General Ledger conversions are a heavy lift for any insurance company, and they come with substantial costs. Your accountants already work long hours before an implementation project doubles their workload. Complex projects face considerable risk of failure during the lengthy implementation.
There are a few reasons migrating from a legacy ledger to a new distributed system delivers significant benefits. For one, institutional knowledge of how data flows and processes fit together increases dramatically. With the proper focus and effort, data can get cleaned up.
One of the most significant improvements that prepares you for the future comes from rebuilding the chart of accounts, the foundation of your ledger.
Related: Learn more about ARC Strategic Services’ system transformation and accounting consulting, or explore ARC Academy courses on general ledger design and financial systems.
Why Redesign the Chart of Accounts?
Your chart of accounts, through the ledger account and the dimensions tracked on each transaction, sets your company’s foundation for data entry and reporting, plus calculations and allocations. And yet, it’s likely that your business looked drastically different 25 years ago when your general ledger was last implemented.
Today, that ledger probably looks muddied after adding new lines of business, adding companies, changing processes, or coping with new regulatory requirements.
For example, you may have two companies that use the same ledger account for different purposes. Or you may have to do complicated data gymnastics to build statutory reports. Worse yet, you may not be able to track the details of expenses at the necessary dimensions based on new business needs.
The result: Your existing chart of accounts looks like business spaghetti.
Avoid the Urge to ‘Lift and Shift’
A system conversion is the perfect time to revisit and analyze your current reporting, allocation, and data entry needs. All too often we’ve seen leaders and vendors bypass this opportunity because they are eager to rush through a system conversion in order to save costs. That’s called “lift and shift.”
“Lift and shift” amounts to taking the old engine out of your VW Bug and placing it into the body of your new Lexus. Your bad data, weak account structure, and old processes will barely work in the shiny new system, and it certainly won’t prepare you for future business needs or use the new system to its full capabilities.
A strong chart of accounts offers executives the reporting they need to ask questions about the financials and to slice and dice the data in ways that help them more easily drive the business intelligently.
Whole New Dimensions
Traditionally, insurance companies tended to have a relatively limited number of dimensions tracked separately in their chart of accounts. That’s because mainframe ledgers often were a 25-digit string representing, for example, Company, Ledger Account, Expense Type, and Department.
Beyond the limited dimensions, ledger account strings in legacy systems typically used long numbers that required a “decoder ring” or “data bible” to understand the data structure. With a limited number of dimensions, the number of Ledger Accounts had to be very large to accommodate data breakouts such as Line of Business and Reinsurance Type (for example, Direct, Assumed, Ceded, Fronted).
For companies using these legacy systems, report writing and allocations require monumental efforts. Users rarely update reports because of the complicated maintenance involved. Accountants then resort to spreadsheets with complex formulas and one-off changes to get results as accurate as possible from a muddled ledger.
Questions to Evaluate General Ledger Needs
ARC Strategic Services strongly advises taking the opportunity of a general ledger conversion to study all current business requirements. Start by answering important questions regarding your existing ledger and workflow:
What reports do people wish they could get out of the ledger? What functionality is missing from your current system’s reporting capabilities?
Where is data entry difficult? Which processes feel manual, error-prone, or inefficient for your team?
What do the current allocations do? How are you currently allocating expenses and revenues across the organization?
Where could new allocations improve data entry and data accuracy? What would make the process cleaner and more reliable?
These questions scratch the surface for building a robust set of business requirements that feed good information into rebuilding the chart of accounts.
Creating Optimum Balance
Most distributed ledgers today track many custom dimensions in the ledger. You want to identify the optimal number of dimensions your ledger needs. The more dimensions you have, the more detailed reporting you will be able to produce from the ledger.
Note these benefits may change and add to some workflows, such as requiring more complicated data entry and data validations. It’s a balance.
Ultimately, redesigning the chart of accounts requires determining what level of detail you can leave in your operational systems (policy admin system, data warehouse) and reconciling that with the level of detail that will be handy for accountants to have in the ledger.
Beyond the limited number of dimensions, old systems can also suffer from low performance. Meanwhile, new systems usually allow for large datasets with little-to-no performance hits. We recommend moving more into the new ledger than compared to the legacy system.
Tips for Rebuilding Your Chart of Accounts
Each dimension should represent exactly one data element. Avoid combining multiple pieces of information into a single dimension value.
Aim for simplicity. Clear, straightforward dimension structures make it easier for teams to code transactions correctly and maintain data integrity.
Do not embed logic into dimension values. Let your system handle calculations and rules, not your account codes.
Dimensions must support necessary breakouts of data available in your current ledger. Ensure backward compatibility and that historical reporting requirements remain intact.
Based on business requirements, dimensions must support necessary breakouts of data in your future ledger, including management reporting, statutory reporting, GAAP, tax, and ad-hoc reporting.
The dimensions should support as many Yellow Book or Blue Book pages as possible for turn-key year-end reporting and regulatory compliance.
Naming conventions for ledger accounts and all dimensions and dimension values guide users to code transactions correctly and reduce errors.
Strengthen Your Foundation for the Future
Building the most robust possible foundation in your chart of accounts will position your business for sustained growth and success. Conduct widespread and lengthy discussions about the dimensions in your current and future ledger.
Explore the benefits of reporting and whether other systems already contain the same data with the same level of detail.
Like constructing an office building, the foundation’s strength ensures that what you’re building will last and endure the test of time. Your chart of accounts and related dimensions determine the viability of a new general ledger that will serve the company’s needs both today and tomorrow.
Benefits of a Properly Mapped Chart of Accounts
Accurate reports that meet almost any business need
Immediate ad-hoc reporting for users who understand the data structure
Detailed allocation accuracy across all dimensions and reporting requirements
Unity of data and processes across companies and departments
Satisfy management requests quickly and accurately
Strong data-entry validations that maintain clean data and reports
Work with a Proven Partner
Each business requires a unique solution when building a new chart of accounts based on best practices. As your independent consultant, ARC combines objective insights and industry experience with your institutional knowledge and processes to help design a future-focused solution.
Ready to Redesign Your Chart of Accounts?
Contact ARC Strategic Services to discuss helping you design a chart of accounts that supports your complex insurance transformation project.