# Accounting in regulated industries Brex’s CAO Erik Zhou discusses considerations for accounting in highly regulated industries with NexHealth Controller Matt Didden. **URL Source:** https://www.brex.com/resources/controllers-classified/season-2/episode-01 --- Episode 01 Accounting in regulated industries [Spotify](https://open.spotify.com/episode/1xJz6kx3SQ8lFKfMBWCCGI?si=ceff9bf975424dd3&nd=1&dlsi=6f540739533e477e) | [Apple](https://podcasts.apple.com/us/podcast/controllers-classified/id1712897034?i=1000671403648) Episode summary In the season two premiere of Controllers Classified, host Erik Zhou welcomes Matt Didden, Controller at NexHealth. The conversation begins with a recount of how Matt landed in accounting after graduating in the 2007-2008 financial crisis and realizing that the world would always need accountants. It then highlights his transition from consulting/audit to client side, and the broadening of his scope from pure financial reporting to handling a myriad of complex business challenges. The episode then turns to its primary focus: accounting considerations in highly regulated industries. Matt points to specific examples - like the anonymization of patient information in line with HIPAA before bringing it into an ERP system - where he’s had to marry accounting best practices and standards with broader industry regulation and requirements. The episode concludes with discussion around communicating and working effectively with executives and cross-functional partners. Matt shares specific cross-functional project examples related to equity award grants for employees and product launches, and the role that accounting played in each. And as always, the episode closes out with Matt sharing a funny accounting anecdote from his earlier days in audit. Show notes - Intro [00:51] - Being a strategic partner to the business [07:21] - Accounting in highly regulated industries [10:30] - Engaging cross-functional partners on projects [23:08] - Controllers are fun too [43:01] Guest bio ### Headshot ![Matt Didden_Controllers Classified](https://brand.brex.com/transform/b759b193-28e9-4569-8f79-d2ffcaaafc5c/Matt-Didden_Controllers-Classified) ### Bio Matt, Controller, NexHealth Matt is a controller at NexHealth. Prior to joining NexHealth, he worked at other prominent growth stage tech companies including Bolt and Mosaic. He got his start in audit after graduating with a BS in Accounting from Villanova. “We've separated our systems. None of the HIPAA protected data is going to be in our accounting systems. It really helps your customers know that this is a big focus of yours. Because it's certainly a focus of theirs.” ### Transcript [00:00:00] **Erik:** Hello everyone. Welcome to Controllers Classified. I'm your host, Eric Zhou, the Chief Accounting Officer at Brex. I am honored to introduce today's guest, Matt Dittin, Controller at NexHealth. This is one of our first guests in the healthcare industry and our first episode of season two, so given Matt's background across healthcare and fintech and mine, I'm in fintech as well. [00:00:29] We wanted to spend today talking about accounting in highly regulated industries. so without much further ado, welcome Matt. [00:00:38] **Matt:** Yeah. Great, Eric. Great to be here and happy to join the podcast. [00:00:42] **Erik:** Maybe just a kickstart, you know, tell us a little bit about how you got into accounting. [00:00:47] **Matt:** Yeah, so, I didn't go to college thinking I'd be an accountant. wasn't really sure what I wanted to do exactly. Originally thought I wanted to be in technology, IT, computer science. took a few accounting classes, started to enjoy it, and then graduated right in the middle of the financial crisis, which, it was very nice to have an accounting degree. [00:01:07] The world always needs accountants. And so I thought that would be a pretty safe play. started my career and really got a fondness for it, enjoying working in accounting, being client service, working with, you know, other controllers, CFOs, founders, helping them understand their business and, you know, learn how to best run things and decide, make business decisions around their business. [00:01:30] **Erik:** And did you get started in an accounting firm at first after school or would you, were you like straight in industry or something else? [00:01:37] **Matt:** Yeah, I started at a small regional firm first, which I thought was a great step in my career, able to get. Right into the thick of things with clients. eventually then moved over to the big four accounting to get that type of experience working with, public companies, Fortune 500 companies, pre IPO startups, and then decided that I really wanted to be on the industry side. [00:01:57] I really enjoyed working with my clients, seeing what they were doing on a day in and day out basis and wanted to take my career in that direction. I think I learned a lot about the variety of things that accountants do once I actually made that move. it's not all debits and credits every day. [00:02:13] You're really able to step in and be an advisor for the business. And it's a really great path that I feel like I've taken my career down. [00:02:20] **Erik:** What were some of the moments that like led you to that understanding? And I totally get you, it is not just the numbers, like it's what you make of the numbers also, but like what were some of the things that happened in your career that helped you along the way to make that realization? [00:02:34] **Matt:** Yeah. I remember, first, job I had after leaving public accounting, first few weeks there, being asked a lot of questions about sales operations, closing deals, reporting things in Salesforce and CRM systems. and it was certainly a crash course in an