Moderated by Emily A., Digital Transformation Consultant at Hyperbots
Emily: Hey, hi everyone. This is Emily and I’m a digital transformation consultant with Hyperbots. I’m extremely happy to have John on the call with me. John is the CEO at LiveData LLC and the topic that we’ll be discussing today is the best and worst practices in chart of accounts. But before we dive deeper into this very topic, John, would you mind telling us a little more about yourself?
John: Yeah, no problem. Thank you, Emily. I will talk a little bit about myself and how LiveData, what we do. So this topic is very relevant to what we do because we ensure that businesses are set up correctly and that they’re able to report and understand the data which starts in those charts of accounts, sub ledgers and those things. So this would be a great topic to discuss with you today.
Emily: Thank you so much, John, for that. So how I want to begin with, you know, discussing this topic is I actually want to first dive into how effective the chart of accounts structure and management really is and how imperative it is. So how do you structure your chart of accounts for optimal financial management and reporting?
John: Yeah. So the first thing to make sure that you’re doing it right is to understand the reporting requirements and what is all the way downstream and how the users are going to use it. But you also have to understand the legal and accounting standards. That’s critical. So the chart of accounts I use for the accounting standards versus the other dimensions like product, cost center, profit center, those departments, it could be different things. Depends on the ERP you use. I make sure that I use them for the proper purpose and don’t mix that with the chart of accounts.
Emily: Got it. Got it. Also, John, do you mind providing a few examples of chart of account elements or categories that really streamline financial processes?
John: Yeah, if you some of the examples to make sure that you can streamline is if you have to like report on it and you need to analyze it, you need to have those details. It’s important that you break it out, but you don’t want to, again, have things broken out that are the same thing in the same purpose between accounts. So you have to be careful because it can quickly get out of control and then you end up in big chart of account cleanup projects and things that are very costly and they cost you errors, too. So you have to be careful there and set up the criteria right for why you’re setting up the actual chart of accounts. You do not want to create multiple accounts for the same thing. Like I said, that confuses people, it confuses systems, it confuses your reconciliations. You then have to break out the same details potentially into multiple reconciliations. So you have to be very careful there. You want to keep accounts that are tied to like the sub ledgers clean, too. So if you have payroll coming in and feeding, you don’t want to touch those payroll accounts with manual journal entries like a payroll accrual if that’s a manual process. So there’s things like that that you want to be aware of and understand that purpose right up front. And make sure that separate accounts for manual journal entries if that’s the process, if there’s no sub ledger, things like if there is a sub ledger. So you don’t mix it and it’s easier for the reconciliation. And then you can group it with the numbering system and things like that when you actually report out. And if you set up the hierarchies, it gets easier.
Emily: Got it, got it. And John, what considerations really guide the chart of account design for, you know, accommodating future business growth or any changes per se?
John: Yeah, so the biggest thing is, is that you do need to be flexible in the design and set up the process for approving accounts. Don’t just let everybody make new accounts. I’ve been in companies where they do that. And every time they get a new payment from a new type of vendor or a new cut, they set up a new project or they they did something new. They automatically create a new account and they start using it for things that there’s normally sub ledgers for to like the fixed assets and things like that. And all of a sudden there’s an account for every fixed asset that gets very messy. So you don’t want to do that because that’s not scalable. And then you’ll have to figure those accounts out all the time. You’ll be trying to inactivate them as they come through the depreciation. It’s hard to reconcile because you’re reconciling now a group of 100 accounts. So that’s very critical to understand, again, what what is actually the accounts going to be used for? Are there groupings? Are there sub ledgers? Are we just trying to save money from a not buying a module in our ERP or something like that? That’s not the way to do it. We need to be able to look at the business and understand how we’re going to measure the business going forward and then be flexible for those changes that might happen. If all of a sudden you’re you change the strategy of the business. What else do you need to look for and try to think ahead of what those things are? You can think about what questions and you can ask the rest of the departments, have them involved in your setup and why you’re doing it across the organization. So you can think about what each person, what questions do you have about the financials? You can start asking the business those questions and then you set up the chart of accounts accordingly.
