Elegant Cost Centers: the Art of System Design

• April 25, 2019
• Kathy Jastrzebski

In our last post of CLA’s Innovation in Nonprofit Finance series, we delved deeper into understanding the concept of Elegant Financial Systems by applying the principle of elegance to our first topic – identifying your organization’s elegant cost centers: locations, funds, departments, programs, and projects. Curt answered the fundamental question: how exactly do I know what my cost centers are? The key being to focus on the natural organization that is a reflection of your nonprofit’s mission.

Now that you’ve given some thought to and identified the cost centers that support your mission, we’ll jump even deeper to the next level: how exactly do we build this into an actual accounting system? 

We’ll leverage Sage Intacct accounting software and the concept of dimensions to answer this question.

The art of system design

You might wonder, how do we align your system design with your organization’s cost centers? What should we consider? Where do we even start? Are you sure it can be done?

We’ll arrive at an elegant system design by advancing on the following four fronts:

1. WHO? Dimensions will be our, “who.” We’ll provide a little background on what a dimension actually is.
2. WHERE do we need to start? We’ll discuss how looking at report requirements will drive where we end up in our design process.
3. HOW do we identify what merits a separate dimension. How many dimensions will you actually need?
4. WHAT should you consider when choosing a dimension for each cost center?

First, a bit of background: dimensions, the WHO?

A dimension, most simply, is a single cost center. Each cost center that you identified as you worked through our last post is assigned a dimension.

Still not sure? A dimension is comparable to a segment from a traditional account string. For example, a traditional accounting string might be: 6000-10-1 where 6000 is the salary GL account, 10 is the department, and 1 designates a restriction. Each of the segments, except for the natural account, is represented by a single dimension in Sage Intacct. In this example, the segment “10” might be denoted by the department dimension, while, the segment “1” may be signified by the restriction dimension.

Why use dimensions instead of strings?

Separating a traditional, segmented account string into separate dimensions not only allows for flexible reporting, but it also supports a clean and simple system design. Rather than having to create a new account for every potential combination of segments, you simply add each segment as a dimension record. Dimensions are available to use for coding across all of your GL accounts (and in combination with other dimensions) without needing to add an entirely new account for each. Simple, clean, and elegant. 

Standard dimensions available in Sage Intacct:

• Location
• Department
• Class
• Project
• Item
• Customer
• Vendor
• Employee

Additionally, each dimension can be renamed to fit your organization’s mission-critical cost centers. For example, the class dimension is often renamed to “restriction” in a nonprofit organization. There are generally enough dimensions available to handle the needs of most organizations, but there is certainly no pressure to use them all. 

Now that we’ve ironed out the concept of dimensions, let’s get started on our design process.

WHERE do we start? 

Similar to determining your organizational structure based on a high-level understanding of your nonprofit’s mission, building an accounting software structure stems from determining and examining at a high level what your reporting package wish list would look like. We start with the end goal — reports — and work our way backward into the details.

Asking the following questions will help determine report requirements:

• What financial information would enable you to make better decisions? Would it be helpful to know which location is most profitable? Would knowing the true cost of a program be beneficial for decision making? Of course, not all costs are directly attributable to a program. Indirect costs must be allocated in order to arrive at a program’s true cost. (A bit of foreshadowing, as one of the topic’s we’ll cover in our series is how to use allocations to arrive at true program costs.)
• What kind of regulatory reports are needed? For example, nonprofits are commonly  required to provide a Statement of Functional Expense. Therefore, if we can structure our departments into a hierarchy that would allow for easily building this report, we’ll want to take that into consideration.
• Lastly, what can your particular accounting system do? You want to take the system into consideration. With a little flexibility, you can often arrive at an eloquent and easily-built report. Below are a few examples of reports from Sage Intacct.

Statement of Activities by Cost Center:

Assuming the following department (renamed “cost center”) structure:

We can easily take a Statement of Activities and expand it by Cost Centers. In just a few clicks, we see a side-by-side comparison:

HOW many different dimensions will you need?

When determining the number of dimensions needed, ask, “should this cost center be its own dimension?” Or can it be layered into another dimension? Two opposing forces are at work here: Reporting vs. Transacting. The ideal balance is to have the appropriate number of dimensions to answer your reporting questions, but not so many that your users are bogged down when entering transactions. 10 dimensions will surely have your end-users running for the hills. With an overly-complicated list of dimensions, the system naturally becomes more cumbersome and strays from the principle of elegance. That begs the question: how do you identify what warrants a dimension?

Each Unique Dimension:

• Does not have a one-to-one relationship with another dimension. If it does, should it instead be a child or subset of the related dimension? 
• Ideally, dimensions should not be multi-purposed if they are in no way related. Otherwise, we fall back into the accounting string (6000-10-1) approach. Imagine you determined your cost centers will be location and department. If combined into a single list, for every location you must have the same departments. California would have IT, New York would have IT, Minnesota would have IT. What if you wanted to see what spending looks like for the IT department compared to other departments? It’s not easily achievable without the creation and maintenance of dimension groups and hierarchies. On the other hand, if you simply created three locations: California, New York, and Minnesota and set up a separate dimension for departments, you could easily code transactions to IT and California. From a reporting standpoint you would only need to expand by department to see a comparison of costs by department. No dimension group maintenance is required.

WHAT dimensions do you use for each?

We now know the number of dimensions we’ll need, but how do you know what dimensions to use for each? You should ask the following questions to help in determining the answer:

• What attributes/fields are available by default within each type of dimension? A great example is the project dimension. This dimension (often renamed funding source) has start and end dates that lend well to grant tracking. 

• The department dimension also comes with its own special capabilities/powers. For example, this dimension makes sense for use in identifying departments because it has a manager field that easily allows functionality for purchasing approvals. Anything coded to a specific department can be automatically sent to that department’s manager for review.

What’s next?

Now that we’ve identified both the conceptual principles and a practical approach for developing elegant cost centers, our next post will apply the principles of elegance to your chart of accounts. Subscribe to the blog to receive an email when the next post in our Elegant Financial Systems series goes live!

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