area that I didn't really know much about and a scope of the role that I didn't really expect as much. [00:02:56] and so kind of being thrown right there in the middle of the fire to solve real world business problems, you know, not just pure financial reporting, but true operational things, great learning experience and being able to find out, more about how truly a business is run behind the scenes. [00:03:13] **Erik:** and when you got into industry, Like what were the steps that you took? What were the major lessons and the first things that you would always do whenever you got into a new job? [00:03:22] **Matt:** I think for me, joining an organization is developing as many relationships as you can internally, whether it's with, individuals in sales, engineering, marketing, people ops, accounting works best when you can be as cross functional as possible. Really feeling like, you know, you're moving from a client service role and at a public accounting firm to a client service at the company and building connections. [00:03:51] Finding out what these, what challenges these individuals have, what questions they're trying to answer. I think that's a key process to being able to do that, to set yourself up then to, build things or create foundations that really then can support the business going forward. [00:04:08] **Erik:** okay, so you were at these accounting firms. You obviously work with a lot of different companies. you've also worked in FinTech and now you're in healthcare. So, sounds like you've had exposure to all kinds of debits and credits, is what I'll say. What are the things that are similar across all of these things? [00:04:24] Like, at the end of the day, is the accounting just the same across everything? [00:04:29] **Matt:** I think what's similar across all of them is that, you know, the purpose of accounting is to synthesize information in a way to inform leaders of the business. And taking that as a general principle, you can then apply it to then figuring out, okay, well, what are the specific things these individuals need to know? [00:04:47] whether you're in software, fintech, healthcare, manufacturing, you know, et cetera, it's all about providing that information to management, to your CEO, to your head of sales, to marketing. Allowing them to make the decisions that will drive the business forward. And so taking that as a core principle and kind of back to what I said about getting those relationships internally, finding out what those are, and you have to mold yourself and your team and your vision to what's going to be best for those individuals. [00:05:18] And so, but always back to that core around, all right, how does the information reflect the state of the business? And that's really kind of what you need to anchor, what I feel like you should anchor yourself on. to then be able to support those individuals. [00:05:31] **Erik:** So, I have a very similar example of this. When I joined Brext, Brext is actually my first job in industry. I was at Brext. a big four for, 11 years before joining Brex. we were doing a NetSuite implementation. I hear tell you that's also going on at your job right now. but when I first joined Brex, we were doing a NetSuite implementation and we were designing the chart of accounts. [00:05:51] so we're picking out all the numbers, picking out all the GLs. my old CFO used to have a saying of, well, GLs are free, right? You can have as many as you want. And so, right. It's not about debits and credits. I could just have one big GL for all of our marketing expense and just label it marketing expense. [00:06:10] But what we ended up doing was we actually talked to our marketing folks and asked them, well, how would you want to categorize each of the lines and types of marketing that you're doing? And we ended up like having a number of different GL accounts, obviously for the different types of spend they had. [00:06:25] Like, that's an example I have. I don't know if like, do you have an example like that to share related to something like that? [00:06:31] **Matt:** we're going through NetSuite implementation process as well right now, as you said, and did something similar, meeting with FP& A and department team, department leads, to find out what information they wanted to know. but also not letting them take full control over your GL structure. [00:06:48] I had an experience at a previous position where, you know, we had way too many departments. there was department codes left and rights where, you know, a lot of it was, okay, somebody wants to move into a manager role. Well, they need to manage a department. Well, there's only one person, give them a department. [00:07:04] And so we were at a company that probably had about 250 people. And I think we had about 80 departments. And so, you know, you need to support the business. You need to understand what they need, but also. advise them and making sure that they're going down the right path. but yeah, getting that level of detail, cause you're going to want to be able to give them something that's useful. [00:07:25] You really want to be that business partner and get them information that will, allow them to make decisions. And so, okay, what, how, what departments do you need? What GL accounts do you need? You know, can we tag these transactions with different codes, you know, classifications, locations, you know, Luckily with all modern ERP systems now, you can really customize a lot of things, which is a blessing and a curse sometimes that you need to be able to manage correctly. [00:07:52] but really it starts with what does the business need? and not just now either. I think a big role of a controller is to be able to see over the horizon a little bit, to understand not