Managing variability in the chart of accounts

Find out interesting insights with Anthony Peltier, CEO Coast to Coast Finance

Moderated by Pat, Digital Transformation Consultant at Hyperbots

Don’t want to watch a video? Read the interview transcript below.

Pat: Hello, and welcome to CFO Insights by Hyperbots. Welcome to today’s discussion on the variability of the chart of accounts (COA) across different industries, companies, and ERP systems. Joining us is Anthony Peltier, the CEO at Coast to Coast Finance, who will share insights on how the COA can differ, based on several factors. Welcome, Anthony.

Anthony Peltier: Thank you. Glad to be here.

Pat: Alright, so let’s just dive straight in. Can you start by explaining what a chart of accounts is and why it’s essential for organizations?

Anthony Peltier: Yeah. A chart of accounts, or COA, is a list that categorizes all the financial accounts in the general ledger. It serves as a framework for recording and reporting financial transactions. The COA is essential as it provides the structure needed for consistent reporting, compliance, and analysis. It helps ensure that all financial data is captured accurately and can be reported in a way that aligns with both internal and external requirements.

Pat: Alright, that makes sense. How does the structure of the COA vary between different industries?

Anthony Peltier: It varies significantly between industries because each industry has unique reporting needs. For example, a manufacturing company might have raw materials, work in progress (WIP), or finished goods under their cost of goods sold (COGS), while a service company, such as a consulting firm, would have accounts that focus more on labor costs, direct service costs. A retail company may emphasize inventory accounts and sales revenue, while a financial services company might have specialized accounts for interest income, loan loss provisions, and brokerage fees.

Pat: Okay. So we talked about how COA might vary between different industries, but what are some specific examples of how two companies within the same industry might have different COAs altogether?

Anthony Peltier: Sure, even in the same industry, companies can have different charts of accounts based on their business models or operating costs. In the technology industry, a more product-focused company might have detailed accounts for hardware production, software development, and cloud infrastructure, whereas a service-oriented tech company might focus more on support costs, software-as-a-service operations, and professional services. Even two retail companies could differ. One with a brick-and-mortar presence might have detailed accounts for store rent and overhead, while an e-commerce company might emphasize digital marketing and logistics costs.

Pat: What factors typically drive these differences in the COA structure from one company to another within the same industry?

Anthony Peltier: Several factors, like company size, business model, geographic location, and regulatory environment, can drive these differences. For instance, a global company might have a more complex chart of accounts to manage various currencies, tax jurisdictions, and intercompany transactions, whereas a smaller company might have a simpler COA, but still reflective of its focus. Risk appetite, management style, and strategic goals also influence COA structure.

Pat: Could the same company have different charts of accounts for different ERP systems? And if so, why would that be the case?

Anthony Peltier: They could. Different ERP systems might require different COA structures due to specific functionalities and reporting capabilities. One ERP system might be designed to meet local statutory requirements, necessitating a more granular chart of accounts for tax reporting or currency differences. Another ERP, used at a global level, might emphasize standardization and consolidation across geographies, leading to a different COA structure. Variations in ERP configurations and how the systems integrate with other financial tools could also contribute to COA differences.

Pat: What challenges do these differences in the chart of accounts pose for financial reporting and management?

Anthony Peltier: The main challenge is maintaining consistency in financial reporting. If a company has different charts of accounts across business units, consolidating financial statements can become complex and time-consuming. There’s a risk of errors that could affect the accuracy of the reports. Additionally, differing charts of accounts can complicate internal management processes, making it harder to compare performance across divisions or subsidiaries and ensure compliance with accounting standards.

Pat: How can companies manage these challenges and ensure effective financial management?

Anthony Peltier: Companies should aim for a balance between standardization and flexibility. Having a master chart of accounts that can be mapped to different local or business-specific charts allows for consistency while permitting some customization. Regular audits and reconciliations can help ensure alignment leveraging technology like consolidation tools and implementing governance policies is also key. Additionally, continuous communication and training between finance teams across different units are essential for maintaining clarity and coherence.

Pat: Alright, that makes a lot of sense. What trends do you see in how companies are approaching chart of accounts design and management in the future?

Anthony Peltier: There’s a trend toward increased standardization and automation. Companies are looking to simplify and streamline their COAs, enabling faster decision-making. There’s also a move towards global standards, especially for multinational companies, to reduce complexity and improve comparability. AI and machine learning are becoming more prominent in finance, helping companies automatically categorize transactions and even suggesting optimal COA structures. This shift will continue as companies seek greater efficiency and agility in their financial operations.

Pat: Alright, I think that’s very insightful. Thank you so much, Anthony, for sharing these valuable insights on the variability in the chart of accounts and its impact on financial management. It’s clear that the chart of accounts is more than just a list of accounts; it’s a strategic tool that requires careful design and management.

Anthony Peltier: Yeah, thanks for having me. It’s an important topic.

Pat: Thank you so much.

Structuring accrued revenue and accrued expense heads in COA

Find out interesting insights with John Silverstein, VP of FP&A, XR Extreme Reach

Moderated by Sherry, Digital Transformation Consultant at Hyperbots

Don’t want to watch a video? Read the interview transcript below.

