Changing your CRE business? Don't neglect your chart of accounts

Operating in an intense market environment that is mercurial and competitive, commercial real estate businesses need to leverage every advantage to grow and prosper.

As the pace of technological and economic change in the industry continues accelerating, one key factor that supports business adaptation is too often overlooked. The chart of accounts (COA) underlying a company’s finances is vitally important for management to make informed strategic decisions, and to provide stakeholders with a clear perspective of your business.

The chart of accounts is the framework of the financial data of a business. The COA comprises all of the general ledger accounts within the income statement and balance sheet and their hierarchical relationships, such as equity, assets, liabilities, revenues, and expenses.

It is from the components of the chart that all accounting is completed, and financial results are reported. The COA needs to tell the financial story of a business in a way that can be easily understood not only by management and employees, but also by investors, lenders, auditors and regulators.

A properly structured chart of accounts enables meaningful financial reporting and analysis. Consistent organization of accounts allows for accurate and comprehensive reporting across different systems, providing valuable insights into the business's financial performance.

The dangers of a poorly designed chart of accounts

Commercial real estate businesses that draw financial data from a range of sources need a coherent, complete framework to accurately track the state of the business. All accounting is completed, and all financial results are reported, using the COA framework. But if this structure is incomplete or incorrect, there can be serious consequences.

A poorly designed or outdated COA may not cause a cataclysmic impact for your company, but it can impede growth and prosperity.

For expanding CRE businesses, the challenge in having a complementary chart of accounts often lies in poor integration with new software solutions, such as a property management system or an enterprise resource planning (ERP) system, which are added to help manage the business.

When organizations rely on a generic or legacy chart of accounts, they invite the likelihood that it will lack the right structure to support new data sources resulting in financial data ending up being incorrect or incomplete when it’s consumed by their accounting system. Consequently, that incorrect or incomplete data must be manually found, extracted and re-sorted for a usable view of the organization’s finances. These efforts are time-consuming and carry a high risk of errors.

The better way is to design a chart of accounts that accommodates your future technology stack and business growth. Here’s when, why and how.

When should you consider redesigning your chart of accounts?

When is the best time to tackle a redesign of your chart of accounts? First, when you determine the COA is impeding rather than assisting reporting. If you require additional software to interpret results, expertise for this software, customized reporting, extra personnel to interpret results – the time and costs incurred by working around a poorly designed or poorly functioning COA can be many times the cost of restructuring the chart to enable better reporting.

Another optimal time to remodel the chart is when your organization has plans to undertake a significant system implementation such as a new accounting or ERP system. Here’s why COA design is important for third-party software integration.

• Data consistency: A well-designed chart enables accurate data transfer and prevents discrepancies or misinterpretations, ensuring that data from different systems is correctly synchronized and reconciled

• Integration compatibility: Third-party software often has specific requirements for data formats and structures. When the chart of accounts is aligned with these requirements, integration is smoother, reducing the need for complex data transformation or customization

• Automation and efficiency: When a COA is properly designed as part of an integrated software ecosystem, this facilitates automated workflows, supports efficient data exchange and reduces manual efforts required for data entry, reconciliation, and reporting

• Scalability and adaptability: A flexible chart design allows for future growth and changing business needs. It accommodates new accounts, departments, cost centers, entities or lines of business that may be required as the business expands or evolves

Ultimately, a chart of accounts that is compatible with your business activities and systems provides a reliable foundation for scalability and adaptability of all of your organization's financial management processes.

How to redesign your chart of accounts for optimal performance

Whether undertaking a COA transformation internally or with external support, consider these tenets.

1. Start with the end in mind

What goals do you want to accomplish? Which pain points do you want to mitigate? What questions are being asked of you today that could best be answered through a redesigned chart of accounts?

2. Structure trumps numbering

It’s easy to get hung up on the numbering of the accounts in a chart. However, if you start with the structure, and sequence the accounts into the structure that is best for reporting, numbering becomes one of the last steps and is easier to accomplish.

To assist in meaningfully demonstrating how income is earned, structure accounts to reflect your business model. Ensure the chart will accommodate future growth for both new lines of business and new forms of income within each line of business.

3. Fewer accounts structured efficiently can be more meaningful than more accounts structured poorly

Focus on telling the story of your business effectively by reducing unnecessary complexity in your chart of accounts. List the categories of assets, liabilities, capital, revenue and expenses in a way that minimizes rework to report results already captured in the chart of accounts.

If you don’t report regularly on it or need to reconcile it, chances are that it may not need its own account.

4. Consider each entity’s needs while allowing for an efficient roll-up of company performance

It is imperative to see the firm’s individual pieces – property by property, region by region, business line by business line – while still enabling ease in consolidating results. View the organization holistically by reducing silos that hamper the ability to communicate the results of the entire organization. Ultimately, you want to see timely information about the performance of each part of the business.

5. Remember that the chart of accounts is being built both for today and for tomorrow

Leave room for company growth for future lines of business, and for new sources of financial data.

6. Ensure proper data governance of the chart of accounts:

• Define account and chart-level data. For example, account 40100-123 rental income, marketing subsidiaries: rental income from marketing subsidiaries is miscellaneous income incurred at a center that does not result from the signing of a lease that is less than 30 days in duration. This could include renting out space for a day, income from onsite activities, etc.

• Establish a vigorous governance structure. This includes chart ownership, the purpose of each account, the definition of an account, where the account fits in the chart of accounts, who may add an account, and other significant considerations.

• Allow for future business change, growth and reporting requirements. Today, all of your business income may be derived from multi-family housing with accompanying ground-floor commercial space. Tomorrow, you may wish to expand into single-family housing, offices or warehouses. In any of these cases, the COA should seamlessly allow for these additions and reporting requirements without having to change the chart structure.

At the end of the day, you want to have a chart of accounts that exemplifies the following advantageous features.

• Structured to facilitate reporting and system integrations. A well-designed chart, for example, can group together certain categories of expenses, such as common area maintenance reimbursables, to simplify classification of these expenses as well as tenant billings. It can also facilitate the addition of future accounts.

• Includes the level of detail required to account for the activities of the firm for budgeting, reporting, and forecasting. Consider travel and entertainment expenses. Are 100 accounts necessary (e.g. Travel – meals – dinner; Travel – meals – lunch; Travel – meals – breakfast, etc.) or can five accounts provide a clearer picture?

• Adaptable to accommodate future growth and business ventures. You can build a chart in such a way that you should never again need to restructure it as your organization changes. For instance, you could expand the numbers within the COA by adding more digits, say increasing them from seven to nine. You can also create ranges to group similar accounts. For example, you could structure construction costs to include 10,000 possible accounts and within those construction costs include five sub-groupings, each with room for 1,000 accounts leaving room for future expansion of an additional five sub-groupings, each with room for 1,000 additional accounts. This facilitates continuous addition of groups and expansion within each group.

• Clearly conveys the complete flow of the organization’s financial activities. No one wants to spend time hunting and gathering accounts from many different areas in a COA to report financial results. The chart should be able to tell the financial story quickly and easily.

• Supports the long-term stability of system changes. Having a current, complete and clear chart of accounts will equip your executive team and managers with a dependable framework for decision-making, reporting – and achieving your most ambitious plans for growth and success.