just what somebody needs right now, but what are they going to need in a year and maybe even two years. I have a philosophy that any decision we make right now from a structuring foundation standpoint needs to last for 24 months. [00:08:17] If it's not going to last for 24 months, we either need to stick with the current state or do something different. you know, especially in startup world, you can't make a decision now that will last five years. that makes the business too rigid. You need to be able to be adapting into the changes as the business grows and evolves over time. [00:08:34] But also you need to make things that, will last enough time so that you're not constantly rebuilding or refactoring your work. so there's a balance to be had there and every organization is going to be different. They're not all going to be the same. And you know, there's no cookie cutter approach to this. [00:08:50] And so you really need to dive into the details and talk with, you know, The individuals at the company and come to a collective decision and really feel like you're being an advisor and like, like sort of that client service role for internal, folks. [00:09:04] **Erik:** I play that role a lot. So your example about having a lot of departments, really resonates with me. 250 people, 80 departments. That's like what average three person a department, so to speak. Do you really have a department with three people? honestly, I can't say we're not guilty of the same thing, even at a thousand people at a certain point, we had like 60 departments at Brex, and even then there were some departments that only had a few people and it's not really a department then it's more like a team. [00:09:34] Right. And they just want to split out some kind of reporting like that. And so we ended up doing this big exercise actually this past year where we consolidated a lot of teams and like actually just made branches, off of like core teams that we do the tracking on. and so, yeah, that was a big change we made this past year. [00:09:50] **Matt:** Yeah. I'm sure it made your life and your team's life a whole lot easier. and it's, and it trickles down as well. You know, FP& A now doesn't have to develop budgets for these individual thing departments or allocate them. You know, you can show information that isn't so granular that it gets lost a little bit. [00:10:06] You know, it, it's. There's win wins around the organization for doing things like that. [00:10:12] **Erik:** So that's some of the stuff that we do kind of almost at any company, you have to make sure the data is organized. You have to have the right tracking tip, talk to your stakeholders to see the reporting that would serve them best. What about. What about when it comes to healthcare industry and diving into the potentially specific accounting requirements there, you know, like, I think this is your first job in healthcare [00:10:37] **Matt:** Yeah. First, first entity I've been at that's, you know, been healthcare focused. and obviously with healthcare, the first thing that always comes up in every conversation is HIPAA, around the data requirements and the sensitivity of this, and, you know, I think we all deal with PII in some sense, you know, whether it's. Personal identifiable information. So, all right. My, I'm so into the accounting world that the jargon just flows out. [00:11:04] **Erik:** I get accused at the company of being the king of acronyms. So [00:11:07]**Matt:** Yeah. [00:11:08] **Erik:** totally get what you're saying. Yeah. [00:11:09] **Matt:** with HIPAA data, it's highly regulated, very sensitive around it, especially, you know, our customers are sensitive around it. Our vendors, you know, everybody's always got their antenna up about, HIPAA information and, Where the approach I like to take, especially in accounting is avoid at all costs, if possible, you know, whether that's. [00:11:32] Anonymizing information before we bring it into our ERP system for reporting or, summarizing it and bringing in a summary form, you know, trying to avoid as much as we can so that when we have these internal discussions, which I actually had 1 earlier today with, our team about a tool that I'm looking to bring in. [00:11:50] you know, one thing I made sure to communicate early in the process is that, hey, we are not going to be bringing in any patient information into this new tool. it's only going to have very GL summary information, nothing specific. You avoid then these concerns around, okay, well, what happened, what could potentially go wrong? [00:12:09] And you steer yourself away from that. so that's a major thing, on the healthcare side with the HIPAA data, that we really start to think about a lot [00:12:18] **Erik:** Don't you sometimes get questions though, about like, When you want to drill into, right? Like the reason why a performance metric went a certain way, you kind of end up needing some of that data eventually, right? [00:12:32] **Matt:** sometimes. Yeah. you know, with us where we process payments as well, and there's patient payments in there. And so, you know, you drill all the way down into the core data, you can see who the individual was on a car transaction, you know, obviously Brex in the payment business, you know, understands that. [00:12:49] And, you know, you need to just try to, I think, really frame out the question, you know, that's one thing I think about as well when I answer or CFO comes to me or CEO with a question. About, you know, Hey, why did performance do this month? Why did it go up? Why did it go down? Is there a mix change? [00:13:09] So what's kind of going on there? really understanding what is the question that we want to answer and maybe also telling him that, all right, I'm going to need a