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What is and how to do Cash Flow?
In this article we will talk about:
- What is the Chart of Accounts?
- Example chart of accounts for a service company
- Sample chart of accounts for a company that sells products
- How to use the chart of accounts to do financial analysis
- Simplify your Chart of Accounts
The managerial chart of accounts is a list of items that is used for the classification and recording of entries and cash flow in a company. These items of income and expenses are divided into larger groups (synthetic chart of accounts), the specification of these groups into subgroups (analytical chart of accounts) and the detailing of these subgroups into items.
Depending on the type of structuring your chart of accounts, you can have more or fewer subgroups. Usually, for our worksheets cash flow, we use 3 levels, following a structure something like this:
- Synthetic Group â € "Recipes
- Sub Analytical Group â € "Product Recipes
- Detailing - Revenue from book sales
- Detailing - Recipes with sales of excel courses
- Sub Analytical Group â € "Product Recipes
An important detail to note is that the type of structuring of the managerial chart of accounts is different from the chart of accounts used by accounting, which tends to be more complex, detailed and have balance sheet accounts, following a line more or less similar to the image below:
For simplified management and control purposes there is no need to have the balance sheet items (active and passive), so I advise you to focus only on the 3 item in the image above, for the year's results. Let's take a look at two examples of application of the managerial chart of accounts.
Let's look at an example of a management consulting firm. To get started, you need to list the groups of services you sell. This is the first sub group within the recipe group and one very important thing is that you can simplify the items that will be here.
Basically, instead of adding all the services you sell, you need to group them into simplified accounts. Assuming that the company does the following consultancies:
- Content Marketing
- Digital marketing
- Social Networks
- Strategic planning
- Business Prototyping
- Cost analysis
- Financial structuring
- Performance evaluation
- Structuring of positions and salaries plan
- Management advice
In our example we have 10 services, which is not quite a large number, but imagine that you have a portfolio with 100 services or products. Doing this detailing can complicate your control and revenue launch throughout the use of your spreadsheet cash flow. So gather whenever you can. In our case, I have created the following groups:
- Marketing consulting
- Strategic consulting
- Financial Consortium
- HR Consulting
Likewise, you can think of the groups of direct expenses (linked to the provision of services) that you can or will have in providing these services. Once again, the simplification work will greatly help in your future analysis:
Continuing to organize your chart of accounts, you will now need to think about the fixed expenses, which are linked to the functioning of your company, regardless of the amount of services provided. Here I put the example of most 3 sub groups:
- HR Expenses
- Operational expenses
- Marketing Expenses
You will still have to organize sub groups for non-operating (financial) revenues and expenses. If you want more content on the topic, see how to prepare a management plan of accounts for service companies in a post that we have written here.
Now that we've looked at a service-oriented company, we can move on to a product company. I believe that the most important thing is to simplify your accounts. If you have a restaurant, you will not register all your dishes, if you have a bookstore, will not register all your books and, in our case, with spreadsheets, we do not record all the spreadsheets we have.
Instead, the ideal is for us to simplify:
- Restaurant - groups of dishes, desserts and drinks
- Bookstore - groups of books
- LUZ - spreadsheet and spreadsheet groups
Let's look at an example of a common bookstore. Just like we did with the services, we need to list the groups of products sold.
Following the same idea, if we sell products, we will have direct expenses related to the sale of these products and, for this, we create a sub group of expenses with products:
Note that product expense groups will always be specific to the business in question, but most often the subgroups of fixed expenses will be similar. You see, we use the same groups for both consulting and the bookstore.
To delve deeper into the topic, see our post on how to draw up a chart of accounts for companies that sell products.
Now that you've seen how to set up your managerial chart of accounts, let's understand how these revenue and expense groups will help you when making financial analyzes. The idea is quite simple, every time you make a revenue or expense posting, link it to a group of the managerial chart of accounts. With this, the spreadsheet cash flow joins the data and mounts graphs automatically, giving you results like the one presented below:
This is already a first step in your analysis. Here, visually and quickly, we can see that our business sells more products (75%) than services (25%). Knowing this, even in this analysis of sub groups, we can do more detail to understand which products are best sellers:
Again, we quickly discovered that in the example of our product groups, Excel courses are much more relevant than the Spreadsheets group. In the same way that we did the analysis of revenues, we can also analyze the expenditure chart:
See that for the month in question 81% of the expenses with products were directed to the outsourcing of production, while 19% for editing the video. In general, grouping group products and services allows you to understand which ones are the most relevant in a straightforward way and thereby drive strategic efforts.
Everything I've said throughout this post was to show you that by using a spreadsheet cash flow it is essential that you have a chart of accounts and that it be simplified, both by using only managerial (revenue and expense) accounts, and by simplifying your items within the chart of accounts groups, to make it easy to do financial analysis.