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9 Key Chart of Accounts Decisions to Drive Reporting in Dynamics 365 Finance & Operations

One of the questions we are often asked by clients looking to upgrade or reimplement Dynamics 365 ERP Applications (i.e. Finance, Supply Chain Management, etc.) is how they can leverage standard functionality in the chart of accounts to better support financial reporting.  While the answer might be slightly more involved for companies that operate in multiple countries vs. a single one, the principles are the same.

Picture of Dan McAllister

Dan McAllister

Introduction

In this article we will discuss 5 key design decisions you should consider when designing your chart of accounts in Dynamics 365 for Finance and Operations.  The result of these decisions will allow you to design reports that will grow with your chart of accounts, update dynamically over time, and allow for the creation of easy consolidated reporting across currencies and companies.

Why is Chart of Accounts Design Critical for Financial Reporting?

We believe the chart of accounts is a critically important feature of your ERP system design or Microsoft Dynamics AX-365 upgrade.  It is often overlooked unless your system implementation project team has a strong financial subject matter expert.  Deloitte wrote a great paper about this titled “Unlock value through your Chart of Accounts” which we recommend as a mental starting point. 

A key point the paper brings up is using the CFO as your executive sponsor for the design of the new chart accounts as they are often best positioned to understand how the chart is being used for strategic reporting across your organization.  They should also do an excellent job of explaining how different internal organizations might leverage information in the chart differently; some might use it for operational reporting while others might only use it for financial reporting and build their operational reports elsewhere. 

A final point the paper makes is that the design of your chart should be based on operational needs rather than ERP system capabilities.  While this is absolutely true, Dynamics 365 for Finance and Operations has a number of key features that should fit any design and can be used to improve downstream reporting so long as they are considered up front.  This blog post will help you understand those design decisions so you can make most of the reporting tools available in Dynamics 365 for Finance and Operations.

Designing your Chart of Accounts in Dynamics 365 Finance & Operations

1) Choose the right team to work on re-design

This one is not specific to Dynamics 365 for Finance and Operations but is a critical foundational ERP solution design decision.  At minimum the team should consist of:

  • A finance executive (could be CFO, controller, other key Finance member) who can solicit feedback from all departments and has intimate knowledge of
  • A member of the IT or consulting team who can advise on functionality and report architecture
  • Select Directors/Managers who can weigh in on cost/profit center reporting requirements

Your group should be able to pair business reporting requirements expertise with systems knowledge and decision-making power.  This is foundational to the construction of financial reports, and likely the experience of this team can be parleyed directly into financial report design.

2) Choose the right number of financial dimensions

Financial dimensions in Dynamics 365 Finance and 365 Supply Chain Management are used for financial and operating reporting purposes. Use too many financial dimensions and the increased data over and data entry is challenging for your business users. Use too few financial dimensions and you may have difficult reporting on data in the way you need.

3) Be specific with the different types of financial dimensions you use

Financial dimensions should be used for specific and unique purposes.  A classic example is departments vs. business units.  If your company has multiple business units such as selling across multiple channels or geographic locations, then you likely have support departments (IT, Finance, HR, etc).  This would be a good use case to use both Business Units and Departments as separate dimensions in Dynamics 365 instead of trying to combine them both into one.  Even so if your chart of accounts contains too many dimensions that can be prohibitively time consuming when it comes to data entry.  Ensure you clearly know the requirements of the business to limit dimensions in Dynamics 365 Finance to actual needs while having a clear purpose for each.

4) Evaluate Dynamic vs. Custom financial dimensions

In Microsoft Dynamics 365 financial dimensions can be set up as “custom dimensions” if desired.  There are a few reasons this can be a good idea:

  1. The dimension is unique to your business and is not in the list below
  2. You are avoiding the use of organizational hierarchies
  3. You wish to use a financial dimension that has implied use as master data elsewhere in the system, but you do not want to maintain that master data

Alternatively, dynamic financial dimensions derive their values from other areas of the system.  For example Customers could be a financial dimension for easy customer sales reporting using the general ledger module.  Each time a customer is created a new financial dimension value would be created for this purpose.  You would simply create a financial dimension called Customers where you “use values from” Customers.  Other dimensions like Department, Business Unit, and Cost Centers are Operating units which can be used in organizational hierarchies.