date or two to get this to you because, you know, of how we structured the data that it isn't all there in a snap of the fingers because we've intentionally made this decision that we're going to segregate things. [00:13:27] Okay. And so I think that's clear, good to communicate expectations with management around. You know, timing of being able to answer questions and that, sure, you can build a system that has everything all together in one place that makes it easy to answer, but you now open yourself up to other risks around security and privacy that, you know, those things can be overcome. [00:13:49] But. Do you want to bring on that burden of being, having to be able to do that? [00:13:53] **Erik:** So I'm curious how you operationally make it happen. So what we do at Brex is a lot of PII, right? We're financial services. When we try to reconcile or drill into the data that we've reported from accounting and finance and dig into the individual customers that, you know, maybe a laggard and spend or people that are over performing, we have a key and we look back and we have to reconcile everything and make sure it all hangs together. [00:14:17] And it does add a few days sometimes, like to get the right reporting out to make sure that people understand. Ultimately, like there's this select number of people that have access to do that. That's how we're managing it. like that's my first part. The second part was I actually had to also spend time educating folks that this is the process and here's why. [00:14:37] And, you know, they don't necessarily like it, but then this is just kind of how it is, if that makes sense. [00:14:43] **Matt:** I've had those conversations before and it's not always the answer that somebody wants to hear, but generally once you explain to them the why, then they kind of say, okay, I understand. And especially when you say, I can still get you an answer. It's doable. you know, I always say that anything is possible with enough effort. [00:15:00] so you can get there, but it's just in the process of how it's done and why it's done that way. And to me, the main benefit or one of the major benefits of that is, you know, when a customer has a question and you have all your stuff, buttoned up and designed well, I mean, we've had this before where, you know, we invoice our customers and they want to wait, is any of this information going to be on our invoice or in statements or whatnot? [00:15:25] And we can confidently and quickly tell them, Oh, no, don't worry. We've separated our systems. None of that, you know, HIPAA privacy data is going to be in our system here. It can't end up there. We don't show it there. And it really helps your customers know that this is a big focus of yours. Cause it's certainly a focus of theirs, that they want to make sure that their data is protected. [00:15:46] And that it's safe. You know, we hear about, I got a letter the other day in the mail about some, service that I didn't even know I was signed up for, had a data breach and alerting me to this. And it seems like these letters are coming in more and more often now. And so for us to tell our customers that this is a major focus of ours and that we think about it in all of our decisions that involve data, you know, it's comforting to them and they know that. [00:16:12] They can feel safe with us, you know, being able to provide them the services that we do. [00:16:17] **Erik:** Do you have any KPIs for your controls related to this or, measurement of performance related to this on your team? [00:16:26] **Matt:** nothing specific. you know, I guess, [00:16:29] **Erik:** it's kind of binary, right? There's either a breach or no breach [00:16:31] **Matt:** right, right. which, it's kind of interesting you say that, yeah, it is a little bit of a binary breach or no breach. where it probably should be though, okay, did we actually find something? Ideally, you should never have a breach because you can be able to find stuff before it actually happens. [00:16:46] you know, it's not a, I think, a formal KPI we have, at least in our finance team here. but I have been at organizations before that, do look at these things, whether it's, you know, engineering with hot fixes or, you know, different development areas where they try to measure these things to figure out, okay, wait, did we have to, do something unexpected and treating that as a KPI to understand, you know, how the business is performing towards this metric. [00:17:13] **Erik:** I often feel, and Brex has been on this journey. We do have a, you know, highly regulated entity at our broker dealer. and so the IT environment at the broker dealer supporting all the controls there is scrutinized. Um,that's been some of the hardest kind of like work that I've had to do, at least cross functionally it's educating the engineers who, you know, they didn't come from working at other financial services companies and then sharing with them the importance of the controls. Have you had success there? Do [00:17:43] **Matt:** I, it's funny you mentioned that, you know, especially with specifically with engineering, I find engineers are always very curious about, accounting related things. you know, I've never had an engineer tell me that, they didn't want to learn about it. They always seem interested in accounting, which, [00:17:58] I don't know if it's been my experience. Not sure if it's also yours, but [00:18:02] **Erik:** you think those are the people that would have been accountants? If not for the fact that you're right. Cause there's this huge dearth in America of accountants. [00:18:09] **Matt:** yeah, I know, I wish, which,maybe we can start a movement there to, you know, less engineering, more accounts to try to help them out. but