Evaluate the Chart of Accounts

I work with a number of health care and other types of clients.  In the last two years, I’ve been blessed to work with more clients than I can count on my two hands.  One thing I continually encounter is a very dry but important subject - chart of accounts (“COA”) structure. 

Too many companies know their books do not capture financial information in the way they should but they avoid the challenge of changing their COA.  That’s not a very interesting subject but it drives financial reporting so thoroughly, I thought we should talk about it. Very often, the COA was originally developed from a canned package or frankly by somebody that simply didn’t plan well enough.  As businesses grow in size or complexity or simply seek to increase their level of sophistication, a change in the COA structure may be warranted.

The following is a short list of leading indicators that there may be a need for a change:

1. Does accounting leadership routinely say “That’s the way we’ve grouped costs for years” in response to people being confused about reporting?
2. Do account descriptions not seem obvious as to what transactions they are capturing?
3. Does the COA capture all departments in the way the organization “talks” about its departments?  Maybe the health center has a department that everybody talks about as being important but it is not represented in the COA.  There probably is a good reason for it – new program, things changed, etc. – however, it may be worthwhile to at least add the new department.
4. Are there components of financial reporting that seem less important?
5. Are overhead departments organized in a way to effectively distribute to budget owners and manage effectively?

If any of these questions trigger further questions, it may be worthwhile to invest in the time necessary to revise the COA.  The following is a short list of things to consider:

1. COA should align with your operations – take the time to step away from the numbers and ask how should reports be set up?  What needs to be captured? What are the major service line departments? Is there consistency of accounts within each department?  i.e., each department should have accounts for salaries, benefits, contracted costs, purchased services, other costs, etc.
   
2. Decide what’s important and set up COA to capture in alignment with needs. The COA may have external reporting that could dictate the COA structure.  Frankly, health care companies that file Medicare and Medicaid cost reports should strongly consider structuring their COA in alignment with the way costs and charges are captured for cost reporting.  That is a very common best practice for well planned out COA structure.
3. Plan for future change – ensure that there are enough segments in the structure to plan for growth and change.  For example, setting up the structure with three sectors for department, account activity and location that looks like: “001-4321-02 Dental – Non-billable Medical Supplies – Main Street” - gives more flexibility than a simple one segment account, such as 4321 – Non-billable Medical supplies.  With the former, it is possible to break down data by service line, type of activity and location.  With the single segment, it will be much more difficult to analyze data by department/service line or location.
4. Capture necessary transactions – sometimes costs of note are commingled and sometimes unimportant costs are separated. See immediately above for example of multi-service lines being commingled.  Primary care and dental costs will likely be commingled.  I also see very immaterial costs oftentimes captured separately.  Does a $30 million community health center need to be separately capturing costs for purchasing pencils vs. pens or could both be captured as office supplies?  That’s a simple example of similar setup I see all the time.
5. Capture what you do – for example, community health centers likely provide the following selection services: primary care, dental, optometry, mental health provider services.  Each service is funded from multiple sources.  The COA should reflect that reality. I see numerous companies that report revenues based on payor source but not necessarily services or departments.  Again, if a company aligns with cost reporting, then the COA should reflect charges by service not by payor, and the payor discounts are quantified in the contractual adjustment accounts.  This set up will help with cost reporting, and will also help with aligning service metrics to revenues.  Gross and net charge per visit can be more easily captured and consistently analyzed.
6. Can accounting system handle the change?  Of course, there may be limits placed on the ability to make changes based on the accounting system in place.  However, that could trigger questions about whether the health center is using the right software.
7. Of course, keep generally accepted accounting principles (“GAAP”) in mind – there are changes pending in very near future for leases, revenue recognition, etc.
8. Overhead allocations – After the company has decided upon the appropriate overhead accounts, a best practice is to determine a reasonable allocation method, and then journalize monthly allocations by setting up “overhead allocation” and “allocation contra” accounts for each department such that the net total of these accounts sums to zero.  Each department will then will have a simple allocation account in their departmental reports.  

These are a few thoughts addressing wholesale changes.  Maybe the health center does not need a wholesale change; perhaps an effective change would be to simply add some accounts or departments.  I’ve seen that approach work very effectively to enhance the reporting.

​What’s most important is to step back away from details, remove oneself from the resistance to spend the time, and think about the gaps in your data analysis. Improvement in the COA can be necessary to become more data driven, which is usually the difference between an effectively managed health center and one that is struggling financially (as long as there is the will to respond to the data but that is a different topic!).