209 | Tax-Ready Doesn’t Mean CEO-Ready

Have you ever looked at your financial reports and still felt like you don't really know what's happening in your business?

Many founders assume that if their CPA or bookkeeper set everything up correctly, their financials should naturally provide the answers they need. But what if your books were designed to file taxes, not to help you make better business decisions?

In this episode, I explain why your Chart of Accounts is much more than an accounting tool. It's a leadership tool that can help you understand where your money is coming from, where it's going, and what it's trying to tell you.

Whether you're running an online business or a brick-and-mortar company, you'll learn how to organize your financials so they give you the clarity to make smarter decisions, spot patterns sooner, and lead your business with greater confidence.

If you've ever felt like you're guessing with your numbers instead of leading from them, this episode will help you build financial reports that work for you.

In this episode, we cover:

• Why tax-ready financials aren't the same as CEO-ready financials
 • The hidden role your Chart of Accounts plays in decision-making
 • How generic categories can hide your most valuable business insights
 • Tracking revenue, expenses, and marketing ROI with greater clarity
 • How much detail is actually useful—and when it becomes too much
 • Why every founder should regularly review and verify their financial reports
 • Teaching your finance team to organize your books around the way you think
 • Turning your numbers into a financial story that helps you lead with confidence

Resources mentioned

Profit Pillars: A Proven System to Maximize the Bottom Line in Your Online Business 

Official publisher page:

https://books.google.com.ph/books/about/Profit_Pillars.html?id=Vzj2EAAAQBAJ&redir_esc=y

Google Books preview:

https://www.simonandschuster.com/books/Profit-Pillars/Parker-Charles-Stevenson/9781637745670

Profit First by Mike Michalowicz

Official book page:  https://mikemichalowicz.com/profit-first

Official publisher page:  https://www.penguinrandomhouse.com/books/549696/profit-first-by-mike-michalowicz/

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Transcript

Why Your Books Are For You

Erin Gray 0:01

Welcome back to the podcast. Today I want to talk about a topic that's a little bit more in the weeds with our business, and that is our financials, specifically our chart of accounts. A lot of founders think that because they have good financials, because they were set up by the bookkeeper or the CPA, that they are categorized correctly. And more often than not, they are. And also that there is a huge difference between setting up your financials for your accountant or your bookkeeper and setting up your financials that are actually useful and provide you information that you can make decisions on and you can see where money moves in and out of your business. You know, your bookkeeping or your CPA, you know, that all exists for taxes, but your financial reporting that should exist for you. And that's data that you need to know so that you can make better financial decisions and make decisions from a leadership perspective. And those two things are very different. So let's dive in. So

Generic Accounts Hide The Truth

Erin Gray 1:02

let me start by saying that most bookkeepers, or if you have a CPA that set up your chart of accounts, they create, when I say generic chart of accounts, when you set up in QuickBooks, if you use QuickBooks, there's just a basic place where you say what kind of industry you're in, and then it sets up a very general chart of accounts that technically works and it's totally fine. And it's going to satisfy it from a bookkeeping and a tax reporting perspective. But it doesn't necessarily give you the information that you need as a CEO to make financial decisions. Questions like, you know, where is my revenue coming from? So if you have several different offers and you aren't splitting that up, how are you supposed to know where your revenue is coming from? If you are, you know, wanting to know, like, where are you spending your marketing dollars, or which employee group is driving labor costs, or like I said, with the marketing, like which marketing is actually paying off? If you just have advertising as your chart of account, which then when you pull your PL, you're just gonna see advertising costs. You're not gonna see whether you did, like, let's say if you did mailers or you did social media or ads, or if you did SEO, you aren't gonna be able to see how much money is going to which category or which account. And so I always like to look at it from the place of, you know, the books are for you. Yes, we give our books to our CPA to do our taxes for us, but being able to read your financials, understand your financials, understand where money moves in and out of your business. Like I worked for my family's construction business, I was very detailed. And the joke was with the CPA, she was like, Erin, your chart of accounts ledger is so big. And I'm like, I know. And I did whittle it down when I got on and I really started to piecemeal and like what do I want to see? But you know, we basically had two businesses in one business. We had the construction side that did big construction projects from anywhere from like weeks or months to a year. And then we also had the service side, which were, you know, go out on a daily service call and then it's done and an invoice is sent. And so I wanted to track each department, you know, the service department as well as the construction department. And even deeper in than that was, you know, inside the construction department, we had a mechanical and we had an electrical. And then sometimes the service guys would go work on the construction job sites. And so it was really important for me to be able to see where was the income coming from, what were the costs of goods sold and the expenses and like where was the money moving in and out of the business? And when you have very general or generic chart of accounts or categories, you know, think of your chart of accounts as just kind of like your file folder, right? Like you're gonna have income and then you're gonna it's gonna be broken down into the types of income, and then you're gonna have costs of goods sold, and that's gonna be broken down, and then the expenses are gonna be broken down. And so when you just have generic categories that have been set up from either your CPA or your bookkeeper from a like, let's set this up from a tax perspective, not from an understanding how money is moving in and out of your business perspective, your chart of accounts are gonna be very different. So, first and foremost, I want to say that the mindset shift that you need to have first is your books are for you. Yes, it may make be more work for your CPA to actually do the, you know, chart of accounts or to do year-end taxes for you. And yes, it might be a little bit more, but my question to you is how important is it for you? Because you are in your books every day or every week. Your accountant is in your books maybe once a quarter, maybe a little bit more, depending on where you are. So they're in it four times a year. And then obviously when tax season comes, you're in it like once a week, 52 times a year, if not more than that. So I would set up my books for myself, right? Running my business, and the same goes for you. Set up your books that are going to benefit you and then let your CPA work around that or your bookkeeper work around it, not the other way around.

