Most business owners' eyes glaze over when I talk to them about the "chart of accounts."
Then we talk about what they are trying to understand about their business's finances. They generally want the same thing:
- How much money am I making?
- How do I know if I'll have enough money to pay the bills?
- Which products and services make the most money?
- Do I have extra expenses that I can cut?
- Do I have enough capital to grow?
When I explain that the chart of accounts is the foundation for understanding each of those questions, they get more interested.
I explain that the chart of accounts is a list of categories.
Then I tell the business owner:
• Where sales come from
• Where expenses go
• What the assets are (what's owned)
• What the liabilities are (what's owed to others)
• What the difference is between what's owned and what's owed. This is called the “equity” in a company.
They quickly understand that with the right chart of accounts they can get all the reports they need to understand their business.
Does this make sense to you, or are your eyes glazing over reading about this topic?
Let me know what you think in the comments below!