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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.
- 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
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:
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.