How to Structure Your Chart of Accounts as a CPG Company

As someone who’s traversed the winding roads of financial management, I can confidently say that structuring a chart of accounts for CPG brands is one of the most impactful steps you can take. Picture your COA as the backbone of your financial system — if it's not sturdy, everything else can come crumbling down.

A well-organized COA simplifies financial reporting and streamlines your accounting processes, allowing you to keep a close eye on production costs and inventory management. It’s the secret to making informed decisions that can propel your brand forward. 

Let’s roll up our sleeves and look at how to create a chart of accounts that meets your unique needs, so you can navigate the world of CPG finance with confidence and clarity.

What is a Chart of Accounts for CPG Brands and Why Does It Matter?

A COA is a comprehensive listing of all accounts an organization uses to categorize financial transactions. Having a structured framework helps you organize income, expenses, assets, liabilities, and equity, so you can gain a clear picture of your business’s financial health.

Now, why does this matter for CPG companies, specifically? First off, it supports accurate financial reporting. When you categorize each transaction correctly, generating reports is a breeze. 

What’s more, a properly structured COA supports informed decision-making. For instance, when you categorize costs associated with production, such as raw materials and labor, you can easily calculate your Cost of Goods Sold (COGS). Understanding COGS helps you effectively evaluate your pricing strategy. Perhaps your COGS is creeping up due to increased material costs — say, a jump from $2 to $3 per unit for a key ingredient. Having that data empowers you to either adjust pricing or seek alternative suppliers to maintain your profit margins.

Key Categories for a CPG Chart of Accounts

Structuring your chart of accounts (COA) is akin to crafting a fine recipe; it requires the right ingredients to yield successful results. I can't stress enough how a well-structured COA lays the groundwork for successful CPG financial management. 

Here’s what you need to know:

• Revenue: This is where all your income streams come together. Capture sales from products, services, merchandise, and shipping income. Plus, don’t forget to record trade spending as a contra account for a truly clear picture of your revenue. Think about your popular organic granola bars — the revenue line should reflect the bar sales, profits from branded merchandise (like your adorable "Granola Guru" T-shirts), and shipping fees to give you a well-rounded view of how your business is performing.

• Cost of Goods Sold (COGS): This section should focus exclusively on direct production costs, which include raw materials, labor, and manufacturing overhead. Keeping COGS clean means avoiding confusion with operational expenses. For instance, if you create gourmet sauces, your COGS would include the price of quality ingredients like heirloom tomatoes and fresh herbs, along with the wages for your hardworking kitchen crew who craft those delicious blends.

• Expenses: Your operating costs need careful categorization. Standard sections here include Operations, Sales, Marketing, and General & Administrative (G&A). Break down marketing expenses into specific campaigns, digital ads, social media promotions, and influencer partnerships to effectively track each investment's impact. For example, when launching a new product line, be sure to log the promotional costs and influencer fees separately so you can measure ROI accurately.

• Assets: Everything you own that adds value falls into this category. That includes equipment, property, inventory, and receivables. Tracking these assets is vital for gauging your company's financial health. Picture this: If you own a fleet of delivery trucks, categorizing them as assets gives you insights into your distribution capabilities and helps you assess their depreciation over time.

• Liabilities: Don’t overlook what you owe! Liabilities encompass loans, accounts payable, and accrued expenses. Keeping tabs on these is crucial for maintaining a positive cash flow. For example, if you secured a short-term loan for new production equipment, listing it under liabilities helps you keep your financial obligations in check, ensuring you don’t find yourself in a tight spot during your busy season.

• Production-Related Costs: These expenses should be categorized separately, keeping your COGS organized. Include costs like equipment maintenance, utilities, and seasonal labor adjustments that arise during production peaks. For instance, during the hectic holiday season, you might need to ramp up staffing for bottling and packaging, so being mindful of these costs can help you manage cash flow effectively.

Customizing Your Chart of Accounts for Growth

Let’s take a look at strategies I’ve found invaluable for customizing my clients’ COAs to support growth:

1. Design for scalability: A chart of accounts for CPG brands should be ready to expand as you introduce new product lines or innovative flavors. 

