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Optimizing ERP through your chart of accounts design
A foundational step in successful ERP implementation
Have you outgrown your chart of accounts (CoA)? Or are you taking a fresh look? Wherever you are on the journey, optimizing your CoA is key to realizing the full value of ERP implementation. Explore the fundamentals of an optimal CoA and see our guiding principles for designing a chart of accounts that can set your business up for long-term success.
Explore content
- What is a chart of accounts?
- How a chart of accounts design effects an ERP transformation
- Guiding principles for chart of accounts design
- A measured approach to improvement
- Cost of inaction
What is a chart of accounts?
The chart of accounts helps define a data model that is well-structured, governed, and robust, thus enabling the creation of reports, both for financial and operational reporting required levels of detail. Depending on the ERP you are interacting with, the chart of accounts has many names: common information model (CIM), finance data model (FDM), accounting segments, accounting dimensions, etc. The CoA represents the common data definitions or dimensions used to record, report, and measure performance across the enterprise, and it should align to the way the organization wishes to manage and report, both now and in the future, while providing flexibility and scalability.
Establishing common definitions for data elements enables organizations to:
- Develop a common language for enterprise data to be used across the enterprise and its subsidiaries
- Drive the enterprise toward a consistent level of data consistency, granularity, and integration across the system landscape
- Enable more effective consolidations and create confidence in the uniformity and visibility of financial data
CoA is a key component of a finance data model and requires thoughtful consideration for companies that operate globally due to differences that surface with statutory, local legal, or management reporting requirements. The CoA sets the foundation for finance and accounting transactional processing and is instrumental in supporting accurate and timely external financial reporting, management reporting, and global consolidation.
At clients, we often see management and statutory reporting performed in silos, making combined financial and managerial reporting a challenge. Companies tend to expand their CoA over time by defining accounts that represent product, region, location, and other managerial dimensions, resulting in an unwieldy CoA structure. Within the past decade, companies have trended toward streamlining their large CoAs to a minimal account set, which results in increased flexibility, reduced processing times, and eased burden of reporting.
The goal of the chart of accounts can be summarized by three objectives:
- Support financial reporting to meet statutory and governance requirements
- Support management reporting and the ability to perform financial planning and analysis necessary to set company strategy and measure operating performance
- Consolidate individual entity results through an efficient “rollup” to a single global view of company performance
Learn more about optimizing your chart of accounts design
How a chart of accounts design effects an ERP transformation
Implementing the principles mentioned can lead to the creation of a sound data model structure and common data definitions across an organization. As organizations look to leverage technology breakthroughs and position themselves to be data-driven, many are embarking on digital transformation programs with a focus on increasing ERP enablement.
The foundation of any ERP implementation is developing a thoughtful CIM design, representing data definitions used across the enterprise. Once designed and implemented, a change in CoA structure might deliver benefits comparable to a complete reimplementation of the ERP application. Capturing data, financial and management reporting needs, and consolidation necessitates the right CoA design to get full value out of an ERP implementation. In cases of reimplementation or data migration from legacy systems, the CoA design also needs to consider the level of detail at which data will be made available from its source systems.
With myriad trade-offs between various design considerations and dilemmas associated with finalizing the complete design of a CoA structure, a comprehensively designed CoA is key for the long-term stability of an ERP implementation.
Guiding principles for chart of accounts design
When designing an effective management structure, organizations have a multitude of factors to consider, including:
- Local versus global
Address whether a single CoA or multiple CoAs are needed, depending on how the business is run. Whereas a global CoA might mean streamlined consolidation and consistency in reporting, a local CoA may mean fulfilling local statutory requirements through general ledger (GL) only, “local” user productivity, etc. - Organizational operations
Analyze the trade-off between flexibility and complexity. Depending on the situation, a flexible global CoA could create unwanted segments for the entity, whereas different CoAs for every legal entity may increase complexity during consolidation.The CoA design should reflect the organizational structure (i.e., how the business is run). This will increase decision-making capabilities; provide a single source of financial data for financial, operational, and management reporting; and enable increased automation.
- Statutory, management, and operational reporting
The ledger should be designed to accumulate data in a way that supports your reporting requirements. Understand the final output that is required from this design, including statutory or external reporting and internal management reporting requirements. The design should support legal, business unit, management, and statutory reporting needs.Think through local requirements during global design iterations to address statutory and regulatory reporting considerations that affect country-specific CoAs (e.g., what US jurisdictions need to be reported on a national, state, and local tax reporting basis? Are there other industry-specific regulations to be considered? Based on local legal requirements, do we need to use alternate CoAs or country-specific ledgers?).