Sherry: Hello and welcome to all our viewers on CFO Insights. I’m Sherry, a financial technology consultant at Hyperbots, and I’m very excited to have John Silverstein here with me today. John is a seasoned finance executive with over two decades of experience in leadership roles, working with both Fortune 500 companies and high-growth startups. Thanks so much for joining us, John!

John: Thanks for having me, Sherry. I’m excited to be here.

Sherry: We’re here to talk about structuring accrued revenue and accrued expense accounts in the chart of accounts, understanding common mistakes, and best practices, and how AI can help streamline these processes. Let’s dive right in. John, why is it so important for organizations to properly structure accrued revenue and expenses in their chart of accounts?

John: That’s a great question, Sherry. Proper structuring of accrued revenue and expense accounts is crucial for accurate financial reporting, compliance with accounting standards, and effective decision-making. When these accounts are set up correctly, they provide clear visibility into outstanding revenues and expenses, ensuring that financial statements accurately reflect the organization’s financial position.

Sherry: I see. So, it’s not just about accuracy, but also about supporting strategic planning and cash flow management, right?

John: Exactly. Proper structuring helps with cash flow management, forecasting, and strategic planning. It allows finance teams to have a clear view of what’s coming in and going out, even if it hasn’t been billed or paid yet.

Sherry: That makes a lot of sense. In your opinion, should accrued revenue and expense accounts mirror their respective revenue and expense parts of the chart of accounts? Why or why not?

John: In many cases, yes, it’s beneficial to have accrued revenue and expense accounts mirror their respective revenue and expense parts. This creates a 1-to-1 correspondence, which makes it easier to do things like ratio analysis. When the accounts align, tracking and reporting are simpler, and it’s easier to reconcile because everything ties directly.

Sherry: But I imagine that there’s a balance to strike, right? You don’t want too much granularity in the accounts?

John: Absolutely. The level of granularity should match the organization’s reporting needs. You don’t want to get too granular because, in a typical month-end close, there’s only so much you can focus on. If it’s too detailed, it can be inefficient. Less granularity can often be more effective for the analysis you need.

Sherry: Got it. What are some common mistakes you’ve observed accountants make when setting up accrued revenue and expense accounts?

John: One big mistake I’ve seen is not aligning these accounts properly. For instance, if you don’t break out the accrued revenue and expenses at the right level, it becomes difficult to perform margin analysis or other key financial analyses. Another issue is getting too detailed, which can lead to misclassification or even overwhelm the team with too much data.

Sherry: So it’s about finding that sweet spot’s detailed enough to be useful, but not so detailed that it becomes unmanageable.  

John: Exactly. Also, failing to regularly update and reconcile the accrued accounts is a common pitfall. Timing issues between revenue and expenses can lead to discrepancies, which can snowball into bigger problems.

Sherry: Could you give our viewers an example of how different industries handle accrued revenue and expense accounts?

John: Sure! In manufacturing, for example, accrued revenue might include income from goods that have been shipped but not invoiced yet. Accrued expenses could include wages or utilities that haven’t been billed. In healthcare, accrued revenue often consists of services rendered but not yet billed, while accrued expenses might include medical supplies or contract labor. In SaaS companies, accrued revenue typically involves a subscription service that’s been delivered but not yet invoiced, or it could be prepaid and recognized over time.

Sherry: That’s helpful to understand how it differs by industry. Moving on to best practices, what would you say are the key guidelines for structuring accrued revenue and expense accounts in the chart of accounts?

John: The key is to align the structure of your accounts with both business needs and industry standards. That way, you can make useful comparisons and support decision-making. You also want to balance granularities providing enough detail for meaningful insights without making the accounts overly complex.  

Sherry: And how important is regular reconciliation in this process? Can AI help with that?

John: Regular reconciliation is essential for maintaining accuracy. Without it, you risk having unreconciled items pile up, leading to errors and timing mismatches. AI can enhance this process by automating the matching of accrued items with invoices and highlighting discrepancies. It can speed up the process and reduce manual intervention, which not only saves time but also minimizes errors.

Sherry: That sounds like a huge benefit! Can you share an example where AI helped a company streamline its accrued revenue or expense management?

John: Sure! I worked with a retail company that implemented an AI tool to manage accrued expenses, like utilities and rent. The AI tool automatically categorized and matched the expenses to the correct accrued accounts detected anomalies, and suggested adjustments in real time. This resulted in a 30% reduction in reconciliation time and a significant decrease in errors, which improved the overall accuracy of their financial statements.

Sherry: That’s impressive! What final advice would you give to organizations looking to improve their handling of accrued revenue and expense accounts?

John: My advice would be to regularly review and update the chart of accounts to ensure it aligns with the business’s evolving needs. As business models and pricing structures change, so should the chart of accounts. Also, consider leveraging AI tools to automate and optimize the management of accrued accounts, from classification to reconciliation. And finally, maintain a balance between granularity and usability to ensure that your accounts provide the insights you need for effective decision-making.

Sherry: That’s excellent advice. Thank you so much, John, for joining us today and sharing your insights on structuring accrued revenue and expense accounts. I’m sure our viewers will find your guidance invaluable.

John: Thanks, Sherry! It was a pleasure.