Generating financial statements is a routine part of the close process. The income statement, balance sheet and statement of cash flows are essential tools for running a business and provide valuable information to investors and other external stakeholders. For internal stakeholders, however, standard financial reports aren't enough. They provide a snapshot of what happened, but don’t explain why. And it’s the "Why?" that really matters:
- Why were labor costs so high last month?
- Why are margins lower in some regions than others?
- Why are we getting so many returns?
Getting the information to answer these questions can be difficult or even impossible. Finance and accounting frequently bear the brunt of complaints when data isn’t available, but they’re rarely the reason. More often than not, the fault rests with the chart of accounts.
The Broken Chart of Accounts
The chart of accounts provides a framework for organizing financial data in the general ledger (GL). Transactions recorded in the GL include specific account codes that provide additional information, such as whether the transaction relates to assets, liabilities, equity, expenses or revenue. These three or four-digit “natural accounts" contain all of the details necessary to produce accurate financial statements.
Problems arise when the chart of accounts structure expands beyond the natural accounts. Many companies break down expenses by department, for example. Others may need to track labor costs by facility. With traditional accounting software, the only option is to capture these details in the chart of accounts. This significantly increases the number of accounts required.
As the number and complexity of account codes increases, the GL becomes difficult to use. Account codes are more likely to be misapplied, more time is spent correcting journal errors and producing accurate financial statements gets harder. The result is a longer close process and more overtime.
Multidimensional Accounting
Multidimensional accounting eliminates the need for complex account codes. Instead of using the chart of accounts for operational reporting, operationally relevant details like department or location are configured as dimensional values.
Dimensions are tags or labels used to group and filter data, much like a column heading can be used to sort data in a spreadsheet. A dimension can be any operational characteristic considered useful for tracking performance, such as organizational details (divisions, business units, subsidiaries) or details related to revenue generation (channels, products, customers).
When added to transaction records, this kind of information creates a rich dataset for analysis and reporting, allowing financial and non-financial managers to track revenue and expenses with as much detail as they require. However, the legacy ERP and accounting software systems that many finance departments still rely on are not equipped to perform multidimensional analysis.
NetSuite combines multidimensional accounting with powerful reporting and analytics to give managers the information they need to make informed decisions, identify opportunities for improvement, and better understand the link between day-to-day activities and financial outcomes.
Watch our recent webinar to learn more about NetSuite’s multidimensional accounting and reporting capabilities.