yeah, once, usually once I've explained to them, you know, the need for something of kind of why it needs to be done a certain way, or, you know, the, I think about the what could go wrong, you know, especially engineers think about it in specific to the software they're building, you know, they understand data privacy or, things breaking, but they don't always think about it to others at the organization that may be tying into. [00:18:44] their data, I'm sure at Brex, we've done this before, you know, you really try to integrate your ERP system in with the core platform, gets you a lot of efficiencies, makes things a whole lot easier. And, but now you're, you know, you're passing data from what the engineers are building to a third party tool. [00:19:00] I've always had good success explaining to engineers, okay, why this matters. and even the longer term vision, you know, here at NexHealth, we're a private company, you know, we don't have to do any SOX compliance or anything like that. You know, we strive to incorporate some lightweight, SOX principles into what we do as just a best practice. [00:19:21] but, you know, explain to an engineer of, hey, you know, one day we maybe will be a public company and how do we lay some foundational groundwork now? To really support that, as well as just, making sure that the business doesn't have an oops moment. You never want one of those. You don't want an oops. [00:19:39] and so I've always had luck talking to engineers about that principle and they get it, you know, they're very rational individuals. and once you kind of bring this into their world a little bit, it just clicks for them. [00:19:54] **Erik:** Yeah. And will they prioritize it though? Like how [00:19:56]**Matt:** Wow. [00:19:57] **Erik:** make its way on the roadmap? [00:19:58] **Matt:** Yeah, now you're talking about a different question around priorities, which, anybody who worked, who's worked at a, software company or engineering folks company knows all about the struggle for prioritization, which, yeah, you know, we've certainly had some things and in all my roles where stuff gets bumped down on the roadmap and it's the beginning of every quarter is always a little bit of a, You know, town hall debate in a way around, okay, what are we going to work on? [00:20:26] What's going to be focused on this quarter? And everybody always has really great ideas. And then it's a matter of the business deciding, okay, what are the things that we can focus on that will drive value and drive the most amount of value for the business in the time that we have? we'd all like to build everything that we could. [00:20:47] That's just never a possibility. And so. Trade offs need to be made. [00:20:52] **Erik:** There, there isn't a magic bullet. And I even recently heard about a very large, tech company. and I'm not going to share the name, but in order to fix this, they actually had to make org structure changes. They moved, call it business systems or IT engineering team, like not product facing, and they moved them all to report into finance. [00:21:12] **Matt:** I think about this in the sense of like data, where especially at, I've yet to meet a small company that has, a centralized data team. Usually data is a team that is spread out throughout the company and put into different places and maybe there's a data person in engineering and in RebOps, maybe finance. [00:21:34] and they all have different managers and different directives, but they're all trying to work on this same data problem. And so, you know, it reminds me how you said there are reorganization. I know it's tough to do, but I always feel that, a company, especially maybe once you get to 300 employees, really having a true dedicated data function that can focus on, gathering data, structuring data, reporting and creating that single source of truth for entities. [00:22:03] Cause I think more times than not, companies get up to a scale of thousand, 2000 employees and then try to do it. And at this point now it's really tough to wrangle that together and then pull it, in a way that can still support things without breaking the business. [00:22:21] **Erik:** I want to move on to a different topic, also a cross functional topic, but something from your previous company. So you were at Bolt [00:22:29]**Matt:** Yep. [00:22:29] **Erik:** at Bolt, right, you guys had these equity options or equity awards that you gave to employees, and then you guys worked out a bunch of loans, to your employees and this was in the news. [00:22:40] **Matt:** So this is why I'm asking, but like, can you give us a look under the hood? In terms of like the decision making and the accounting ramifications for all that. And I'm guessing you have to work with legal on it. Yeah. Yeah. There was a lot of people involved, finance, legal, people ops. and, you know, [00:23:00] **Erik:** the audience also, I'd love to hear just from your point of view, what were you trying? What was the objective, right? And then what were you trying to,to achieve? [00:23:08] **Matt:** Yeah, you know, the objective was to try to, you know, give employees, you know, a pathway to make a, decision around their equity that normally would have been afforded only to select individuals at an organization and open that up to more individuals. you know, especially equity is complex and you have legal issues, tax issues, financial planning. [00:23:35] **Erik:** and this was, the goal of this was to give employees, a pathway that may not have been afforded to them, at other companies, Basically giving them liquidity for illiquid compensation that they've been receiving. [00:23:48] **Matt:** not liquidity directly, but more of a sort of tax planning, investing structure, for them where, you