2. Use classes for channel tracking: Rather than complicating your COA with separate accounts for Direct-to-Consumer (DTC) and Wholesale sales, embrace the power of classes in QuickBooks Online (QBO). Classifying transactions under one "Product Sales" account means you can still generate a "Sales by Class" report. It’s like having your cake and eating it too — without the calories! 

3. Adjust for operational costs: As you scale up production, operational costs will naturally rise. Capture these expenses in an "Operations" section that includes labor, consumables, utilities, maintenance, and that extra espresso machine that keeps your team energized during peak production times. Keeping tabs on these costs will help you maintain healthy cash flow while you focus on growth.

4. Embrace technology: Investing in the right accounting software can significantly streamline your COA management. Using platforms like QBO, I’ve automated swathes of my accounting processes.

Best Practices for Your Chart of Accounts Setup

Here are accounting CPG best practices I’ve gathered over the years that can help you set up an effective COA without the headaches:

1. Keep it simple: Your COA should provide a clear picture of your financial health without overwhelming complexity. Stick to essential categories, and avoid clutter by grouping similar expenses. 

2. Separate COGS from operating expenses: COGS should reflect only direct costs related to producing your products. Mixing these with operating expenses can lead to confusion. Maybe you’re a startup that produces artisanal jams. You’d categorize your COGS to include ingredients, labor, and direct overhead, while keeping operational costs such as utilities and administrative salaries distinctly separate.

3. Regularly review your accounts: As your business evolves, so should your COA. Schedule periodic reviews to make sure your accounts still align with your current operations and goals. If you launch a new product line, it might necessitate the addition of specific accounts to accurately track its financial performance.

4. Be mindful of growth: Structure your COA in a way that supports scalability. When launching new products or entering new markets, your COA should be flexible enough to accommodate those changes without requiring a total overhaul.

5. Focus on financial alignment: Your COA should align with your overall business strategy. If your brand's goal is to expand rapidly, ensure your COA is equipped to capture the necessary data for informed decision-making. Alignment will ultimately lead to more strategic financial management.

The Role of Inventory in a CPG Chart of Accounts

To structure your chart of accounts, I’d suggest you consider dividing inventory into clear categories: raw materials, work-in-progress, finished goods, packaging materials, and maintenance supplies.

For example, if you produce organic juices, raw materials might include fruits and vegetables, while work-in-progress could be batches currently being processed. Finished goods would represent the completed juice bottles ready for sale. Packaging materials could encompass bottles, labels, and cartons, and maintenance supplies would include cleaning products and equipment parts needed for production upkeep.

Tracking COGS and Production Expenses

When it comes to tracking COGS, I recommend focusing on a comprehensive set of accounts to capture every detail of production costs. In my books, I include raw materials for all the ingredients used in production, followed by packaging costs necessary for presenting the final product. 

I also account for direct labor expenses — the wages of workers directly involved in manufacturing — and overhead costs, such as utilities and maintenance for production facilities. Tracking shipping and handling fees for incoming materials and outgoing products provides additional clarity, helping me analyze total production costs accurately.

Organize Your Chart of Accounts for Success

A thoughtfully crafted chart of accounts for your CPG brand helps you keep tabs on your financial health and makes reporting a breeze. So, don’t let chaos reign in your financials. Take charge of your COA now. And remember, BBG is here to lend a hand. Our personalized accounting services and financial consulting services can help you whip up a COA that not only reflects your business's unique needs but also supports your growth ambitions.

For additional insights into managing your CPG finances, check out our guides on Understanding Key Financial Metrics for Food and Wine Entrepreneurs, Top 5 QBO Plugins for CPG Companies, and Strategic Financial Modeling for Scaling CPG Brands. 

Author Name: Eileen Vasko

Author Bio: Eileen Vasko is an accomplished Accounting professional with over 10 years of experience in financial management, cost accounting, and compliance. As a former Controller at Iron Horse Vineyards, she excelled at managing complex financial operations, including inventory cost accounting. As the Accountant Manager Team Lead at BBG, Eileen specializes in building highly efficient accounting processes including accounts payable/receivable, payroll, and tax reporting. Eileen is highly skilled in using advanced accounting platforms and tools to drive efficient processes.