Emily: Got it, got it. So shifting gears to consistency and uniformity, John. How do you ensure chart of account consistency across the different subsidiaries and departments?
John: Yeah, this can be difficult depending on the system you’re using, but there are tools and things to use as well. Or again, like I said earlier, making sure that you have approval processes for setting up and that you go through and make the requirements and make it. If you can’t have if your system doesn’t have a roll up to the highest level to your consolidations and things and that it goes down. If your system doesn’t have that, then you need to make sure that you have the proper procedures. Is this account in the parent and it’s a child from a legal entity structure and things like that? You have to make sure that it rolls down and that you’re trying to use the same account numbers and account naming conventions across the thing. So everyone knows what they’re looking at. And it’s not different when you look at one entity to the next entity that rolls up into the same. So that’s the critical thing. Some systems do it really well. A lot of them don’t. So you have to make sure you have the controls around it and to make sure that it’s consistent from day one. It gets harder when you’re starting to get into M&A as well, because you’re sometimes inheriting a structure that doesn’t make sense. So then it’s how do you map and group and consolidate those accounts and inactivate and make it active and change the naming convention up front or during that integration process? Then it becomes a lot easier. So it’s not just if you’re just organic growth, it’s easier. But then if you have M&A and things, too, then there’s challenges. But setting the projects up to actually integrate properly versus just here’s another ledger and let’s do a mapping in Excel to bring it all together. That doesn’t work long term. And again, doesn’t scale well.
Emily: Got it. Got it. And any recommendations, John, that you might have when it comes to the tools or, you know, methodologies in order to support uniform chart of account implementation organization?
John: Yeah, there’s there’s tools out there like FlowQuest. There’s Blackline. There’s a few tools out there that help with it. And I think we get a little more details on those later. But also the ERPs sometimes have tools and processes in place and are locked down by role and things like that. So it’s critical that those are actually set up and that you’re using the ERP properly to control it. And that it’s not a free for all and just setting things up and that everyone understands why we’re opening them, what the purpose of those accounts are and that you’re documenting as well. You don’t want to fix issues in the chart of accounts through outside reporting systems like Excel and stuff like that. If you notice you’re doing that and you’re having to either fix things in a BI tool or you’re in Excel as you’re reporting things, or you’re having to give a lot of supplemental data or you’re not giving something, it’s you’re just having to give the whole chart of accounts to everybody and everything and the hierarchy all laid out. Then you know that there’s a problem and it’s getting out of control and that’s where you need to fix it. You’ll also notice mistakes happening where you have a lot of misclassifications between them because your chart of accounts got out of hand. So there’s things you can do to watch. You want to be preventative rather than realize when it’s too late and you end up in a, again, chart of account cleanup mess.
Emily: Fair enough. So you mentioned, you know, mistakes or issues. So I actually want to dive deeper into avoiding pitfalls and, you know, actually learning from those mistakes. So, John, what common mistakes or pitfalls have you encountered in chart of account establishment or maintenance?