know, allowing them to effectively start the clock on capital gains tax, which, you know, You know, I've seen this a number of times in my career with executives. it's a pretty common program at, you know, I would say mid stage startups that they do. [00:24:11] And the idea was to be able to provide this to more individuals. you know, and like you said, it's complex involving, you know, finance and accounting, you know, what is the reporting ramification of this? How do these work from a, you know, gap reporting? And then legal, how do you structure this from a legal standpoint and tax standpoint and as well as people options, communicating this to people. [00:24:33] Okay, how is this going to work? Like, what does this mean? definitely was, you know, something that generally is only, like I said, done for executives. And so the idea was, okay, how do we democratize this a little bit more and allow others to participate in something that, you know, they might not be able to do at another organization. [00:24:50] **Erik:** So what I heard was you guys had employees. All these employees had stock option awards. Those stock options, in order for you to have ownership of the shares, you actually have to buy them. There's a strike price. I don't know how much it was, but there's some amount of money you have to pay up front just to have true ownership. [00:25:08] and also, often times that check is a high dollar figure if you actually want to do a meaningful number of shares. And people just don't have that cash lying around. And so the program that you're talking about is how do we give folks. access to the funds to buy these shares now so that you're not waiting until you get acquired, you go IPO, and then you definitely have to pay basically like wages, income, like your marginal tax rate. [00:25:33] you can buy it now. And so that when you sell it later, you get the long term cap gains rate. [00:25:38] **Matt:** Yep, effectively. Yeah, that's the idea. you know, and it's something where, especially from the tax perspective, options and equity grants in general are extremely complicated. you know, I think very few individuals who are granted these, and it's a significant portion of their compensation. [00:25:57] Don't always fully understand how it all works. even myself being in accounting, don't always fully understand how these things work. And there's a lot of nuances and different rules that, you know, can change sometimes. You know, if Congress decides to change the taxability of, equity instruments or different, you know, other triggers in the tax code, it can really make this complicated. [00:26:19] which, you know, is something when we always talk to employees about their options. The first thing I tell them is talk to your tax advisor because you need to understand how does this impact your specific situation because there is no standard playbook for how to do these things. [00:26:35] **Erik:** what was the accounting for it? Like, did you guys hold The loans, so to speak, or was there something, was there another party involved or how did you guys work it [00:26:44] **Matt:** Yeah, now, so the company, the note was with the company, and so, you know, they were just accounted for kind of as a loan, on the books of the company. [00:26:55] **Erik:** Okay. Makes sense. maybe not. Okay. Talking about this topic, obviously the executives were involved in a situation like this. There's a lot of complexities in your roles across the different startups that you've been, what's been your strategy and communicating effectively with, the executives. [00:27:13] **Matt:** Yeah, so whenever I, talk to the executive, I think about two things. you know, what is the question they're trying to answer? And when they get that answer, what are they going to do with it? I think those two things in parallel are really important. a lot of times people generate metrics and KPIs just to have a KPI. [00:27:31] to throw it on a PowerPoint spreadsheet and up in a meeting and that nobody really knows what to do with it. so for me, it's, I really want to drive back all the way to what is the decision process and what's decisions going to be made there and getting alignment with the executives on that question and really understanding then their needs. [00:27:52] sometimes you find that they ask a question and they think that they want that answer and that they're going to go do something with it, but they really want something else. And so, you know, back before chatting about kind of ERP stuff, You know, these are the type of questions to ask as part of that process where you're really finding out what is the core piece there that they want and building around that and challenging it and kind of poking at it and understanding really what is it that we're trying to get to. [00:28:21] so for me talking to executives that way, you know, especially executives that maybe are not, or don't have a strong financial background where they aren't, finance people, these might just be. you know, engineers that are now in an executive role or salespeople in an executive role, like, you know, not core finance individuals. [00:28:43] So, you know, you can't go and throw, P& Ls and balance sheets at them or just some complicated AR metric, for example. you know, you really want to understand what is it that they want to try to accomplish. You know, they're trying to run a business. Not necessarily run a P& L. and so understanding kind of where they want to be there and then kind of adjusting your process and making sure that you're supporting that. [00:29:09] you know, sometimes you may get an answer and then you just work behind the scenes to then make it kind of in the accounting sense and the finance sense to what they're