This is part two of three in my series of posts talking about the importance of financial structure.
Chart of Accounts
Financial transactions are recorded with a set of codes called the chart of accounts. These codes are classified by assets, liabilities, equity, income, cost of goods, overhead, and more. The chart of accounts is the foundation of your financial reporting system. It should be detailed and very well thought out.
Fixed and Variable Overhead
It is very important to separate your overhead into fixed and variable types. Fixed overhead remains essentially unchanged within a certain range of income. Examples include salaries, liability insurance, and rent. I like to refer to variable overhead as “somewhat variable overhead” because it varies slightly with changes in income. Examples include gasoline, small tools, office supplies, and legal fees.
General Ledger
The general ledger is a master accounting document that provides a complete record of all the financial transactions in a business.
Thick versus Thin GL
This is a standard accounting term used to describe how much detail your GL contains. A thick GL contains a robust chart of accounts. Additional information will be added to each transaction. This includes marketing, product categories, departments, employee names, labor minutes sold, labor minutes paid, fixed assets, warehouses, warranty, callback, service agreements, and more.
Budgeting
A budget is an essential piece of your company’s financial structure. It is a projected income statement and establishes your company’s financial goals. A budget may also include a balance sheet, statement of cash flows, and other reports. A budget is an action plan that helps you allocate resources, evaluate performances, and formulate plans.
The basic process of creating a budget starts by listing your business’s fixed and variable costs, on a monthly basis. Your next step is to predict what your monthly income will likely be. Finally, decide on the allocation of funds to achieve your goals.
Related Content
Financial Reporting Structure for a Contracting Business. Part 3
Financial Reporting Structure for a Contracting Business. Part 1
