Chart of Accounts
So what is Chart of Accounts and why is it relevant to HVAC owners?
Additionally, Chart of Accounts offers a structure for your financial management procedures and offers insightful advice on how to boost productivity. It is the actual system that you put up on the back end of your accounting software through QuickBooks, Xero and other softwares. Its sole function is to monitor the performance of your business with proper data. You might not be aware of it, but this procedure entails a lot of steps, and if you get any of them wrong, millions of dollars could be lost. And today, data-driven firms are the only ones that can really succeed.
There is a table in your QuickBooks account where you can create a chart of accounts. It’s confusing right? Because you have chart of account’s accounts. So every account inside of the chart of accounts has a number, and that number is either an income account, a cost account or expenses.It’s called a bucket where you set up for different income expenses that are put into or categorized.
There are couple of key terms that owners should be familiar with.
When you think about an HVAC business, there’s really several primary departments like Residential, Commercial, Maintenance and some other classifiers which are Service Maintenance, Residential Service, Residential Maintenance, and Residential Replacement. Those are three different departments inside of the business.
Now, the reason that a department is so important is that it is how you categorize your income and your activity types. These are the different jobs that are similar enough in terms of their equipment costs and material cost, labor costs, and their indirect costs. This way you can create department groupings where you can line up jobs that have similar cost structures. That gives you a very clear understanding of how successful that one department is being versus another one. So in the HVAC space it’s critical that you have your different departments separated inside of your Chart of Accounts.So that when you look at this blueprint, you can understand how profitable things are and how well they’re running based on different departments gross profit.
Gross profit is not your true profit, right? People just get that confused. Gross profit is how much money you made after your expenses that went in directly to supplying the service. Example: providing the plumbing, providing the electrical, people doing that work, their wages and all the costs that come with them, warranty subcontractors,, credit card fees and things like that are all direct costs. Direct costs are what you take out to get your gross profit.
Net profit is what you get after your operating expenses and your direct costs.
When you look at a chart of accounts, it functions a lot like a spreadsheet. The first column is going to be your actual chart of account. But then insied of any accounting software, you also have a thing called class, and class goes along the top.By using classes you can actually breakdown the revenue a little bit further. For example, commercial versus residential. So there are different ways to break things down so you can get more clear costs.
The reason why a chart of accounts is so important is that when you look at your financial statement as a business owner, you need to get to understand how profitable that business is and you need to be able to do it quickly, and this is really the most important part that most owners struggle with. Their financial statements do not give them actionable informatio because they have to do a bunch of math to figure out what’s actually going on, right? It is not organized in a way that allows you to really understand what’s going on with the business very quickly. Our goal on the financial side is to make it where our owners and our clients can get our files from us and be able to open them in three to five minutes. They understand how to look at it, they understand what’s going on and they can take action based on what they see. So they can make changes and make adjustments A.S.A.P!
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