Moderated by Prad, Financial Technology Consultant at Hyperbots
Prad: Hey, everyone welcome. I’m Prad from Hyperbots, a financial technology consultant. Welcome, Claudia. Thank you for joining us today to discuss the chart of accounts granularity. So let’s dive right in. Claudia, what practices should a company consider when deciding on the granularity of its chart of accounts?
Claudia Mejia: Hi, Prad, thank you for having me. Happy to be here. Well, let’s talk a little bit about when a company wants to initiate its financial reporting. They need to think very closely about the chart of accounts, right? Some of the factors they need to consider are the size, the complexity, the industry they’re in, and the level of detail they want for reporting and compliance purposes. Large organizations with different business units might want more granular charts, while smaller companies may need simpler COAs.
Prad: That’s a valuable insight. Can you give us some examples of how different levels of granularity might look in practice?
Claudia Mejia: Well, as I mentioned, large organizations may have different levels of detail in their chart of accounts. For example, they might not only want to see revenue and operating expenses by business unit but also have a very granular view. Instead of just marketing expenses, they may want to see specific categories like digital ads, so they can assess the ROI on those investments. In contrast, smaller companies might only need a single line for marketing.
Prad: Those were some great pointers. What are some of the challenges associated with having a very granular chart of accounts?
Claudia Mejia: There has to be a balance. Going too granular can create complexity for the accounting team. It requires more effort to ensure all lines are properly mapped, which increases the risk of data errors and makes financial reporting and compliance more difficult. So, it’s important not to overcomplicate the process.
Prad: On the other hand, what are the downsides of having a COA that isn’t granular enough?
Claudia Mejia: At the end of the day, we want the chart of accounts to provide insights that help us understand the business. If it’s not granular enough, you won’t have a clear picture of the cost drivers or be able to make informed decisions. It’s also important for compliance, especially when auditors review your financials.
Prad: Great point. Are there any industry standards or guidelines companies should follow when structuring their COA?
Claudia Mejia: It depends on the country and the industry. There are frameworks like GAAP, IFRS, and others that companies need to follow based on where they operate. Certain industries, like travel or manufacturing, may have specific standards, but ultimately, itÂ’s essential to understand both operational and compliance needs when structuring the COA.
Prad: Can you shed some light on how AI and automation tools help manage the granularity of charts of accounts?
Claudia Mejia: AI can be incredibly useful in managing a chart of accounts. It can automatically categorize transactions, suggest adjustments, and predict trends. For example, if AI notices certain expenses aren’t being categorized properly, it might recommend adding a new chart of accounts. This reduces the manual effort required by the team and helps ensure accuracy.
Prad: As we near the end of the interview, what advice would you give to companies trying to strike the right balance between too much and too little granularity in their chart of accounts?
Claudia Mejia: I’d advise companies to start by understanding their operations and industry. The chart of accounts shouldn’t be created in isolation by finance alone it needs to be a cross-functional effort. Different departments might interpret categories differently, so everyone must be on the same page about what each category means and why it’s included. Leveraging AI for insights can also be a helpful tool in finding the right balance.
Prad: Finally, how can a well-structured chart of accounts contribute to a company’s overall financial health and strategic goals?
Claudia Mejia: A well-structured chart of accounts enables sound financial reporting and compliance. It helps with budgeting, forecasting, and strategic planning, allowing the company to make informed decisions that drive the business forward. It also ensures smooth audits and contributes to robust financial management, which is crucial for achieving long-term goals.
Prad: Thank you so much, Claudia, for sharing your insights on this critical topic. Finding the right balance in COA granularity can greatly impact an organization’s financial effectiveness and strategic decision-making. Thank you once again.
Claudia Mejia: Thank you, Prad, for having me.
Moderated by Pat, Digital Transformation Consultant at Hyperbots
Pat: Hello, and welcome everyone to CFO insights brought to you by Hyperbots. Today we have Kelly O’Neill, who’s the head of KM One Ventures. Welcome, Kelly.
Kelly: Hello! It’s great to be here today.
Pat: Thank you so much for joining us. We’re here to discuss the intricacies of payment terms in vendor invoices and purchase orders, and how state-of-the-art tools can enhance our understanding and management of these variations. So let’s start with the basics. Could you explain what payment terms and vendor invoices or POs typically refer to? And why are they so important in business transactions?
Kelly: Absolutely. Yeah, these payment terms are critical for the functioning of a sound finance practice. Payment terms define the conditions under which payments must be made by the buyer to the seller. These terms are really crucial because they directly impact cash flow management, liquidity, and the overall financial health of both parties. They also influence vendor relationships as timely payments foster trust and reliability, while delays can strain these relationships. Understanding and negotiating appropriate payment terms is key to ensuring smooth operations and maintaining positive business dynamics.