Simple Frameworks And Book Picks

Erin Gray 5:05

I want to recommend two different books here. If you have an online business, that's gonna be one specific book. If you have a brick and mortar business, that's a different book. So the online business is Profit Pillars by Parker Stevenson. He breaks down the four different types of pillars and then he puts in there the chart of accounts that need to go under each pillar. If you have a brick and mortar business, that's a little bit different in terms of what kind of chart of accounts or categories, I should say. You're everybody's gonna have a chart of accounts, but it's the categories that go in your chart of accounts. So for your categories, if you have a brick and mortar business, you could check out the book Profit First by Mike McAllowitz. It's a little heavy and like sometimes it felt a little like too much overkill. And this goes back to like, you're gonna have to trust your intuition and what feels good for you. I would also, if I had a brick and mortar, and I would do this also if I had an online business, is I would just Google with Chat GPT, like this is the type of business that I have. What are the types of categories that I would want in my chart of accounts? And then start from there and like see the way that the categories are set up and then what is specific to your business. Like for our construction business, you know, we didn't pay for marketing because we were what 40 years in and we were primarily referral-based. So advertising was something that was just one line item, you know, we had very little advertising. But what we did have was like I broke apart like the payroll into different classes or categories for the mechanical guys, for the electrical guys, for the service guys. Like I wanted to see how much was going to each department. And so the second thing that I would say is like use your judgment. Some things we don't need 400 categories, but there are maybe some categories that you are going to want more of, maybe because you have you want a more detailed information, maybe about obviously your income, certain expenses. And then some expenses or cost of goods may not be, you know, that you may not need to be that detailed. The question that you have to ask yourself is is this information going to help me make a better decision? Or am I going to get even more clear on how the money is moving in and out of my business if I get more detailed with this specific category? And if the answer is yes, then set it up the way that you want to. If the answer is no, then don't do it. It's not like just because we should have, you know, specific categories that we that we need to do that for everything, but there are specific things that when I talk to clients about, when I ask questions, they don't have the answer for me, which is not a problem. It just shows us where do we need to get a little bit more detailed with our financial reporting than what we currently are. So I'll put those two books, the links in the show notes for you. Profit um pillars by Parker Stevenson. That's for online. And then Profit First by Mike McAllowitz. I don't think he really talks too much about chart of accounts in the book, if I remember correctly. He just more so talks about profit first, which is the same thought process that Parker Stevenson talks about of like making sure that you allocate for profit, but he does kind of help you with the chart of accounts. So if you have a brick and mortar business, just go online, Google and see what you get for your chart of accounts, and then really look pull your chart of accounts, have your bookkeeper help you, or if you know how to do it, pull your chart of accounts and see actually what you have. And then what do you want to be more specific about? You know, and the goal and the big picture that I'm always trying, because I'm always thinking about it from a 30,000-foot view.

Tell A Clear Financial Story

Erin Gray 8:27

The the big picture that I'm that I want you to take away here from is your numbers tell a financial story, right? When you look at your PL, when you look at your balance sheet, it's not just numbers, right? You should immediately be able to see like where money is moving in, where money is moving out, like what is changing, where is cash going, what is working, what isn't working, like where are the margins? Like you should be able to easily see and decipher. And I know we joke, you know, we used to joke with the CPA about how my chart of accounts were kind of hefty, but I could go into the banker and I could have conversations with him because I knew exactly where the money was going. I knew exactly where it was coming from, I could tell, I could see patterns. Um, the same thing with the bonding agent, right? Like the reason why we had such a beautiful relationship, obviously, because there was that relationship there, but he trusted me because I knew what I was talking about, because I knew my numbers. I knew and I could forecast and I could explain things. And for the 3D world people of like the bankers and the insurance agents, and if you do bonding, you know, all of those types of people that aren't necessarily in the 5D spiritual world, they like those concrete answers. And when we can give them concrete answers because we really know and intimately know, like I always joke, like it's time to get intimate with your money. When you can intimately know where your money is coming from, where it is going, how it is moving inside your business, it makes those people that like all of that concrete, you know, number 3D stuff feel much more at ease. And so when you're able to really be so clean and clear on where the information that you are receiving in your business, which is all coming from your financials, which all ultimately comes from, you know, the chart of accounts and the data entry. And I

