The general ledger structure is often underestimated on how it impacts school operations, governance and controls. Areas such as tuition fee billing, the budget process, purchasing policies and reporting are all impacted by the GL structure, where an inadequate GL structure can impede school operations and cost the school significant amounts through process inefficiencies and budget risk.
The structure of general ledger accounts
The components of a general ledger structure are usually dependent on and designed around the financial system’s structure, and include but are not limited to:
Chart of Accounts
The chart of accounts typically defines the major financial reporting areas used by the School. The chart of accounts is an important part of the structure as it often creates the primary allocation component of the general ledger.
Cost Centres
Cost centres are responsibility areas for spending (e.g. departments or faculties) and are individually defined to suit the individual school’s operational reporting areas.
Cost centres can enhance existing financial reporting and create the ability to deploy departmental reporting, which has perhaps the most significant impact for budget management.
Sub-Allocation Codes
Sub-allocation codes allow for further breakdown at a secondary level to the chart of accounts. They can be used to analyse income and expenditure for projects and events without having to manually extract and collate data or create a specific cost centre or general ledger code.
Divisions
Divisions can be built into an account structure to allow another level of reporting within the same school, such as Junior and Senior.
Does your structure impede school operations? Common problems we see
Complex is not sophisticated, simplistic is not easier.
We are often asked how big a chart of accounts should be, and we always give the same response-it depends on your school and your specific operations. Quite often, merging or reducing the number of accounts might not be possible for operational and reporting reasons.
A school might have the right number of accounts, but when the GL structure is messy it can impact accountability as transactions can get lost and/or overlooked within a disorganized structure.
Impact on budget control and accountability
There should be a designated budget holder for each general ledger code, and this person is ultimately responsible for managing the budget for that code. Accountability and budget control are lost when there are multiple people managing the same general ledger codes. For example, having a single GL account for “Junior School Excursions” that is used for all excursions for Preparatory to Year 6, will not work in a school where there are separate budgets for each year level which are managed by different year level coordinators.
To help manage overspending and achieving the school budget, a GL should incorporate cost centres that reflect the schools organisational structure and delegations of authority policy.
Impact on Reporting and Performance Analysis
A robust general ledger structure will accommodate all types of internal and external financial reporting. Standard reports for financial performance and financial position should be produced directly from your financial system and allow for detailed and summarised reporting.
If GL accounts need to be manually reconciled to split out transactions for reporting purposes, then you will never be able to produce automated reports from the financial system. Manual spreadsheet reporting is inefficient, prone to errors, and puts corporate knowledge at risk if only one staff member knows how to prepare and maintain the manual reports.
Impact on Government Reporting
There are key areas of a school that need to be separated to report on the annual Financial Questionnaire (FQ). Consider the time spent on manually reconciling and splitting out transactions from accounts so the FQ can be submitted correctly. If an item needs to be separated, such as boarding or trading items, then creating separate GL accounts can save time and eliminate the risk of errors.
Impact on Other Systems
We have seen many instances where a school’s chosen financial system offers features such as electronic purchase orders, and staff portals to review GL transactions and to produce financial reports, but these features cannot be utilised because of an inadequate GL.
When to consider a GL review and restructure
When a restructure occurs, it provides an opportunity to realign the chart of account structure, number sequences can be applied to account ranges, and types of accounts can be ordered within these sequences. Consistent grouping, numbering, and account descriptions are very important, and all structures should be flexible to enable the creation of new GL codes if required in the future.
Changing Systems
An ideal time to consider a restructure of the general ledger is upon implementation of a new financial system. Often, legacy system accounts are converted across for simplicity and to ensure familiarity whilst learning a new system, because changing software can be a stressful experience for staff. However, this can sometimes limit functionality within the new finance system which can ultimately make the staff members role harder. For example, if the legacy system does not include cost centres, departmental reporting may not be achievable and custom reports may need to be manually prepared to provide a solution for budget holder reporting requirements.
Reporting or Leadership changes
If a change of governance occurs, often reporting changes can follow. This can be either internal within the school leadership team or from an external authority.
It can be difficult for a new manager to understand the running of the business if the accounts are not clear and concise or lack detail. A restructure provides an opportunity to achieve improve the quality of the reporting output for the new governance.
Simplify/Tidy up of accounts
If the school has been using the same system for many years, it is recommended to review the existing GL structure at least every five years. Over time, account structures can become messy and out of sequence, as additional budget requirements are identified along the way and new accounts are added on a “best fit” determination.
Benefits of a restructure
We have discussed how an inadequate GL structure can impact a school, so the benefits of having an organised and consistent GL structure are to:
Enhance multi-level reporting
Enable automated financial reporting direct from the financial system
Reduce time spent on reconciling and analysing transactions
Improve operational areas of the school for staff
Reduce budget risk from potential overspending
Increase transparency & accountability for financial performance
Enable other features of the financial system that might not be utilised
At Precision, we have assisted many schools by reviewing general ledger structures for limitations and have helped develop customised and robust chart of accounts. Don’t let your bad GL structure hold you back any longer -take advantage of our school experience to create and manage a GL restructure.