Moderated by Emily, Digital Transformation Consultant at Hyperbots
Emily: Hi, everyone. This is Emily, and I’m a digital transformation consultant at Hyperbots. I’m very pleased to have Rick on the call with me, who has been a CFO for a long time and has been into finance across different business segments, industries, and revenue streams. So happy to have you on the call with us, Rick.
Rick Suri: Thank you for having me. It’s a pleasure to be here.
Emily: Of course. So, Rick, the topic we’d be discussing today is liabilities in the chart of accounts.
Emily: And just to get things started. The 1st question that I have for you is, what role do liabilities play in a company’s chart of accounts, and why is it important to structure them correctly?
Rick Suri: So that’s a very important question, because liabilities are, you know, sums of money or obligations to 3rd parties. They represent an essential part of the business and have a lot of significance for managing the business as well as reporting on its financial health, so correctly structuring the liabilities is a critical topic. And not just for accurately reporting the financial status of the business, but also for internal reporting. It can have implications on lender covenants, and a lot of other financial parameters.
Emily: Got it, understood. So, Rick, would you be able to provide some practical examples of how liabilities differ across various industries, such as manufacturing, retail, or SaaS?
Rick Suri: That’s another great question. So liabilities across different industries would mirror the industry itself. For example, if you’re a manufacturer, you would have accounts payable, and obligations or money owed for raw material purchases and services. For retail, there would be similar obligations for goods that have been bought. In addition, they would be lease liability, and in a SaaS industry, you would have liabilities for deferred revenue, those kinds of expenses, and maybe in certain cases, liabilities for other expenses.
Emily: Got it. So what are the best practices for structuring liabilities in the chart of accounts to ensure clarity and compliance?
Rick Suri: Some of the best practices to ensure clarity and compliance are paying attention to classification. You have long-term liabilities and short-term liabilities, or current liabilities. Within certain long-term liabilities, you would have an obligation to identify the current part of that liability. You would require more specificity like each liability. Some of them may have to be reevaluated, so consistency is important. Just consistency between the way different liabilities are treated across the entity, especially if it’s a multinational or multi-unit entity. This will make consolidation easier. There should also be transparency, meaning liabilities need to be broken out with some degree of specificity, so you’re not clubbing different kinds of liabilities, which makes reporting and analysis easier. Lastly, regular reviews to ensure that the current designation is accurate.
Emily: Got it, understood. What are some of the common mistakes or errors that accountants often make when structuring liabilities in the chart of accounts?
Rick Suri: Common mistakes that I’ve seen include improper classification, the risk of over-aggregation, and not disclosing significant liabilities separately as required under GAAP. You could also encounter redundant accounts, which you obviously want to avoid. Inconsistent terminology is another issue. And perhaps the most significant mistake is omitting certain liabilities.
Emily: Makes sense. So, Rick, how can AI help in improving the accuracy and management of liabilities within the chart of accounts?
Rick Suri: AI, as I like to call it, augmented intelligence, is a powerful tool. It’s rule-based, utilizes machine learning, and offers great benefits. One of the biggest advantages is automatic classification—it can automatically classify liabilities based on examples. It can also help detect anomalies, like unusual patterns in accounts payable. Standardization is another benefit, and AI can drive consistency across the business. The biggest value is predictive analysis, where AI can assist with forecasting, cash flow management, and other financial predictions. Finally, it enables dynamic updates, automatically suggesting changes when certain factors shift.
Emily: That’s really amazing. Can you share a specific example of how AI has been used effectively to manage liabilities in a particular industry?
Rick Suri: I can think of a couple of industries, but let’s take healthcare, for instance. AI has been used to automate the classification of liabilities, like between accounts payable and accrued expenses. It’s used to analyze historical data, detect vendor anomalies, and flag unusual spikes in payments. This has helped healthcare providers better manage their business and flag potential errors or risks.
Emily: Got it. How can companies ensure that their liability accounts remain flexible and adaptable to changes in the business environment?