Pat: Alright, that makes sense. Since we’re talking about payment terms, what are some of the common payment terms that you encounter? Could you give us a few examples?
Kelly: Absolutely. Some common payment terms include net payment terms, like net 30 or net 60. This means payment is due within a specified number of days after the invoice date. For example, in net 30, payment is due in 30 days from the invoice date. Another would be discount terms, like 2/10 net 30, where a 2% discount is offered if payment is made within 10 days, with the full amount due at the 30-day mark. Cash on delivery is another method of payment, which is made when the goods are delivered and then there are milestone-based payments, which involve paying at various stages of project completion, such as 20% due upon signing, 40% at a midpoint, and the remaining 40% upon completion. These terms balance the needs and capabilities of both buyer and seller.
Pat: How do extended payment terms like net 120 or net 180 affect the company’s cash flow and vendor relationships?
Kelly: Extended payment terms like net 120 or net 180 can provide buyers with more time to manage their cash flow, giving them flexibility, especially if they need to generate revenue from the goods or services before making payment. However, these can strain vendor relationships if not managed carefully, as vendors may face cash flow challenges while waiting for payment. Clear communication and compensating the vendor for the extended payment period through higher pricing or other incentives can help maintain a positive relationship.
Pat: Right. So, how do discount terms like 2/10 net 30 benefit both the buyer and the seller?
Kelly: Discount terms like 2/10 net 30 can be mutually beneficial. For the buyer, it offers an opportunity to save on costs by making an early payment. For example, a 2% discount on a $10,000 invoice saves the buyer $200 if paid within 10 days. For the seller, it improves cash flow by accelerating the payment. It’s a win-win: the buyer reduces expenses, and the seller improves liquidity.
Pat: How do milestone-based or progress-based payments apply in large projects or contracts?
Kelly: Milestone-based or progress payments are common in large-scale projects where work is delivered in stages. For example, in a $1 million construction project, payments might be structured with 20% due upon contract signing, 40% after the first phase of construction, and the remaining 40% upon completion. This structure ensures that the contractor has the funds needed to continue work without placing too much financial strain on the buyer, who pays as milestones are achieved.
Pat: Why might a company offer consignment payment terms, and what are the potential benefits and risks?
Kelly: Consignment payment terms allow a company to sell goods before paying the vendor. This can be advantageous for inventory management and cash flow. The vendor retains ownership until the goods are sold, reducing the buyer’s financial risk. However, the risk to the vendor is higher, as they are dependent on the buyer’s ability to sell the goods. This term is beneficial in industries like retail, where products may take time to sell.
Pat: With the increasing complexity of global supply chains and diverse payment terms, why is state-of-the-art technology needed to manage these variations effectively?
Kelly: Managing the complexity of payment terms across global supply chains requires state-of-the-art technology. Advanced AI and automation tools can analyze and optimize payment schedules, identify potential cash flow issues, and ensure compliance with contract terms. They can also help negotiate better terms by providing data-driven insights. In today’s fast-paced business environment, manual management of these variations is not only inefficient but also prone to errors, making cutting-edge technology a necessity.
Pat: How do payment terms impact financial planning and reporting within a company, and what role does technology play in this aspect?
Kelly: Payment terms directly affect a company’s financial planning and reporting. They influence when cash outflows occur, which affects budgeting, forecasting, and liquidity management. For instance, extended payment terms may require adjustments in cash flow projections, while early payment discounts may lead to the reallocation of funds to maximize savings. Technology provides real-time visibility into payment schedules, enabling more accurate financial planning and ensuring financial reports reflect the true state of the company’s obligations.
Pat: Extracting and understanding these variations of payment terms can be challenging for systems. Could you explain why more advanced models are needed to accurately interpret and act on these unstructured payment terms as written on invoices?
Kelly: Payment terms can be presented in various formats and wordings across different invoices, making them difficult for standard AI systems to interpret. These terms are often written in unstructured text, requiring advanced natural language processing models to accurately extract and understand them. Understanding context, such as the relationship between different terms and the overall payment structure, is crucial for correct interpretation. Advanced AI models equipped with deep learning and sophisticated algorithms are needed to not only extract these terms but also to automatically take appropriate actions, like triggering payments or flagging discrepancies. This is essential for ensuring compliance and optimizing financial operations in complex business environments.
Pat: Alright, I think that would be all for the interview. Thank you so much for your insights, Kelly. It’s always great talking to you understanding these payment terms and leveraging advanced technology. It plays a pivotal role in maintaining both financial health and strong vendor relationships. Thank you so much, Kelly.
Kelly: Thank you.