John: Yeah, the biggest thing is not doing maintenance. So you haven’t used an account for a long period of time and you leave it active and then all of a sudden you get stuff showing up again. So it’s critical that you go through maintenance and are you using accounts for the original purpose and things as you’re going through and doing your audits and testing and things. So it’s critical that you go through that piece of just understanding what’s out there, what’s been added, why it’s been added, what’s inactive and what or what can be inactive. So you don’t have a overly cumbersome chart of accounts. The other thing is, is to make sure that you do have a process in place that when you set up a new account that you’re using, why you’re doing it, that you have a purpose you’re using. You’re not doing it to replace like a fixed asset ledger, like I mentioned earlier, or you’re using the chart of accounts just because you want it broken out because it’s a one time event. These one time events usually have a code. So think about something that’s more long term than short term when you’re naming your chart of accounts. There’s other ways and detailed reporting to get exactly what it is because you can go down and drill down to the invoice or whatever it is. So that’s critical to understand. And you don’t want to do it to save money because it’s going to cost you in time. It’s going to cost you resources and everything else. If you’re trying to get over granular or try to save things from buying the modules, like I said, that you need to buy when your business needs certain aspects and details underlying, you need those sub ledgers. So don’t just try to do everything at the GL level. Use proper systems and tools as well and integrate them. So you’re not having to duplicate details and stuff and that you’re able to go down to the detailed reporting when needed and that you understand when it’s supplemental versus a summary report, which your chart of accounts just needs to align to that. And again, monitor the mistakes that are being made. You’ll start seeing mistakes if you did get out of control or you didn’t document and do the purposes right or you enabled an account to be used for the T&E system. I see this all the time, too. You suddenly in a system, you should only have T&E accounts that are available for people to select. In fact, if you start allowing other things, you’re going to get more mistakes. So it’s also understanding when you add an account, what other systems will load that account in that are integrated with your ERP that you might now get people entering things into the wrong place.
Emily: Definitely. So just out of curiosity, John, can you share specific lessons learned that influence your chart of account management approach today?
John: Yeah, my chart of account, my approach to it is to keep it as simple as possible and make sure that it’s long term thinking. I don’t open accounts just for one time of things. I know some people disagree with that because you need it broken out. You got your PPP money or something during COVID. You had to break it out. But there’s other ways to do it and to break out and to measure and stuff. But if you start doing that and every year you’re just opening, all of a sudden you have a thousand accounts. And so for me, it’s always understanding what the long term impact is and then what other dimensions are you allowed? A lot of ERPs have five or six dimensions. They have legal entity, they have cost center, they have department, they have product. They have different ways that are connected to your chart of accounts, but it’s not in your actual chart of accounts or GL codes.
Emily: So, John, now you just spoke about simplicity. So I just wanted to understand how do you actually go about, you know, balancing detailed chart of account information with the simplicity in financial reporting?
John: Yeah. So it gets to be a challenge because you do have to break things out. And people have questions that get more detailed than just what was my revenue? What was my cost of goods sold? You have to go to another level. So that’s where it’s important to have the hierarchies so you can easily look at it in your ERP versus just offline or in an Excel file or BI or a reporting tool. So having the proper setup that aligns with actual your reporting is key. And then understanding, you know, when does it need to go to the detail versus when are you just looking at variance analysis? If you’re doing variance analysis, then it’s probably appropriate for the chart of accounts. If you’re looking at the details and what the variances are, that should be in your supplemental reporting and things and shouldn’t go all the way up. And you would pull like my invoices by vendor to figure out or things like that. There’s other ways to get to the analysis stage versus just looking at your overall review. It needs to be able to be looked at in a timely fashion and everything, too. If your closed process and reporting process is just getting longer and longer and explanations because you’re grouping too much or you’re too detailed. So there’s that balance of being too much or too detailed where your process is longer and you can’t close the books on time. So that’s critical to monitor and watch if you’re seeing challenges and mistakes there. It goes back to, you know, is there a standard to the chart of accounts, too? Is there a way that the industry looks at it? So you might want to go into the gap, the efforts, the public statements of comparative companies and look at how they look at things. So when someone else comes on or you’re bringing new people into the organization, too, they’re going to understand it. So there’s a lot of resources and ways to keep it simple and understand. And then when you need to get detailed again, there’s other places for that.
Emily: Got it. Got it. OK, so thank you so much, John, for being a part of this discussion today. You know, the discussion was really fruitful where we spoke about the chart of accounts, the structure and management consistency, as well as, you know, avoiding common pitfalls and then balancing the detail out with simplicity. It was a really great session and it was amazing hosting you. Thank you. Thank you.