Rick Suri: The most important thing is continual review. Companies should regularly assess their chart of accounts to ensure they’re not missing any new liabilities and that everything is properly categorized. For example, companies need to break out the current portion of long-term liabilities when appropriate. This process needs to be ongoing to stay aligned with changes in the business environment.
Emily: And just to wind things up, Rick, one final question. What advice would you give to CFOs and finance teams about managing liabilities in the chart of accounts?
Rick Suri: My advice would be to focus on providing consistency, clarity, and accuracy in the reporting of liabilities. Finance teams should embrace automation and AI, which can help with reviewing liabilities regularly and ensuring accurate financial reporting. Leveraging technology will be essential to staying ahead and maintaining high standards.
Emily: Got it. Thank you so much, Rick, for these valuable insights on managing liabilities in the chart of accounts. Having you was truly amazing, and it was a very fruitful discussion. Thank you!
Rick Suri: Thank you for having me. It was a pleasure sharing my thoughts on this topic.
Moderated by Sherry, Financial Technology Consultant at Hyperbots
Sherry: Hello, and welcome to all our viewers on CFO Insight. I am Sherry, a financial technology consultant at Hyperbots, and I’m very excited to have John Silverstein here with me, who is a seasoned finance executive with over two decades of experience in leadership roles, with expertise across both Fortune 500 companies and high-growth startups. Thank you so much for joining us today, John. We will discuss the critical topic of structuring tax heads in the chart of accounts. To start, could you explain why having a well-structured tax head is important in a company’s startup accounts?
John Silverstein: Yeah, it’s critical to have structured accounts and make sure that it aligns with not just tax but your other areas, as we’ve discussed before. The tax heads in your chart of accounts are essential for several reasons. They ensure that you’re accurately tracking your tax liabilities, recoverable, and expenses, which is critical for your compliance with tax regulations. Additionally, they provide clarity in financial reporting, aid in the reconciliation of tax accounts, and reduce the risk of penalties due to misclassification or errors. Proper structuring also facilitates smoother audits and enhances decision-making by providing clear insights into a company’s tax position.
Sherry: And from your vast experience, can you provide some examples of different tax heads that might be necessary for various industries, like manufacturing, retail, or SaaS?
John Silverstein: Yeah, they all have their nuances. We can talk first about the manufacturing industry, where your tax heads might include sales tax payable, excise duty payables, and customs duty payables. In retail, it’s a little different; you might see sales tax payable, output GST/VAT payable, input recoverable of GST/VAT, and property taxes. So a few different accounts need to be split between the appropriate areas for compliance reasons. Meanwhile, for SaaS companies, relevant tax heads might include service tax payable, and that’s an important distinction. Sometimes you have mixes between your industries based on the companies you work with, where you might have service tax and sales tax and different components of sales tax. So getting compliance right and connecting to a tool, AI can help with this as well. On the SaaS side, you also have withholding tax payable and recoverable. Each industry has its unique challenges, and it gets more challenging as you mix services and manufacturing.
Sherry: In your opinion, what are some of the best practices for structuring tax heads in the chart of accounts?
John Silverstein: Yeah, making sure that it’s organized by nature—like if it’s a tax payable, recoverable, or tax expense. When we were going through specifics on manufacturing, splitting them allows you to easily see which taxes you’re paying. Aggregating and putting just a tax line doesn’t help. The timing and different regulations and compliance you need to meet vary. It also makes it easier to audit if split out.
Sherry: In your journey in the finance industry, what are some common mistakes you’ve seen accountants make when structuring tax heads in the chart of accounts?