Clean Data And Smarter Bookkeeping

Erin Gray 10:20

didn't even mention this, but like the data entry has to be legit. Like I have looked at so many financials from people, from clients, and I'm like, we'll just spot check things. And I'm like, why is this here? Why is that here? It's like it's one of those things of like you want to trust your bookkeeper, you want to trust your CPA and also verify just because they are doing that work for you doesn't mean that you get to be hands-off with, you know, your company. You still need to look at on a monthly basis where is like the data entry part too. Like, and you don't have to go through every single category in your PL, but just spot check and just see like where is stuff going. And that is also something that we as business owners need to teach our bookkeepers. I think, you know, one of the things that I'm always saying is like, I'm teaching people how to think and the way that I think, not necessarily like you have to think the way that I think, but like, you know, when you have a bookkeeper, you want them to be thinking the way that you're thinking in terms of like, where would she put? What is important for her? What does she want to see when she looks at these reports? So you really have to teach the people that you work with how you think so that they can begin to think like that, so that they can then provide you the information that you need. You know, one of the things that I see over and over again with clients and their financials is that they accept or they bring me the chart of accounts and their financials of whatever their CPA or their bookkeeper set up. Because it's almost like when I asked them, like, well, how did you get to this place? Like, why do you have it like this? The answer almost always is, well, that's just the way that the CPA set it up, or that's the way that, you know, the bookkeeper did. And I want to say this here because I didn't say this when I was talking about specific categories. Like I was so specific as in like, let's say, you know, your assets, like with your bank accounts, I would literally put like primary checking and then with a parentheses, like the last four of the checking account number, you know, primary savings with the last four of the account number, like payroll account with the last four of the account. Like I was so specific, you know, if you have assets, like if you have equipment, I literally would put the last four of the VIN on the chart of accounts. So I could easily identify when I looked at my balance sheet, I could see what I knew what those specific accounts were, what those assets were, what the liabilities were. Like I didn't have to go to my depreciation sheet to figure out what it was or anything like that. Like that's what I'm saying when I say specific. And you're gonna have to play with this and see like what works best for you. But I'm always like, more information isn't going to be an issue, right? It's like when we don't have more detailed information is when we get a little fuzzy or unclear. So I'm always on the air or the side of like, okay, let's just do more data and then we can pick and choose what we want. So going back to what I said with, you know, asking clients, like, well, how did you get to this place or why don't you have this? Or it's the answer, like I said, is almost always like, that's just what was set up for me. And so we take this, the stance of like, this is what the CPA did because that they're the expert versus questioning, you know, where one of the things I always say to CPAs is like, I'm not questioning your intelligence or your brilliance or your authority, but I want to understand how you got to this decision or I want to understand how you got to this way of thinking. And so it allows me to understand where they're coming from. And then for me, if I want to push back on that line of thinking and say, well, what about this? Or have you thought about this way? Or, you know, the tax law says this. And so

Push Back And Customize Your Reports

Erin Gray 13:53

I just want to encourage you and empower you that if you are someone who is like, well, that's just what the CPA did, or that's just what the bookkeeper, like, it's your business. You get to go back and say, hey, you know, I want to have more detailed information. Can you help me do that? And like pay them for their time to do that. Like they are the, if you want to call it experts in bookkeeping and accounting and taxes, but you are the expert in your business. You know, your financial report should be built around you. Like you spend 52 weeks or 52 times a year, if you want to say it that way, if not more, if you're looking at your financials more than once a week, you spend 52 times or more in your financials. Your CPA probably spends four whatever with taxes. You know, a well-designed chart of accounts becomes more than just an accounting tool. It becomes more than just something that got set up when you started your business. It becomes a decision-making tool, a leadership tool, something that you can really look at, lean on to make financial decisions. And the more detailed that you, you know, are with your chart of accounts and your categories, the more intimately you are with your books, the easier the, I don't want to say quicker, but the quicker and the more confident that you can make decisions. So this week, pull your chart of accounts, pull a report, have your bookkeeper do it. Who, you know, if you have a CFO, have them do it. Look at it. I'll put those two links in the show notes for you. If you have an online business, look at that one specific book, Profit Pillars by Parker Stevenson. If you have a brick and mortar, then either Google or Chat GPT categories, as well as you can read the book Profit First by Mike McAllowitz. Like I said, it's a little overkill. And I think Parker in his book Profit Pillars kind of talks about that without naming it. But there is helpful information in there and it will give you some more, yeah, detailed specific information for you and your business if you have a brick and mortar business. But go Google, you know, different categories for you and spend some time to write out like where is my income coming from? What are the expenses that I, you know, use on a consistent basis? And, you know, if you are doing advertising and you have an SEO manager and you have, you know, maybe you pay for ads or whatever it might be, like you might want to actually separate those out to see where they are. So

Weekly Action Steps And Closing

Erin Gray 16:11

that's all I have for you this week. And I will see you in the next episode.