The Importance of a Well-Structured Chart of Accounts for Integrators

What is a Chart of Accounts?

A Chart of Accounts helps to categorise financial transactions in a business. These are grouped together by category to create a balance sheet and a profit and loss (P&L) statement. For example, we may have:

• Income
• Expenses
• Assets
• Liabilities
• Equity

This accounting works on a ‘double entry’ system, which means that every transaction must record two accounts. For example, when paying a supplier, we may have an expenses account and a bank or cash account. Modern software will record these payments in the expenses account and default the entry to the overall cash account as well.

Systems like these produce a clearer picture of money coming out and going in – which is ideal for costing jobs as well as general business overheads.

Maintaining the right level of detail in your COA

Business owners need to use specific account categories when recording transactions. For example, labelling marketing activity as ‘operating expenses’ can be too vague. We may need to be more granular to ease financial reporting.

This is about balance – too much detail in our financial information (such as labelling staples and printer ink) may make P&L too difficult to analyse. Tech integrator accounts should be structured into categories such as current assets, fixed assets, current liabilities and depreciation etc.

Cost of Goods Sold (COGS) and gross profit

Integrator financial accounts have two types of cost: overhead expenses and COGS. Overhead expenses aren’t affected by different jobs – they affect everyday business operations like utilities and staff.

This means they’re fixed, whereas COGs are based on each job, which must generate enough profit to cover overheads and keep the business sustainable. For example:

• Equipment
• Materials
• Freight
• Onsite labour

Without accurate COGS reporting, integrators risk miscalculating their profit margins. There are two key formulae for gross profit and gross margins:

Revenue – COGS = Gross Profit

Gross Profit / Revenue = Gross Margin %

The role of job costing in financial management

Accurate bookkeeping is instrumental for profitability – and that comes down to tracking individual jobs. Without granular detail on job costs, integrators could be losing profits on one big job compared to several smaller, more profitable ones.

Accounting will analyse the source of financial losses, such as project managers, technicians or other factors. It can also ascertain pricing for future jobs.

A common mistake for small businesses is to create separate COGS accounts for every job or vendor. This may take up time, when that financial data may already be available in the accounts payable system. An alternative, when using standard accounting software like Quickbooks, is to factor in individual job costing as a secondary coding of all expenses. For example, we may use job reports within the system tools.

The importance of budgeting for integrators

We can use job budgets to keep individual projects on track, but a strong COA will also assist with operating budgets. This helps integrators to forecast, using an Excel spreadsheet to input expected sales and their associated expenses. Using the formulae outlined above, we can then calculate profit margins and ensure they cover overheads.

This does not have to be an exact science, but a rough overview to facilitate long-term decisions for the business.

CEDIA’s recommended Chart of Accounts

CEDIA’s Chart of Accounts example gives integrators suggested account types for their system. It offers a customisable template, with each account created in the order it will appear on the statements and assigned account numbers.

There are two available structures:

• Basic: A less detailed view wherein costs directly related to jobs are included in the COGS.
• Intermediate: A more detailed view of job-specific costs, outlined in the COGS section as well as individual jobs sections.

These customisable templates provide a clearer view of your company’s cash flow and general financial health. Using sub-accounts like asset accounts and liability accounts, integrators can spot potential losses and make predictions for future jobs. You can access these by joining CEDIA.