The issues with using too many nominal accounts in your business

Running a business is no small task and understanding business financials is a crucial element for success. Unfortunately, many business owners over complicate their financials by using too many nominal accounts in their system. For small/ Medium business owners, managing finances isn’t always their strong suit and when the accounting system becomes too complex, it can be overwhelming. So instead of focusing on growing the business, they may spend excessive time trying to understand their financial statements. This can lead to frustration, missed opportunities, and even burnout.

Whilst it is essential to have nominal accounts like sales and expenses, as they are necessary to track various financial activities , having a disproportionate number can create inefficiencies and lead to poor decision-making.

In this Onesys blog post, we'll explore why keeping your chart of accounts condensed is essential for clear and effective financial management.

Complexity Leads To Confusion

One problem with having too many nominal accounts is the level of complexity it adds to reporting. When you break down nearly every transaction into separate accounts, the chart of accounts becomes messy and frankly, overwhelming to look at. This makes it hard to get a clear snapshot of your business’s financial position at a glance, because you have to look so many different places for what should be streamlined information.

• For example, if a business owner creates individual accounts for every type of office supply purchased—pens, Staples, envelopes , etc. it becomes challenging to keep track of the overall total of office expenses. Instead of seeing a simple "Office Supplies" account, the owner is now forced to work through various accounts to understand the full picture of expenditure, leading to confusion and inefficiency.

Analysing Financial Data Becomes Difficult & Creates Potential for Inconsistent Reporting

Having too many accounts can make it difficult to extract meaningful insights from your financial data. Financial analysis often requires comparing and aggregating sets of data to spot trends, manage budgets, and make informed decisions. When data is spread across numerous accounts, it can be hard to see the big picture.

For example, an excessive number of revenue accounts might obscure the overall sales trends, making it harder to identify which products or services are performing best. Similarly, with too many expense accounts, it may be difficult to see where cost-saving measures could be implemented effectively.

When businesses have too many accounts, the likeliness of inconsistent reporting increases. Different people in the business might categorise similar transactions differently, leading to inconsistencies that can skew financial reports. This not only makes internal financial analysis harder, but can also cause issues during audits, where consistency and clarity are critical.

Increased Time and Effort in Reconciliation

Every account needs to be reconciled regularly to ensure precision of financial statements. The more accounts you have, the more complicated and time consuming this process becomes. Instead of focusing on key areas of the business, owners and their accountants may find themselves bogged down in the balancing and reconciling a surplus of nominal accounts. This increased workload can result in mistakes, as the chances of missing or incorrectly categorising transactions rise parallel to the number of accounts.

How to Streamline Your Chart of Accounts

1. Consolidate Similar Accounts: Group similar transactions into wider categories. E.g, rather than having multiple accounts for each different vehicles expenses, create one "Vehicle Expenses" account and clearly label transactions by vehicle.

2. Set Clear Guidelines: Set clear rules for categorising transactions and create an "open to ask" environment to ensure consistency.  Also establish rules for the creation of new nominal accounts, especially if there are multiple people working in your accounts department.

3. Regular Review: Periodically review your chart of accounts and merge/ get rid of unnecessary accounts. Make this part of you Bi-Annual or Annual accounting practices.

4. Accounting Software: Invest in accounting software that allows for detailed tracking with broader nominal accounts (Such as cost centres & departments in Sage200 or subaccounts in Acumatica). This way, you can still get detailed information without cluttering your chart of accounts.

5. Consult with an Accountant: If you aren't sure about how to streamline your nominal accounts, consulting with a professional can provide valuable guidance and ensure that your financial reporting remains clear and effective.

Conclusion

It can be tempting to create a nominal account for every possible type of transaction, but this approach can quickly backfire, leading to confusion and inefficiency. By simplifying nominal accounts, you can maintain accuracy in your financial reporting, reduce time spent on reconciliation, and make better informed decisions for your business. Remember, keeping your accounting simple often leads to better financial management and in turn, a more successful business.

How Sage 200 or Acumatica Can Help
Both Sage 200 and Acumatica offer robust accounting software solutions that allow businesses to manage their financial data more effectively. These platforms enable detailed tracking within broader nominal accounts through features like cost centres, departments, or subaccounts. This helps keep your chart of accounts clean and streamlined while still providing the granular, in depth detail needed for comprehensive and meaningful financial analysis. By leveraging these tools, businesses can avoid the pitfalls of overly complex accounting systems, ensuring more accurate reporting, easier reconciliation, and better financial oversight.

If you're interested in having a conversation around nominal structure, Sage 200 or Acumatica please get in touch on 01423 330335 Option 1 or by emailing info@onesys.co.uk

Blog post written by Charley Edwards,  Implementation Consultant at Onesys