Over time, many organizations struggle with the complexity and administrative burden associated with an ever increasing amount of cost centers and accounts in their General Ledger. Reorganizations and other changes in business conditions are often coupled with requests from the business units for new divisions, cost centers, and P&Ls. The accounting group, in an attempt to preserve past data for historical review purposes, will often keep/maintain the old structure in addition to the new. Over time, this creates an infrastructure that requires more and more people to maintain (including an exponential increase in journal entries to move costs into the 'right location”), requires more time to do analysis, and increased frustration from the business units as they are not able to get information and answers on a timely basis. The result is that Finance and Accounting has to spend more and more of their time with basic data maintenance – getting the information into the right places – leaving less and less time for the value-added activity of interpreting the data into meaningful and actionable ways for the business unit. Proactive management of the GL infrastructure is critical to keeping administrative costs down and allowing Finance and Accounting to focus on proactive analysis. Every cost center and division within the General Ledger, while helping to break down costs to a more detailed level, also represents additional work and opportunities for defect in the accounting processes. Listed below are a set of guiding principles that assist in reducing complexity in the GL over time.
In general, an account is used to determine the TYPE of spend in the General Ledger – and generally determined during the set-up of the Chart of Accounts
The primary reason for the cost center element in the General Ledger is to assign ownership – for an individual or a group – for that particular transaction. In most cases, an annual budget will be loaded that actual costs can be compared against. The individual/group that is incurring the cost will charge their “home cost center” (the cost center that they have responsibility for).
Rollup of cost centers. Divisions should have a unique One-to-Many relationship with the cost center. And while some General Ledger chart-of-accounts will allow for the same cost center to be used across many divisions (violating that uniqueness), most organizations (including Sony) do not allow it.
Sales, General and Administrative Costs are overhead in nature and not part of product costs. In general, SG&A cost centers should take their costs directly from the subsystems – into the appropriate GL account as defined by the Chart of Accounts set-up. Cost centers roll-up under SG&A and set up for the group that has accountability and control of these costs.
The assignment of costs from one group to another – usually based upon activity or sales based criteria. For support organizations this will often mean costs are allocated “out”, while P&L groups will see these costs allocated “in”. Good practice is to use a separate set of accounts in the General Ledger for these allocations so that standard reporting can provide the group a clear understanding of true controllable spend versus allocations in/out.
- Start with a complete and thorough cost center review. It is difficult to make progress without first reviewing and assessing all of the cost centers and divisions. Sony has its GL hierarchy posted on SharePoint for easy access. In this review, map out all of the divisions and cost centers to get the following detail:
a) The individual/group that is responsible for these costs. The cost center manager would be the person that is responsible for preparing/reviewing the budgets and monitoring budget-to-actual performance. In many cases, this will be the manager of the people that reside in the cost center. In addition, you might have defined additional rollups or hierarchies of cost centers up to the BU head.
b) If there are multiple cost centers for one cost center manager, define what additional detail this breakout provides. This can often be gathered from the cost center description.
c) Define how many people reside in each cost center
- Understand the business. The more that the Finance & Accounting group understands the business, the better support that we can provide overall. What are the cost drivers in the group? Where is the money being spent? Controllers are sometimes better off in gate keeping these cost drivers than trying to manage through many individual cost centers.
- Ensure that cost centers are defined at the right level in the organization. Does the cost center manager have responsibility and accountability for these costs? Is it part of his/her management objectives?
- Avoid multiple cost centers for one cost center manager wherever possible. There are exceptions (if the cost center manager is at a higher level in the org and has several different groups), but make sure there are good reasons. (Keep in mind that the number of cost centers under one’s control is not correlated to the amount of power wielded!!).
- Cost Centers should have a budget. If not, why was it set up?
- Minimize the creation and use of cost centers just for allocations. Effective usage of the GL chart of accounts can help with this one.
- Develop a plan – to reduce your cost centers each year. And make it part of Finance and Accounting objectives.
- Utilize the annual budgeting process to reduce. Once a cost center has a budget for the fiscal year, it is difficult (although not impossible) to make changes during the year.
- Look for opportunities to reduce cost centers. Reorganizations can be events that trigger the request for additional cost centers. But managed correctly, and with some discipline, can also be an opportunity to reduce. If the individual/group that is taking on additional work in a cost center in the From org, why not combine the people and activity into an existing cost center in the TO org, and eliminate the old cost center.
- Be disciplined on the creation of new cost centers. Develop a set of “rules” that the group can use. Make it part of the creation process. Cost centers should not be created for one-off analysis or where details exist elsewhere in the GL or subsystem. This would include requirements for more detail around Accounts, Vendors, or Products. Most large companies have this sort of detail in one of the sub-systems, or a data warehouse solution.
- Re-use cost centers instead of creating new ones. Accountants tend to be nervous about losing track of historical data. And this needs to be taken into consideration. However, in most groups with frequent re-organizations and other business changes, it is often better to simply document and track these changes – while keeping the GL focused on the summary view.
- Set expectations up-front with the business unit management team. Clearly communicate that cost center reduction is a priority and explain the rationale. In many cases, this will alleviate some of the pressure of unnecessary requests during the year. Sometimes this will include notification to a cost center manager that consolidation will occur in the next year – to help with the transition over time.
- Manage the requirements from the business unit during the year. A request like “please open a new cost center to track xxx” doesn’t have to be met with: “No because that creates more work for the accounting group” but rather: “I recognize that tracking xxx is an important business requirement. Let me explain to you how we can have visibility into these costs without adding to our accounting spaghetti.”
- Finance owns the General Ledger. In the end, understand that the GL is owned by Finance. Controllers should have the responsibility and be empowered to appropriately set up and maintain the structure of the Ledger. The business will help define the reporting requirements, it is up to Finance to satisfy these requirements and provide the analysis in the most efficient and cost-effective way.