their firms’ financial data.
But with the ability to build a customized Chart of Accounts comes the question of how to build one that leads to making better business decisions. A well-designed Chart of Accounts can be used to generate financial data that provides clear details about how different areas of the firm are performing and where improvements can be made. It should also make it possible to participate in (and compare with) industry benchmarking studies to evaluate the firm’s performance alongside its peers, which provides another useful approach for owners to gauge their firms’ financial health.
For example, by separating “Direct” expenses – those expenses involved in generating revenue for the firm, such as advisor compensation (including compensation for advisory services provided by owners themselves) – from the “Overhead” expenses of the firm’s day-to-day operations, owners can glean insightful data that gives a clearer picture of the firm’s profitability. For solo practices, this can even help to show whether the firm actually is profitable after accounting for the owner’s work as an advisor.
Because it takes time to build an entirely new Chart of Accounts from scratch, we’ve provided a downloadable template that includes standard transaction categories relevant to most advisory firms and that can be imported into the firm’s accounting software. The template categories align with major industry benchmarking studies, but they can also be adapted to suit the needs of individual advisory firm owners.
Ultimately, the point of the Chart of Accounts is not just to have a system for organizing the firm’s financial data, but to be able to access and use that data, to make the firm even better. And by assessing the level of organization and detail that is most relevant for the firm, firm owners can ensure that their firm’s financial data will help them make the most well-informed decisions for their business!