then looking for. [00:29:19] **Erik:** So at Brex, you're totally right. Like I, I speak with other folks, or folks on the exec team and they're managing their function, right? they may even be in charge of the revenue for a certain subset of customers. So they own this portfolio and then their key metric is just that revenue number. [00:29:38] So they don't fully appreciate or, They're not gold on the entire P& L, certainly not net contribution margin or unit economics to a certain extent. And then I think part of my job has been educating people actually. Like I went to business school, like, like, you know, I got an accounting degree. I've been looking at P& Ls my whole career. [00:29:59] At the end of the day, I try to take all that knowledge and I break it down for them that, Hey, I know this is your goal, but if we took a look at the long term picture of our business. We have to make sure we earn revenue that has better unit economics. And I explain like, okay, if you enable this kind of customer, right, these are the unit economics given these terms. [00:30:21] But if you think about selling it this way, like this is what the P& L would look like instead. And then if you just compare the bottom lines, right? Like the math just proves itself out. do you have, is it like topics like that? what's a topic that you've gone over recently? in that sense? Yeah. [00:30:37] **Matt:** yeah, you know, something you said there that really kind of struck with me too, was just around, you know, sometimes. How goals are structured, you know, versus, okay, what is better for the long term health of the business? yeah, I, had a previous job, you know, had, we had a situation where, you know, we were trying to bring a new product to market and deciding how it would be like structured and reported on and really trying to think about, okay, well, what is the longer term picture on this? [00:31:08] You know, how do we structure this in a way that. You know, achieves the goals that we're wanting to, like before we even start, you know, before you've even kind of gone to market or set a goal with it, you know, being able to, set that appropriately, I think is a really key, [00:31:25] **Erik:** What about when you share something and it's like, from your perspective, like you're trying to just share like the bigger picture and then you get pushed back. [00:31:32] **Matt:** the situation I'm thinking of is a, you know, we were the best way to report, you know, a cost structure associated with revenue. You know, obviously margin is such a major factor, especially, you know, in the software [00:31:46] **Erik:** And this is gross profit, right? This is [00:31:47] **Matt:** Right, right. Yeah. Yeah. With gross profit. we're trying to figure out, okay, how do we, you know, classify something and figure out what it is? [00:31:57] you know, which bucket does it go into? I think. Hopefully, as most people know, I think the guidance on what things go into cost of revenue is about one line in the entire gap codification. There ain't a whole lot of guidance in there, and the SEC also doesn't provide a whole lot of guidance. And so, you know, it's clear as mud, as they would say. [00:32:16] And so, you know, a lot of it is figuring out, okay, what's the substance of the transaction, you know? And that's for me, when I've talked with executives around, you know, well, how does this need to work from an accounting purpose? I really just try to, first, let's go back to the substance of the transaction. [00:32:32] you know, when you think of that balance of substance over form, I'm always in the camp of substance, where, okay, what is it that this actually is, what is it that it's meant to be? And, you know, what is the economic reality associated with it? And, you know, if we end up with a decision that maybe isn't the preferred outcome. [00:32:52] Then you can go to the business and say, okay, well, what can, what are the options we can do to try to restructure this, to change it around? you know, sometimes you can make an economic change on something with a vendor, customer, third party, that then can get you the outcome you want to. you know, especially sometimes something may have been originally structured in a certain way to serve a certain purpose, you know, and maybe that might not be true today. [00:33:17] And you can work with the, that third party to. Restructure things and really align now the substance of it to what you're looking for. [00:33:28] **Erik:** I've gone through these, exercises in identifying what should be in cost of revenue. So unit economics, and also conversations about gross versus net. Whether or not revenue, some revenue number and some cost of revenue number should be presented gross, like separated out, or if I should just have a net revenue number where they're combined together. [00:33:48] And I, there's a range here. I found that there are some substantive transactions, so to speak, that if you're just being intellectually honest, this is what it costs to produce the revenue. Right? Like, you know, at Brex, we process all kinds of, credit card transactions, right? They're all through MasterCard though. [00:34:12] We would not be able to process any of those transactions without MasterCard fees. And so that is purely a cost of revenue, right? That's part of my unit economics versus my interchange revenue on the transaction. But then there are these things where, like, like, server costs, right? You know, do you really need those server costs for our platform in order for that swipe to occur and then for us to get the data to,to know how much we need to settle up, you know, on the following day for that transaction, when we front the money on the card. [00:34:46] **Matt:** I've had this