From coat to full control – five levels for better financial management

"Find the coat!", he said and threw a new set of travel expenses on the desk.

Some time ago, an acquaintance of mine had an expense claim for a raincoat rejected. He had bought it in connection with a conference when it suddenly started to rain. The company should cover that much, he thought. The company didn't think so. They asked him to review the travel invoice again. He went back, summed up and assessed, and submitted a new travel expense report with the same final amount, but without a visible coat. If you don't have a reasonable level of granularity in your bookkeeping, it’s possible to hide the coat.

Every economist's dream is a specific set of accounts where the information available can enable useful and good analysis. A data basis where you don't have to make assumptions or guess at allocations. Just as an engineer must consider strength measurements and material properties when constructing a building, finance must build its reporting and accounting data in a detailed and forward-looking way.

In a traditional set of accounts, you’ll find main accounts showing income, expenses, assets, and liabilities. But for most businesses, these figures only scratch the surface. On their own, they add limited value. Compared to historical figures, they may be slightly more informative, but only slightly.

The level below is various general ledger accounts that are part of an accounting group. Here it may be common to create an account for rent, one for cleaning, one for exterior maintenance, all of which will make up the main group "office costs". You can do the same on the revenue side. Some people have an account for products, one for maintenance and one for service assignments. Then you have broken down total revenue a little more and can look at the change between the different main categories. But to take the analysis a step further, we need to look at where in the organization the revenues and costs actually arise.

Most companies are divided into departments, which means that both revenue and costs can be recorded where they occur. It’s often straightforward to set up a departmental structure, but accurately allocating costs to the right departments can be challenging. At the same time, you must avoid the internal invoicing trap, where the focus shifts from optimizing company-wide value to maximizing departmental performance.

Read more: ERP for the CFO

This one goes without saying: using customer and supplier data in financial analysis is invaluable. How much do your suppliers invoice annually? Who are your most important customers? What is their share of turnover? How has it changed since last year?

Customers and suppliers can also be grouped into categories. RamBase offers many options for this, predefined or user-defined fields such as:

• Industry sector
• Geography
• Supplier size
• Classification (a, b, c supplier)

RamBase also has dedicated fields for end customers. This means you can track not only who you invoice but also who actually uses the product. Companies subject to export controls and international trade regulations can benefit especially from this.

Read more: Why your CFO's input is crucial when choosing an ERP system

There are several dimensions that can be linked to individual transactions in the system and used for reporting and analysis. RamBase supports up to 10 dimensions, and here only your imagination sets the limits. These dimensions can be linked to general ledger accounts, sometimes as mandatory fields, to ensure proper classification before approval.

Relevant dimensions might include:

• Geography
• Purpose
• Project number
• Activity dimension

However, it’s easy to get overambitious and add too many mandatory dimensions. Be sure you’ll actually use the information. A dimension only adds value if the data quality behind it is solid.

By creating separate articles for your products, you can break down the revenue base even further. How many units of product X have you sold? What is the average price? What is the net growth and in which customer group is the change most pronounced?

RamBase allows detailed product specification. You can define fixed sales prices, predefine accounting rules, link to suppliers, and more. Products can also be grouped into product groups, enabling reporting independent of general ledger accounts.

Read more: Get to know the finance module in RamBase Cloud ERP 

If my acquaintance’s employer had taken a thoughtful and detailed approach to accounting data, he would have left the payroll department empty-handed. It wouldn’t have been possible to hide a coat among the totals and call it something else.

We have to hold two thoughts in our heads at the same time. We can impose all kinds of requirements for details and specifications, but sometimes it’s more efficient to let a few details slip - like the coat - rather than spend significant resources maintaining the quality and granularity of our data.