An elegant chart of accounts can bring clarity, simplicity, and efficiency to an organization’s financial reporting. Follow these basic principles of effective COA design and set up your financial system to directly flow from your mission.
- There are four basic principles of effective chart of accounts design, and they are most prominently applied to reporting elements like travel, supplies, and meals.
- Redesign your general ledger accounts to create easy-to-read financial statements. An ideal structure will be based on your vision, plans, and organizational chart.
- Locations, funds, and departments are the common building blocks of an effective chart of accounts.
- Account groups and roll-up accounts can be used to present financial information to a variety of audiences
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“Why can’t we just keep the weekly ‘flower fund’ on the church books?” This was a question recently posed by a passionate church volunteer who uses a small $50 fund to make sure there are fresh flowers at the front of the sanctuary each week. Her question, while completely sincere, illustrates a common problem: too much complexity and granularity in the chart of accounts (COA). Her question was borne out of a desire for accountability; however, when a COA is built around small elements, it becomes difficult to see the forest for the trees.
To create a COA that results in easier to understand reports, clarity for ministry leaders, and overall simplicity, it’s important to apply the basic principles of effective COA design. This involves asking four questions:
- Is this particular component absolutely necessary?
- Is this particular component absolutely required?
- Is this component significant in total dollars to overall church revenue or expense?
- How could we meet the reporting need another way?
Church cost centers — start with your mission
Your financial system should flow directly from your mission or purpose statement. Quite often, structures in the accounting system were set up years ago, and — based on changes to your mission, strategy, and personnel — may no longer effectively serve the organization.
To develop an ideal structure of cost centers, review your strategic plan (if one exists), organizational chart, and previous budgets. If a formal organizational chart doesn’t exist, map one out quickly by hand. Have a brief discussion with senior and executive pastors about how they see the vision, plans, and org chart changing over the next three to five years.
Locations, funds, and departments: common building blocks of an effective COA
Multi-campus churches will want to use a location dimension in their COA to identify various campuses. To avoid creating an entirely new set of department and general ledger codes for each location, use an accounting system that supports multiple sites.
Fund accounting is useful for organizations that need to track reserves in multiple “buckets” without having several cash accounts to keep it all straight. Commonly, churches use a “missions” or a “capital” fund to set aside dollars out of the annual budget for various projects. Many of these projects span more than one year, with funds raised in one year being spent in another. Your accounting system should support tracking multiple funds across fiscal years.
Departments — youth, media, worship, and the like — are a bit more straightforward, but it’s still important to clarify reporting and accountability structures.
- Use your organizational chart to understand who is responsible for each department and how each department rolls up into the church’s broader mission.
- Create groups of departments that support the highest level of reporting needed. An accounting system that supports grouping is particularly helpful when ministry leaders change the overall structure.
- Resist the temptation to have too many departments. Be certain that any sub-departments or projects are necessary, required, or significant to the church budget.
Church general ledger accounts
Redesigning your general ledger accounts can help you create easier to read financial statements, deal with lingering issues in the accounts, and successfully share the story of your church’s financial health.
Your starting point remains these basic principles:
- Is this line item absolutely necessary?
- Is it absolutely required by outside users?
- Is it significant in terms of total revenue and expense?
- How could we meet a staff or volunteer’s request in another way?
Use these principles to capture critical information without additional line items. Ask yourself if you really need to add a separate line for each related expense, or if you could code them all to the same line item and capture the detail by running a report by vendor.
Supplies, travel, and meals, oh my!
These three areas surface regularly when redesigning a church’s general ledger accounts. However, because local churches often provide meals for multiple unrelated purposes, accounting for food and beverage is often the most complex. Most churches have the following purposes for food:
- Special event food (e.g., food provided for participants of a training or retreat)
- Staff meeting food (internal meetings)
- Meals and food with volunteers or other ministry participants (external meetings)
- Food and meals while traveling
Because these expenses are discretionary, and the total spending across departments can add up to a substantial amount each month, some kind of tracking of meals and food is absolutely necessary.
Avoid creating so many variations of food line items that it becomes hard for staff to pick the correct account. It is not uncommon to see event food, meeting meals, travel meals, and meals with others as separate ledger accounts. The simplest solution is to use a single meals and food account and use location and department structure to provide any additional tracking needed.
The same principles can be applied to ministry supplies and travel. Use a single travel and transportation account and a single ministry supplies account. With a properly designed structure of departments or projects, you can easily identify purpose and provide discrete tracking and measurement.
Using account groups or roll-up accounts for better reporting
Another way to shape an elegant chart of accounts is to use account groupings or roll-up accounts to organize your line items. Creating account groups or summary accounts allows you to be intentional about what level of detail you share in your financial reports, which is useful when you present financial information to a variety of audiences.
For example, you may want your finance committee to view your financial reports in full detail, with enough transparency to satisfy their compliance and oversight role. For your full board, you may prefer to present a set of financial reports that collapses (or rolls up) related line items so that a much smaller number of revenue and expense categories are displayed. A condensed financial report can better focus your board on strategic questions like how much you should keep in reserves or how much to invest in a campaign to increase individual contributions.
Simple can be sophisticated
Finally, what do you do when a well-meaning staff member or volunteer asks about the “flower fund” or something small that they just “have” to track? Lean into the fourth basic principle, and ask how can you meet their need some other way. Thinking about the request intentionally can lead to completely new ideas, such as using a prepaid debit card for small expenses, or creating a dashboard with drill-down capabilities to provide greater financial visibility.
How we can help
Building an elegant chart of accounts requires balancing the need for sufficient relevant financial data with the desire to keep reports simple and understandable. Our nonprofit professionals can help you structure your financial systems to wholly support your mission work and enhance the effectiveness of your organization.