Most small business owners are not certified accounting or financial professionals, so they typically don’t prepare the financials at their own business. They either hire people internally or outsource the work. However, they still need to be able to know what data being processed, to ensure their reports are factual and functional. Most importantly, we need solid accounting reports to run our operations profitably. For some, it might be in preparation for a possible sale. This article focuses on the profit and loss (P&L). Once your chart of accounts (COA) is in order, your balance sheet will be more effective.
Technical definition (courtesy of Investopedia): The COA is an index of all financial accounts in a company’s general ledger. It is an organizational tool that lists by category and line item, all the company’s financial transactions during a specific accounting period. These categories feed into your business’s two most important financial statements: the P&L and balance sheet.
The COA is the heart and soul of a P&L. As someone who sold their business to a publicly traded company, our P&L spoke volumes in terms of the type of company we were running. In other words, if your COA is a mess, your P&L will be unreadable and, therefore, useless in allowing owners to think critically and factually to make short and long-term decisions.
The Importance of Categories
Categories are critical in the COA. Take sales, for example; You will naturally have a category for parts sales and any other line items related to parts sales. Next, you should have a category for Cores, Commodities, and Recalls.
When categorizing your expenses, put every expense associated with employees into a labor category. There are typically many more expense categories like advertising, insurance, maintenance, and repairs. Organize your categories, prioritize them, and list them accordingly based on their cost to the business. Labor is our most significant expense, so list that first. Do not sort them alphabetically! We want owners to first see their largest expense categories and not get side-tracked.
Time is Not On Your Side
Whether you are considering selling your business or not, get your financial house in order by hiring a CPA to assist in reorganizing your COA. The second recommendation would be to hire a professional appraiser to assess the value of your operation. It’s a wake-up call to measure your estimate of what the business is worth against a professional opinion. Most companies will look for financial statements from the last three to five years. Consistency from year to year is essential.
