You Can Know What You Don’t Know: Chart of Accounts

Continuing my series offering best practices and tips to address the many challenges executives at health centers face, this month I am addressing the topic of the chart of accounts and accounting for grants. 

This topic seems basic and a bit granular, but when you understand the premise, “What gets measured, gets managed”, these are important topics.  I set out to do a series of topics on themes that I routinely see. I continually encounter scenarios where analysis is limited due to poor use of data often due to poorly designed chart of accounts structure.  If data isn’t accumulated in a way to help measure your organization’s finances, then it will be challenging to use the data to make good decisions. I think many executives try to understand their organization’s financial reporting and conclude it’s all gibberish simply due to a poorly designed chart of accounts.   

I summarize the chart of accounts data shortfalls as follows:

• A lack of uniformity across departments causes difficulties in comparative analysis and transaction postings.
• Department set up that are not arranged by service lines and overhead categories that cause confusion.
• Revenues are often not organized by service line, making it difficult to compare visits/encounters to revenues billed.
• ​​Expenses are often not organized by spending classification, such as personnel costs, goods and services, purchased services, etc.  
• Costs to be accumulated for grant tracking are often commingled with non-grant expenses making the required tracking of program activity very inefficient to track, along with frequent inaccuracies.

These shortfalls contribute to poor data analysis, and limit management personnel’s ability to understand where problems are - activity by service line (revenues, costs, and margins), not capturing all costs for grants, etc.  

With that in mind, I offer the following basic setup recommendations:

• Set up a uniform baseline chart of accounts that can be replicated for each department.  This will allow for consistent data across service lines.
• Set up departments for major and/or all minor service lines and also overhead.  I recommend setting up subdepartments of major departments if the company wants to have aggregated and disaggregated reporting.  For example, it would be useful to have a overhead department, and sub-departments for various groups like information technology, human resources, etc.  
• Revenues should be recorded at gross with contractual adjustments, captured by service line and payor source.  Leadership will want to know service activity (visits, etc.), and thus, revenues should be organized in such a way to align with this service activity data.
• Expenses should be organized by personnel costs (wage/salaries and benefits), contracted services, supplies, goods & services, etc.  
• Don’t put too much detail at the chart of accounts level for grant tracking as the organization will be adding new accounts for each new grant.  Take a “sub-ledger” approach so that revenues are captured in total. Accounting software usually allows for the coding of expenditures as grants and then staff can set up custom reports to summarize expenses per grant.
• There will be many advantages to this set up, including uniform reporting across departments, simplicity of reporting, alignment of service delivery, organization structure, and reporting, and accurate grant accounting, done efficiently.

It may be impractical for many companies to discard a chart of accounts and set up a new “company” but there may be egregious situations that warrant the change.  Without that change, companies should consider how to set up their reporting to align as closely as possible with the above recommendations. This can be done by utilizing your accounting software custom reporting features, using a grouping approach.  

Ultimately, the important premise is to align your reporting with the way you think about your operations, for example reporting revenues that aligns with service activity data.

Next month, we’ll discuss some operational reporting matters such as utilizing key performance indicators to manage the enterprise.  

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W. Karl Baker, CPA, spends his time thinking about ways to help organizations with sound financial decisions, including improving revenue cycle management.  Find more information at www.BakerCFOadvisory.com and www.SolvereAdvisory.com.