- Thick versus thin GL
A thick GL caters not only to financial reporting needs, but also to the management and operational reporting needs of an organization; a thin GL is used only to capture data for financial reporting. Thus, a thick GL requires a larger CoA.Optimize GL segments through streamlining and standardization. Enhance the use of other available master data components to reduce the “noise” in the GL and enable a “thin” ledger. If the value of a segment can be derived from another, then it should not be a unique segment.
- Designing the CoA
Consider the CoA’s ability to enable the organization to make data-driven decisions; provide a single source of financial data for financial, operational, and management reporting; and increase opportunities for automation. - Ease of access and data security
The structure should not be too large to demotivate users to enter values. The values should be coded to allow users to identify their meaning. Design values such that it is possible to impose access to certain financial reports or balances. - Presence of legacy systems and data conversion
Every system has its own way of capturing data and generating reports. If legacy systems are not phased out during the ERP implementation, you need to consider data conversion efforts, such as if conversion strategy will be able to provide data at the detail required by the ERP if the legacy system captures it at a summary or more detailed level.
All values related to a specific segment should be uniformly defined and considered to be like-type. Specifically, when designing GL account values and natural account segments, consider:
- How can we design account values to align with financial statements and disclosure requirements?
- What are the appropriate account naming and numbering conventions to support the buildout of financial hierarchies for reporting? How many digits should each value be?
- What types of values should comprise our data objects (i.e., alphanumeric versus numeric)?
- Are account values common across the entire chart or specific to a line of business, country, or other technical requirement?
- Should we create specific account values to capture US GAAP, local GAAP, and IFRS® requirements?
- CoA design should be scalable to meet the existing and future needs of all entities and countries. For example, segments should contain enough digits for future value list growth, and the design should be flexible to accommodate reorganizations, acquisitions, and other business changes.
- What are the appropriate account naming and numbering conventions to support the buildout of financial hierarchies for reporting? How many digits should each value be?
- Consider alignment with longer-term IT strategy.
- Hierarchy and rollup
The grouping and structure of a CoA should be aligned to the business model to enable statutory and reporting requirements. Use number ranges for GL accounts to identify multilevel account hierarchy. CoA values may be arranged into hierarchical, rollup, or parent relationships. This means that values can be summarized and totaled together based on grouping. For example, “total revenue” may be a parent value that summarizes all the values that capture more granular types of revenues. - Budgeting
If the ERP will be used as a system to impose budget constraints on transactions, budgeting requirements must be captured during CoA design (i.e., if you budget for expenses for every department for a year and “department” is not a segment in the CoA, then you will not be able to impose budgets on transactions. You cannot budget at a lower level than your CoA). - Consolidation
If there is a need for consolidation, depending on the CoA structure of various entities, you may require a different CoA for the consolidation books. If your reporting needs can be met using the existing CoA, the same CoA can be used; otherwise, there may be a need to create a new CoA for the consolidation book and perform mapping between two CoAs to derive accounting for the consolidation books and bring balances therein.
A measured approach to improvement
While there is a clear need and strong desire to realize near-term improvements, we recommend that an organization follow a measured approach based on the following four strategic efforts:
A final note: Chart of accounts maintenance and prevention against regression
A chart of accounts design is only as good as an organization’s capability to govern and maintain it over the long term. To leverage an optimally designed CoA to the fullest extent, it needs to be supported by a strong governance structure. Governance enables the maintenance and creation of accounting segments, policies, and processes. The governance body should include key stakeholder groups, such as controllership, FP&A, tax, compliance, and business technology.
Maintenance of the CoA should be centralized to enable greater control over data integrity. As part of the governance process, the use of the flex-field segments in Oracle and data objects in SAP should be clearly defined and documented to prevent disparate meaning or incorrect use. For example, for operating accounts (US GAAP), identify a materiality threshold to reduce the number of accounts to be created.
A suboptimal governance process could result in regression and data quality issues.
Your next steps in a chart of accounts design
Whether your company has outgrown your current-state CoA; the chart has evolved into an unmanageable, inconsistent, and unrecognizable form; or you are simply taking a fresh look at the CoA as part of an ERP system implementation, a CoA optimization using the CIM approach can elevate your organization’s existing system capabilities or establish a foundation for success for a new ERP, multiplying the potential benefits to be gained from any financial transformation. As you embark on your CoA transformation journey, think about your long-term reporting strategy and contemplate how you can further enhance your reporting and analytical capabilities.
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