Balancing granularity in the Chart of Accounts (COA)

Emily: Hi, everyone. This is Emily, and I'm a digital transformation consultant with Hyperbots. I'm really pleased to have Jon Naseath on the call with me. He is the CFO and COO at various small to midsize businesses and is currently working with Cantu Capital. So it's really great to have you, Jon.

Jon Naseath: Pleasure.

Emily: So the topic we'd be discussing today is that Jon is balancing granularity in the Chart of Accounts, and I'd want to kick things off by asking, why? Is finding the right balance in the granularity of a chart of accounts important for any organization?

Jon Naseath: The trick is to figure out what's going to be applicable for your business. So you're trying to look at the business units, and where do you want to look at the full balance sheet and P&L across the entire business? If the Chart of Accounts gets too granular. It can overcomplicate reporting, increase the workload, and make it harder for stakeholders to understand. What is that? P&L, or what is that balance sheet impact for that piece of the business in retail? For example, you might not want to take every minor office expense separately and break them down. But where do you want to roll it up into things like rent, utilities, and marketing to understand the cost drivers effectively?

Emily: Got it. So, what is a great example of retail? Can you provide a few more examples of what might constitute too many or too few granularity levels in different industries?

Jon Naseath: Sure. Usually, we get too much. Granularity is where different people have been submitting requests for what they want to report on. The most extreme example I saw was when I was at the company, and they had built out their products into the Chart of Accounts, and that was fine when they had like 5 products, but then they built that out into like 10 products, and then 20. And they ended up with, like, 50 products trying to figure out how to tag all that revenue and all those expenses into each individual product. The offering was just way too granular. Another example could be the healthcare sector, where there's medical equipment versus diagnostic equipment, just kind of granularity, and one of the key things is when you create confusion around which code to tag things into. If some of a certain expense could be tagged to multiple codes, that just becomes complicated. So, making it mutually exclusive and comprehensively exhaustive. So it's unique to figure out what codes go to; it's really the key.

Emily: Got it. Great advice. So, Jon, how can AI help determine the optimal level of granularity needed in a company's chart of accounts?

Jon Naseath: Well, the real way that I think AI could help would be by looking back at what's happened historically and figuring out what that common level of granularity is across all your expenses and then coming back with a recommended singular level. So, no single part is. and the revenue is broken out in too much detail where the expenses are at a similar higher level. If you want AI, it could really help standardize a constant detail level across the whole business.

Emily: Understood, so just out of curiosity. How can a company change the granularity of its chart of accounts without affecting previously posted data?

Jon Naseath: We definitely don't want to go back and restate or redo things. Historically, the main way that I've seen this is oftentimes they'll take a point in time, call it at the year-end user ideally, and then report from a new perspective. Going forward and figuring out what is old and new is key. But then creating that mapping that figures out where you take your old accounts? And how those old ones are going to map to the new ones is critical. I think that's the main piece.

Emily: Understood. Also, are there any industry standards or auditor requirements that help determine the right level of granularity for the chart of accounts?

Jon Naseath: There aren't really any consistent universes. Universal standards are historical across industries. It really depends on what business model you have and how you're doing your business model. Different companies, especially publicly reported companies, will align their management reporting and their investor reporting so that investors can see things consistently across industries, or they'll try to, and then even in that example, though, if a company does something unique, then they'll claim why they're unique and special. But for the Chart of Accounts, it really is. Whatever that company and their products and their expenses are. There are opportunities to certainly consider how other companies are doing it and align with them in general. But your business is unique. And so you're going to build out different chart account requirements for your own business.

Emily: Got it. Who should be involved in signing off on the Chart of Accounts within a company, and why?

Jon Naseath: Yeah. This is a lesson I learned for myself in my life. I was involved. I was driving a transformation project for a very large company, and some of the issues we were talking about happened. I was kind of a program manager for this large ERP quote-to-cash transformation. We pulled together everybody, every stakeholder. So we have. I remember a large meeting where the CFO. The controller's internal auditors and representatives from external auditors were involved, and they certainly should have been. I was driving the overall transformation as program manager, and I was also very focused on all of the data for all of the things that impacted finance, and let's just say that I spoke up too often. My, my, I was pushing for detail. I wanted to make sure that everything was considered and everything could be represented from this one Chart of Accounts, but I didn't take into account the extra effort it would require, or I just wasn't aware of the extra effort it required to tag everything to all of these dimensions and complexity that I wanted to build into the Chart of Accounts. People were kind during the discussion, but I realized that I was not a rep. I was. I didn't own it, and I wasn't the primary user of it.

Jon Naseath: So really, those are the people that you need to be letting guide how they're going to use it because the controller primarily owns the chart of accounts. The CFO is the primary recipient of the outputs from it, and then even the internal auditors have requirements and different requirements. But a program manager with good intentions doesn't necessarily own it and should just sit back and listen and make sure things are consistent but not add additional requirements.

Emily: Got it. Are there any other common mistakes that companies make when defining the granularity of the chart of accounts that you know, and how exactly? Can they actually avoid it?

Jon Naseath: Just really looking at it. I use the term blowing out your chart of accounts, meaning there are just too many details. It. It complicates the reporting. It makes it so that their decision-making is hard, although on the flip side, you can go the other direction because I've seen it. Where, if you start with, say, the generic chart of accounts that comes out of something like QuickBooks, that might not be detailed enough, and then you need to add in different accounts to be able to manage your business. And so what ends up happening is you have your Chart of Accounts. But then, say, FP&A. Or other teams have their own reporting hierarchies that they use, and you need them. You want your chart of accounts to be the most useful product or the most useful tool for covering the majority of your business.

Emily: Got it, and just to summarize everything we spoke about. Jon, one last question: How can AI assist in regularly reviewing and maintaining the integrity of the Chart of Accounts?

Jon Naseath: Yeah, great question, specifically for the Chart of Accounts. Think of it as a living document or a living hierarchy. There's its master data. It is the master data for how you're going to manage the finances of your business, so if that master data isn't complete, then you're going to have challenges. So one of the ways that AI can help is it can automate kind of that consistent review and make recommendations for how it could be structured, and then also make recommendations for which accounts or which transactions get coded to which account, so just kind of helping you manage that master document. Manage that, master. Data can be very helpful for that. AI can also detect certain expense categories that are rarely used for similar accounts and make sure they're mapped together, or if something is too detailed, it could help roll it up into a different account.

Emily A: Got it. Got it. Thank you so much, Jon, for sharing your insights on achieving the right balance in the Chart of Accounts. The role of AI in this process and the best practices for maintaining a well-structured chart of accounts. This discussion provided valuable guidance for any company looking to optimize its financial reporting. So thank you so much.

Jon Naseath: My pleasure.