Best Practices Setting up and Maintaining an Effective COA

In our first COA post, Chart of Accounts- Getting the Full Accounting Report Benefits From Your ERP we described COA structures, how they are used to capture and track transactions in the General Ledger and the role that the COA plays in financial reporting.

In this post, we’ll discuss the best practices used in setting up and maintaining an effective COA.

To recap, an ERP tracks financial transactions across two dimensions, Time, and Type. Transaction time dimensions are handled using the concept of accounting periods. When processing transactions, accounting periods are usually based on months. In terms of reports, reporting periods can be comprised of weeks, months, quarters, seasons, and years.

Transaction type dimensions are handled via the COA. The COA uses GL accounts to separate transactions into general classifications such as asset, liability, equity, revenue and expense, and more detailed classifications such as salaries, rent or office supplies.

ERP reporting tools use report columns to define the time dimension, and the transaction type dimension is controlled via report rows. The intersection of the time and type dimensions creates accounting data points. These data points are the foundation of all accounting reports.

A lot of thought should be given to setting up the COA. The time invested in properly constructing a COA will pay dividends in the future by streamlining financial reporting.

Best Practices

Over the course of dozens of ERP implementations, six top best practices have emerged that positively impact setting up a successful Chart of Accounts:

• Executive ownership
• Understand your company’s reporting needs
• Use professional resources
• Clean up past errors and build a COA for the future
• Test your COA against reporting
• Stay within yourself

Executive Ownership

Visible executive ownership is the number one success driver across all ERP implementation tasks. Employees look to company executives for both direction and a sense of the importance associated with company initiatives. If the Executive team doesn’t take the project seriously, chances are that the project team won’t either. Since the setting up of a new COA is usually related to a new ERP implementation, be sure that company executives are aware of the new structure, and how it will support the company’s strategic plans.

To learn more about the value of executive ownership look at Preparing for ERP Implementation- Getting Started on the Right Foot.

Understand your company’s reporting needs

Complete a report review to understand your company’s reporting needs. Include all company levels in the review. This is especially important at the executive level as company executives are dependent on reporting to understand company performance.

Review the current reports and identify any reporting issues. If there are reporting “workarounds” in place, identify them and develop permanent report solutions. Document all issues and solutions.

Separate COA related issues and pass the issues on to the team members assigned to build the new COA. Ensure that they understand the issues.

Build pro-forma reports and review them with the report users. Gain user agreement and determine the day one reporting requirements. Day one reporting requirements relate to critical reports. Don’t try to revise or build all reporting prior to the go live. ERP “canned” reports while not optimal can meet basic needs for non-critical reporting.  Keep things under control. Remember all the reports need to be tested and reconciled. Include day one reporting needs as an implementation requirement.

Today’s ERP’s offer robust reporting and data display options. Functionality such as homepages, dashboards and other visual presentation tools can provide enormous opportunities for timely data analysis. Keep in mind that all reporting is not the same. While data review tools such as KPI’s and measures are probably not considered a report in a true sense, they are built in the same manner as a report, in terms of capturing COA transactions and will benefit from an effective COA.

Use Professional Resources

Document your reporting requirements and build pro-forma formats. Share report requirements with the implementation consultant. Use the consultant’s expertise to assist in developing both the reporting required and structuring the COA to support that reporting.

Even when building reports and/or COA with internal resources, be sure to have the consultant review and comment. They have the experience of many reporting projects under their belt to fall back on and know what’s needed.

The review is particularly important when implementing an ERP with “dimensions” functionality. Dimensions provide an alternative method of categorizing transactions and is used in the reporting process. Dimensions are built outside of the COA and can support a more streamlined COA structure. Knowing how to use dimensions in conjunction with the COA can be highly effective and an experienced consultant can assist in the process.

See: Chart of Accounts- Getting the Full Accounting Report Benefits From Your ERP for a more detailed explanation of what dimensions are, and how they are used.

Work with the consultant to develop a report test plan. Report testing can commence once the COA and a few Trial Balances are loaded into the test system.

Clean Up Past Errors and Build a COA for the Future

Download the current COA into a spreadsheet. Review the spreadsheet to identify duplicates, illogical and inactive accounts. Define additional COA information such as department codes, lines of business or locations as needed.

Build a new COA spreadsheet. Be sure to provide a cross reference from the current to the new COA. Format the new spreadsheet into the import format required by the ERP being implemented. Import the new COA into the test system and compare the COA import to the spreadsheets.

Download some prior period Trial Balances into a spreadsheet (1 or 2 months). Update the Trial Balance files with the new COA as needed. Format the Trial Balances into the ERP’s JE import format and import the Trial Balances into the test system General Ledger.

Reconcile the imported Trial Balances to the current ERP. Correct any errors. Finalize and save the import formats to support loading the data into the production system when required.

Test Your Reporting Against the COA

As a part of the system testing, test day one reporting against the Trial Balances loaded into the test system. If needed, load some limited budget information as well. Reconcile the reporting to the same reports in the current system.

Since you’ve loaded Trial Balance data into the test system from prior GL periods, reconciliation should be an easy process. Identify any testing issues and review with the implementation consultant to determine issue resolution tasks to be completed.

Resolve any report testing issues identified. Re-test the reports as required and finalize the day one reporting formats.

Completing the report reconciliation process during the testing process lessens the chances of reporting issues in the “Go Live” project phase.

Stay Within Yourself

Anyone who has played an organized sport is probably familiar with the term “Stay Within Yourself”. Coaches use it all the time to remind players not to try to perform at a level beyond their capabilities.

The same concept applies when implementing an ERP. The implementation team needs to be able to stay within their capabilities. Trying too hard or taking on too much prior to “Go Live” results in errors, poor decisions, and a less than desirable outcome.

I can’t tell you how many times I’ve been involved in projects where the staff is small or inexperienced and obviously overwhelmed in their current environment. Despite this, project leaders set implementation goals and task completion deadlines which couldn’t be achieved in the best of circumstances. The project leaders are not staying within themselves.

This kind of thinking never succeeds. What usually happens is that so much time is spent on completing unrealistic task schedules that other things get overlooked, errors are made, and the implementation never reaches its full potential.

Stay within your skillset! You’ll be happier in the end.

On-Going COA Maintenance

Just building the initial COA is not enough. Careful COA maintenance should be used to keep the COA from becoming disorganized and over time, ineffective.

Assgn all COA maintenance tasks (including dimensions) to a member of the accounting team. If necessary, you can build a formal COA maintenance request process. If you think that a formal process may be “overkill” at least request that any COA maintenance needed is communicated via an e-mail. This allows the accountant completing the maintenance to be able to ask any questions as needed and allows them to archive the request.

Vesting COA maintenance tasks to a specific person is quite easy to manage as the process is controlled by system permissions.

Conclusion

A streamlined and relevant COA is critical to successful reporting. If the COA is structured correctly, the amount of report editing can be reduced or eliminated entirely. Report editing reductions directly increase reporting efficiency and accuracy.

Today’s reporting tools provide the user with everything from traditionally formatted reports to charts, graphs and dashboards. With web-based tools, reporting has never been easier to generate and access. In fact, some companies have abandoned paper-based reporting packages completely.

Remember though, that all this functionality and technology is directly dependent on the relevance of the COA to your company’s reporting requirements. If your COA is inadequate, reporting will suffer.