Microsoft Dynamics 365 dimensions

5) Maintain Financial Dimension IDs and Masks

When designing your financial dimensions thinking downstream to daily Dynamics 365 users data entry and reporting is key. Most companies use numbers as their financial dimension ID values, but some do not consider how to maintain them properly.  Some good Microsoft Dynamics 365 practices to consider:

  1. Set each financial dimension type to be a differently length so they are visibly easy to identify
  2. Use the Dimension value mask functionality to enforce dimension lengths and IDs.
dimension value mask
Use the Dimension Value Mask functionality to enforce dimension lengths and IDs

3. Beware the limits of “smart numbering”. There is potential value in breaking out your financial dimension values in a similar way to how charts of accounts are broken out; where the first digit is an indicator of what the dimension value stands for.  If you choose to go down that route keep the rules as simple and easy as possible.  Dynamics 365 for Finance and Operations is intended to be your indefinite ERP system; make sure to think when planning about how well this design might hold up in 2, 5, 10 years.  If you could run out of numbers in your smart numbering scheme then you should rethink your approach.

6) Appropriate levels of control over data entry

There are a variety of ways in Dynamics 365 for Finance and Operations to control the entry of financial dimension values on transactions:

  • Default values on master data
  • Legal entity defaults on financial dimensions
  • Legal entity defaults on main accounts
  • Account structures
  • Advanced Rules

The proper level of use depends on business requirements.  For example, it might be that only one department should use a certain main account.  You could fix the financial dimension value for that main account so nothing else could be used.  Alternatively, if that account could have a range of dimensions you can use advanced rules to enforce the selection of only valid options; more on that to follow.  There are a wide variety of options to fit business requirements.

The Chart of Accounts is the most important aspect of financial report design but financial dimensions are a close second.  It is critical to plan for how you are going to build reports using your financial dimensions before finalizing design decisions.

7) Consider Account structures and Advanced Rules

Dynamics 365 for Finance and operations requires at least one account structure to be in place for a chart of accounts to be functional.  Account structures define the financial dimensions available per main account in addition to identifying what is required or optional.  Advanced rules are optional but take this one step further, controlling what dimensions can be used with other dimensions to avoid the use of “bad combinations” of account strings that will need to be cleaned up later.

The implication for financial reports in Dynamics 365 is all around how to manage data entry and validation over the course of your normal business.  One thing many companies do is write financial reports that seek to identify the entry of bad data combinations; it’s simple to write a report with a combination of financial dimension values (or ranges) that do not go together to give you easy access to everything that looks incorrect.  Better still though to prevent the bad data entry from happening in the first place.

8) Anticipate Business Growth

There are several ways to plan out your row definitions in Microsoft Management Reporter.  These will mostly be covered in a later blog, but for chart of accounts design important concepts are this:

  • Make sure your chart has enough digits to be able to expand. Have you left enough gaps to allow for new business ventures or regulatory requirements over the next 2, 5 10 years?  If not you might want to reconsider your approach.
  • Avoid getting too fancy with your numbering schemes; what you plan for today could end up causing growing pains in the future

Things change over time as your business grows and the financial environment changes.  The ultimate goal here is to be flexible enough to avoid the need for another chart of accounts overhaul for as long as possible.  There are tools in Dynamics 365 for Finance and Operations to assist with this.

9) Leverage main account categories

The big piece we recommend to design in Dynamics 365 for Finance and Operations for reporting is main account categories.  Main account categories can be used in row definitions in lieu of actual account numbers.  Instead of building your report on the premise of ranges of accounts build it using main account categories.  Things to remember:

  • There are standard main account categories but those can be deactivated if they are not relevant and business users can add new categories
  • If you rename/change/add main account categories your report will have gaps
  • Information about the Main Account Category can come through directly in your report

Ultimately this is the master data in Microsoft Dynamics 365 that makes financial report design so slick for companies that often add accounts and dimensions to their charts of accounts.

Conclusion: Chart of Accounts Importance

If you are implementing Dynamics 365 for Finance and Operations you are likely doing so to build a platform upon which you can grow a flexible and dynamic business.  For your finance team the chart of accounts is the backbone of their work day in and day out.  A poorly-designed chart of account can cause pain points for years, while a well-designed chart can reduce time and effort needed for budgeting, report building, and ongoing maintenance.  This decision is worth time and consideration as part of your ERP implementation and Dynamics 365 for Finance and Operations includes great tools for managing this.  In our next post in this financial reporting series we will change gears to work through clever ways to assemble Budget vs. Forecast vs. Actual reporting in ways that will dynamically update month to month.

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