Can you make your way through a maze without a map—or with an extremely rudimentary one? Maybe. But if you have a map that is clear and detailed, getting to the end of the maze is going to be a quicker and more enjoyable experience.
Trying to navigate your finances without a good Chart of Accounts (COA) is similar to this situation.
So many of our clients at Graphite (we are a startup accounting firm) come to us with a COA that is cluttered, disorganized, and either too simple, or too complex to interpret. It turns into something that they just go through the motions updating, rather than using as a tool to help them evaluate, plan, and stay organized. A good Excel template can help serve as the COA map that your startup needs to unlock its full potential and take control of your business finances.
A Chart of Accounts (COA) is a record of all of the financial accounts associated with your startup. This list, typically housed in an accounting tool (like QBO) or spreadsheet, helps you track any money coming in and out.
The purpose of a Chart of Accounts is to help your team separate and analyze the way that your organization is bringing in and spending money. An accurate and well-planned COA provides a clear understanding of your startup's overall financial health and helps make strategic decisions to drive further growth. It also serves as the foundation for creating key financial reports, such as the income statement and balance sheet.
Additionally, this record supports your reporting processes that keep you compliant with tax standards and investor expectations.
Typically, accounts are split into five separate categories:
Many organizations default to the basic Chart of Accounts format we call the "QuickBooks Default." Essentially, this is just a list of expenses outlined in alphabetical order.
While this may be suitable for smaller teams with straightforward financial considerations, many startups quickly outgrow it. When a startup's financial situation becomes more complicated — including hiring, investing in technology to help it grow and attracting VC funding — a need arises for a better solution. Most high-growth startups need their Chart of Accounts to support more in-depth financial analysis, with clearly categorized expense accounts to track spending accurately.
The "QuickBooks Default" also doesn't consider any industry-specific considerations that may impact the success factors of your COA.
It's easy to import your COA into QuickBooks. Here's a step-by-step overview of the process:
QuickBooks offers both desktop and online versions, which offer distinct COA setups.
One of the most significant benefits of using QuickBooks Desktop COA setup is its flexibility. It offers more customization and control over various account types and sub-accounts. Other benefits include industry-specific features and tools and offline functionality. It's also ideal for startups that require more advanced reporting and tracking.
Online QuickBooks setup is more streamlined and user-friendly, making it ideal for startups with a limited number of accounts or those just getting started with their accounting software. Online COA setup also allows for unlimited accounts and automates bank account and credit card transactions for easier reconciliation. The cloud-based nature of online QuickBooks also means users can access their COA from anywhere they have an internet connection, enhancing accessibility.
COAs for manufacturing startups tend to include separate accounts for raw materials, work-in-progress, finished goods, direct labor and overhead costs.
COA templates for service businesses typically include labor tracking and project-based tracking.
For retail and eComm startups, consider accounts for inventory, sales revenue, cost of goods sold, store rent and point-of-sale systems fees, among others.
Accounts for subscription revenue, customer acquisition costs, hosting fees and software maintenance costs are common on COA templates for SaaS and tech startups.
If you're making the leap from an overly simplistic or disorganized Chart of Accounts, knowing what to include and what not to include can be tricky. We initially recommend contacting a firm like ours to implement or refine your COA.
However, if you plan on refining your COA yourself, the following considerations are the most crucial components that give you the best view of your organization's financial health.
More is not always better. Charts of Accounts often fall short because they include too much information. This clutter makes it difficult to analyze your data effectively. The trick is to include the most relevant information and no more. We’d recommend dividing your COA into three categories:
A numbering scheme is often recommended for a reliable COA, but this isn't just to make it look nice. It's necessary to keep everything organized, easier to analyze and error-free.
The first step in creating a numbering scheme is determining its structure (i.e., how many digits will each account number have?). Most startups use 3-5 digits, but this can vary depending on your organization's complexity and finances. A clear numbering system also makes it easier to generate recurring financial reports like monthly income statements, helping you spot trends and make informed decisions more quickly.
Designate a starting number for each category (e.g., revenue, COGS and OPEX). For example, all revenue accounts will start with 4, all COGS with 5 and all OPEX with 6.
You'll add the same second digit for each subcategory within the broader categories. For example, COGS labor would be 51000 and COGS non-labor costs would be 52000. If you have further categorization within the COGS labor category, their numbers would be 51100, 51200, etc.
Essentially, more shared digits point to a more granular association.
This number system takes the guesswork out of categorization. Associated numbers make it easier to create simple-to-identify subcategories without visually organizing data in a way that makes your COA unnecessarily complex.
Ultimately, the numbering system gives you more opportunities to do more sophisticated analysis, more easily.
Your people are one of your greatest investments, and also one of your costliest investments. You want to be able to analyze the money you’re spending on labor to determine your future decisions.
Within each of the three categories mentioned earlier, we recommend splitting your costs into people vs. non-people costs.
The benefits of splitting out your expenses in this way include:
Take it one step further and split out your labor costs between departments to compare your investments in labor in different areas of the business. You might compare the salaries for product/tech vs. sales vs. operations, instead of grouping all labor.
Not only does this enhance the benefits mentioned above, but it also helps you to demonstrate ROI. Maybe you want to demonstrate the effectiveness of your sales/marketing department, relative to your revenue.
If you separate labor costs by department, it makes it easy to grab your total expenses for sales/marketing during a certain period, including labor and marketing spend, and hold them up against your MRR or ARR growth.
How should you go about setting up a COA in Excel? Follow these steps to get started with a structured approach:
Here's a sampling of how you might organize your COA:
Assets 1000:
Liabilities 2000:
You would continue in the same pattern for equity, revenue, expenses and any other categories.
COA templates are typically organized by numbering systems. Here's a look at the various templates and what to know about them:
| Hierarchical | This involves assigning numbers to each main category and subcategory. |
| Simple | Smaller startups will usually use a 3-digit numbering system. |
| Complex | Larger, more complex startups may use a 4-5-digit numbering system to accommodate greater detail. |
| Gap | Some templates leave gaps between numbers to make room for more accounts in the future. |
Manage account and detail types by following these tips:
We reviewed many changes you may need to make to your Chart of Accounts, so your head may be spinning a little. You may not have the time or resources to make these changes yourself. Thankfully, you don't have to.
Here at Graphite, we put together a free downloadable Chart of Accounts example that considers all of these best practices. And we split it out by industry for an even quicker time-to-value for you. Pairing this with a cash flow statement template can give your team even more clarity into your financial position and decision-making needs.
If you're ready to revamp your Chart of Accounts and immediately experience more actionable financial analyses, download our free template now. You can also pair it with an income statement template to better track your revenue, expenses, and profitability over time. Contact us today to schedule a free consultation if you need further assistance.
Desktop COA tends to be more flexible and robust, which is ideal for complex startups with more advanced business models. Online COA is more streamlined and user-friendly, better suited for early-stage startups with fewer total accounts.
Start with an existing template and adjust it to meet your needs. Customizing may involve adding accounts, renaming accounts, removing accounts, adjusting account types and details, assigning account numbers, and more.
Yes, most accounting programs offer COA import features, making data transfer easy between different systems. You'll likely have to do formatting work with your template to ensure compatibility.
Your COA should be reviewed and updated at least annually. Depending on your startup and its stage, more regular updates may benefit you.
You'll need a combination of financial statements, income and expense records, and other documentation, including employer identification number, sales and expense reports, inventory records and more.