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.
