Recently I saw a discussion thread on “The Point”, the National Main Street Center’s discussion board. This particular post was about a downtown chart of accounts and reading some of the comments took me right back to my first few weeks as an Executive Director.
When I first got the position, there had been quite a gap (almost 18 months) between my predecessor and I so needless to say there were some things that we needed to clean up. This was also the first time I was going to be responsible for an organization’s bookkeeping on a day to day basis. I started working with our treasurer and we quickly discovered that this was going to be a much bigger project than we had anticipated.
At the time, we were working with an accountant and they were doing the bookkeeping, cutting checks, etc. However, this was creating some significant delays in reporting and other things, so we decided that we were going to bring these functions “in house”. When we did, we discovered that many things had just been put into a general income or general expense account, and the chart of accounts was almost useless. The treasurer and I decided that we were going to invest the time and start from scratch, creating a new chart of accounts and then meticulously going back a couple of years and putting things where they should have been. Yes, it was a challenge but we knew that the organization was going to be stronger for it in the long run.
The first place we started was the chart of accounts. Now, reading the tread on The Point, there are some that are fairly similar and some that were a little unique. As I started thinking about what we went through, I realized how important having a good Chart of Accounts was and how it really helped us make some tough choices so I wanted to share what we implemented and tell you how it helped.
We broke our Chart of Accounts into the following categories
1000s – Cash Accounts
2000s – Liabilities
3000s – Assets
4000s – Income
5000s – Cost of Goods Sold
6000s – Expenses
Let’s take a little deeper dive into each of these.
The 1000s are pretty simple. This was our various checking accounts, petty cash, etc. However, even though we only had a couple, every account had a four digit account number. For example:
1001 – Main Bank Checking
1002 – State Bank Checking
1003 – Petty Cash
This ensured that our overall reporting was consistent.
The 2000s and 3000s are pretty standard for any organization. Your Liabilities are things such as payroll, accounts payable, taxes, etc. Your assets are opening balance equity, retained earnings, etc. Most Main Streets probably won’t have a lot of these accounts either, but it is important to have them listed and to remain consistent with the four digit numbering.
The 4000s is where we really started to get specific to the organization. We chose to break that down even further based on the four point approach so that we could get a sense of how our money was coming into the organization (and later how it is being spent). So, we setup a system like this:
4000 – General Income
4100s – Organization
4200s – Promotion
4300s – Design
4400s – Economic Development
We would then go a step farther. For instance, if we had a major event, such as our music festival that would bring in income from a number of sources, we would set that up like:
4210 – Blues in The District
*4211 – Sponsorships
*4212 – Food Vendors
*4213 – Merchandise Sales
The accounts that were marked with an * would be a sub account of the primary, in this case Blues in The District.
This setup allowed us to see exactly where money was coming from and ensure that we attributed everything to the correct account.
Next came the 5000s, or our Cost of Goods Sold. Now, you may be thinking, aren’t those just expenses? Yes, some of those are expenses. However, for things like merchandise, there are costs that are associated that you need to account for. Additionally, we wanted to ensure that we had a clear picture of each function of the organization so by setting up our 5000s as Cost of Goods Sold, we would essentially be able to generate a Profit & Loss for every function the organization held. This meant that for every 4000 account, we created a matching 5000 account, which looked like
5210 – Blues in The District
*5211 – Sponsorships
*5212 – Food Vendors
*5213 – Merchandise Sales
Anything that was an expense for the event went into those particular categories. If we ordered cards for fundraising, those went into the sponsorships, the cost of the t-shirts from the company before we sold them went into merchandise, etc.
If you tallied everything from the 4000s and 5000s you would then have a Gross Profit.
Next came our 6000s, or our expenses. These were expenses that were truly organizational expenses, things that didn’t have a direct income and expense, but were incurred by the organization such as salary, utilities, rent, etc. So our 6000s looked something like:
6001 – Postage
6002 – Rent
6003 – Utilities
6004 – Phone Lines
6100 – Payroll
*6101 – Salary
*6102 – Payroll Taxes
This gave us our net profit for the organization and set us up to have a lot of success moving forward.
By creating this chart of accounts, we were able to truly examine every function the organization was going. We could see what was making us money, and what was costing us. Some of those things that cost us we determined were worth it because the cost was low and the return in goodwill or community benefit was high. Other events were quickly cancelled because the return wasn’t there. Setting up this system made me a better director and made our board that much stronger and gave us all the confidence to make the best fiscal decisions for the organization.
Since creating this system, I have implemented it at several volunteer stops along the way. It is a great way to track your organization’s finances and puts you in control of the dollars. I will forever be grateful to that treasurer for taking so much time with me to setup this system that the organization is still benefiting from today. Really, that is why we did it, and why any of us get involved with Main Street. We want to make our community and our organization’s better. I am confident that the effort he and I put into this system did just that, and I hope you will consider implementing a similar system in your organization.