Moderated by Emily, Digital Transformation Consultant at Hyperbots
Emily: Hi everyone, good morning, good evening, good afternoon based on where you are. I’m Emily, a digital transformation consultant at Hyperbots, and today I have Mike Vashnum with me. We are going to discuss a practical toolkit to bring efficiency in accruals. But before we get into details, Mike, would you like to introduce yourself?
Mike: Sure. Thank you, Emily. I’ve been working in Silicon Valley for about 30 years and have had the opportunity to work in a diverse range of industries. I’ve been fortunate enough to touch every aspect of finance, including controllership, FP&A, treasury, tax, and investor relations. In my last two roles as CFO, I also managed non-finance and operations departments like legal, HR, IT, facilities, and procurement. So, I bring a very diversified and wide-ranging experience in finance and operations.
Emily: That’s great, Mike. I have divided this session into two parts. In the first part, we will discuss the current accrual landscape, and in the second part, we’ll dive into AI and accruals. So, for the first part of this discussion, Mike, I’d like to ask you to highlight the importance of expense accruals for companies and how they generally impact financial reports.
Mike: Absolutely. Not just expense accruals, but any accruals are essential for a company. If you look at basic accounting principles, you have to match the revenue with your costs. If you’ve booked the revenue and incurred the cost but haven’t received the invoices or bills, your profitability will be inconsistent. One month you might show higher profitability because of lower expenses that weren’t booked, and the next month you might have all those expenses catching up, but no matching revenue. This mismatch doesn’t present an accurate picture of profitability. By accruing expenses for which you haven’t received invoices, you match your revenue with the associated costs, giving a more accurate representation of profitability. This is crucial for investors and analysts to ensure the company’s profitability for a specific period is correct.
Emily: Understood. Based on your experience, Mike, what is the current process used in companies for accruals?
Mike: Different companies use different processes. Most accrual processes are manual because you have to collect information from respective departments. I would categorize accruals into inventory accrual and expense accrual. Inventory accrual can be automated in sophisticated ERP systems, where goods received notes allow for booking received but not invoiced items as accounts payable. Expense accruals, however, are very manual and time-consuming. Accountants typically send emails to department heads to check for pending invoices and services rendered. They also look at open POs to follow up on whether services or expenses have been incurred. Despite some ERP systems offering recurring accruals, accurate accruals still require manual processes and a lot of back-and-forth communication.
Emily: Can you also share the categories of accruals and how does the reversal happen?
Mike: Sure. As I mentioned, there are inventory and expense accruals. Expenses can vary depending on the company’s size and nature. The reversal process is necessary to avoid duplication of expenses. When you book an accrual at the month-end and then receive the invoice in the following month, you don’t want to double-book the expense. So, the best practice is to book the accrual, reverse it, and rebook it at the next month-end.
Emily: Can you highlight the pain points in the accrual process?
Mike: The main pain point is the manual process. Collecting data, ensuring the accuracy of accruals, and coordinating with various departments are time-consuming tasks. Ensuring all necessary accruals are booked correctly is critical because auditors will not accept general accruals they need specific purposes and processes.
Emily: Thank you, Mike, for explaining accruals and the current landscape. In the next section, we will cover AI and its role in accruals.
Mike: Sure, thank you.
Emily: Welcome back, Mike. Thank you for taking us through the current landscape of accruals. Now, let’s discuss the role of AI in accruals. What role does AI play in accruals, and can you provide some examples to help us understand it better?
Mike: Absolutely. AI can tremendously speed up the accrual process. While ERPs can handle many tasks, AI enhances them, especially in communication. For example, AI can look at open POs and automatically send messages to the respective departments asking if services have been rendered. This eliminates the need for human intervention. By setting AI to check for open POs on specific days, it can collect and follow up on all necessary information automatically. Let’s take the legal department as an example. AI can send automated messages to attorneys asking if services have been rendered, which replaces the manual process where accountants send emails and wait for responses. AI can also help with inventory by identifying received items that haven’t been invoiced and processing those accruals. Essentially, AI can handle the communication aspects of accruals, ensuring accurate and timely data collection without human intervention. This streamlines the month-end close process, allowing accountants to focus on analysis rather than data gathering.
Emily: That gives me a clear vision of how AI helps in accruals. Thank you so much, Mike.
Mike: You’re welcome. I’m looking forward to seeing AI develop further to make the accrual process faster and simpler, ultimately allowing more time for analysis and less on data gathering.
Emily: Thank you, Mike, for being a part of this discussion on AI and accruals. It was great having you here.
Mike: Thank you. Glad to be here.