John Silverstein: Common mistakes include improperly classifying where you group taxes incorrectly, and mixing sales and property taxes. The key is to split it out into different regulatory bodies. You also want to customize for specific jurisdictions to align with those regulations. It doesn’t necessarily have to be in the chart of accounts, depending on your system and tax systems, but you do need at least the bare minimum of proper classification and grouping. You need the granularity to understand those different types because they’re all calculated differently. Make sure to keep compliance with tax laws, so you don’t have compliance issues. Another common mistake is failing to reconcile your tax liability regularly. This often gets overlooked and is only thought about once a year. It’s much better to work with your tax advisors to book your taxes every month, so you understand your true liability from a working capital standpoint.
Sherry: Adding on to the question, how should federal and state income taxes be structured in the chart of accounts?
John Silverstein: Federal and state income taxes should be structured separately in the chart of accounts, allowing for visible and accurate reporting. You don’t want to go crazy, though, because all the states are different. You can manage granularity outside the chart of accounts; otherwise, you’ll end up with over 50 tax accounts, which is unmanageable. It’s critical to get the right granularity and split the types of taxes as we discussed earlier. Federal income taxes, state taxes, payables, and liabilities need to be broken out separately for precise tracking of obligations and payments. This separation simplifies the reconciliation of payments and helps you understand when to make those payments, as federal taxes are a little different from state taxes. Additionally, businesses should consider having provisions for deferred tax assets and liabilities. This can vary between federal and state levels, so breaking them out appropriately ensures compliance and accounting standards while providing easy visibility.
Sherry: Since AI is transforming the finance landscape, how can AI help manage and improve the tax structure of a company’s startup accounts?
John Silverstein: AI will significantly enhance the management of your tax structures. Often, even as a CFO, you’re working with outside tax advisors, sending data back and forth. AI can streamline reporting requirements and calculations. It reduces human errors between your tax books and management accounting books. It will help ensure reconciliation and capture the right data for complicated jurisdictions, as well as compliance with tax laws and regulations. AI can go through data to ensure appropriate allocation and compliance while providing suggestions based on learning models. The accuracy will improve, and AI can help detect and correct misclassifications. Additionally, having reporting and analytics on taxes can shed light on often-overlooked areas, helping you better understand tax calculations, which can be quite complex.
Sherry: To dive a little deeper into the previous question, could you provide a specific example of how AI can help a company in a particular industry, like retail or SaaS, better manage its tax structure?
John Silverstein: Sure! For a retail company operating in multiple states, it has complexities in managing sales tax, each with different rates and rules. AI can automate the categorization of transactions based on state and sale, applying the correct tax rates. AI can also help reconcile sales taxes and ensure you’re collecting the correct amounts. If you don’t collect sales tax, recovering it can be challenging. AI can help identify errors and prepare for audits, reducing tax penalties, especially since sales tax complexities can lead to audits from various states. For SaaS companies, AI can determine tax obligations based on where services are delivered and where servers and customers are located, classifying transactions correctly. Real-time compliance reporting is critical, and these industries will benefit greatly.
Sherry: What role does real-time monitoring play in managing tax structures with AI, and why is it beneficial?
John Silverstein: Real-time monitoring allows AI to track changes in tax laws and regulations, instantly reflecting these changes in your chart of accounts. If something changes and you need to track it differently, AI can prompt you to make those adjustments. Often, tax advisors inform you about upcoming changes, but being proactive is crucial. AI helps identify discrepancies or non-compliance and keeps you informed about your tax liabilities and exposures.
Sherry: What are some future trends you see in the integration of AI with tax management in charts of accounts?
John Silverstein: With a shortage of accountants and tax professionals, AI will play a huge role in automating tasks, optimizing strategies, and predicting tax exposures. AI will manage more complex scenarios, providing companies with precise insights on structuring and jurisdiction changes. For smaller companies, AI can suggest strategies they might not have considered, making tax management more accessible. It will also automate routine tasks for accountants, such as reporting and compliance changes, allowing them to focus on enhancing tax strategies and governance.
Sherry: Thank you so much, John, for these valuable insights on managing tax heads in the chart of accounts. I’m sure our viewers will find your perspective on how AI can transform tax management particularly enlightening.
John Silverstein: Thanks, Sherry.