a few times, you know, with different, different business leaders where, well, you just said there of, okay, well, do we actually need this? where I think some people like to look at, something that's cost of revenue and say, well, We can run the product without this. [00:35:02] And so maybe it's not cost revenue. And, you know, like your example of servers, excess server capacity. Well, it's excess. We're not using it. where I like to go back to the business though and say, well, if you're not using it, then we should stop spending the money on it. you know, one of these where, somebody will say, this isn't necessary to actually run the product. [00:35:25] Okay, well then why are we paying for it? And this is where now you can really take that controller role, you know, away from the debits and credits and into that business advisory, you know, where maybe there's something where somebody didn't actually think it was possible to turn this thing off, and that, you know, you use this accounting treatment to really then drive a business change and get more efficiency. [00:35:47] you know, I've had that a number of times with different scenarios, different companies, different industries. I think this is something that. And I think that's pretty common across a lot where may be just idle costs sitting in cost of revenue. And it's like, okay, well, it's like, let's improve our efficiency here. [00:36:04] Let's not just move it from one bucket to another, but actually try to now drive better financial performance of the business. [00:36:11] **Erik:** So I'm going to go one step further on the example I just shared with the server cost, because the conclusion was actually that we did include it in unit economics. And the reason for it, because like, what's the alternative? The alternative is that instead of using software to ingest the MasterCard file, sure, I can get a huge text file. A huge text file or a CSV from MasterCard and try to organize all the, payments that way, parse it out and, then make the payment the following day for settlement. and that's just not scalable, [00:36:46] **Matt:** Yeah, now that does not sound fun. [00:36:48] **Erik:** Yeah. So no,we do have the server costs in there because without those server costs, we wouldn't be able to process the transactions at the volume that we actually do. [00:36:57] And actually it is kind of like we thought about it more. It is part of the unit economics versus. our interchange, now you might argue like in the spectrum of aggressive versus conservative, you know, you can make a judgment where we stand on that. I, we kind of thought that's the intellectually honest way for ourselves to look at our business. [00:37:17] but that's, you know, to me, that's what it boils down to, right? Like, are you being intellectually honest? Is there a [00:37:22] **Matt:** I think that's [00:37:23] **Erik:** behind what you're doing? [00:37:24] **Matt:** right. I think that's a great way to phrase that. And, you know, I even think where, you know, when, once you share these numbers with a third party, whether it's. Investors, potential investors, other stakeholders, regulators, you know, they're generally going to see through things once they dive into the details. [00:37:45] And so, you know, if you have a thought through honest analysis about how you want to treat these, especially, I mean, gross first and that's a great example where there's a lot of judgment and I've seen even 10 Ks that seem 10 Ks from two different companies. That seem to have similar kind of businesses, economics that have treated things differently. [00:38:07] and so, not always clear what actually the outcome should be, but if you're honest with yourself and you feel like that the numbers reflect the reality of the transaction and the economics, then you can stand by it. But you need to be able to put in some of that work and really review and understand. [00:38:26] And look at others, what they're doing out there. you know, a lot of stuff comes back to what's standard industry practice. I mean, especially in the payment space, like you said, you know, there's some pretty good examples out there of what others are doing around interchange and, you know, cost of revenue on the payment side to understand, okay, well, what is it that others are doing here? [00:38:46] And if you deviate away from that, likely someone who sees your numbers is just going to make an adjustment on it anyways, you know, when evaluating your business. [00:38:54] **Erik:** Yeah, I agree with that. that thing you mentioned about. what are others doing and comparing yourself with industry in the market? That's actually also part of my strategy, when communicating some of these topics to executives, because, you know, we're a private company, but we do have some comparable peers, out in the market. [00:39:10] And I kind of just share, well, this is what it's looking like right now with the presentation for these public companies. And oh, by the way, I know that investors, when they're looking at those companies, they And this is going back to the gross versus net topic. It's almost not as important today as it used to be because now people are doing gross profit multiples and not top line revenue or gross revenue multiples, right? [00:39:37] When it comes to valuation. And so, you know, it's those kinds of details also that I share with executives that then make the conversation a little bit more relevant to them. and then I, you know, that, then I take that information back and working with our auditors, it just paints a different picture, in getting to the answer that I need to kind of, work with all the stakeholders and their views, if that makes any sense, right? [00:40:00] Yeah. [00:40:01] **Matt:** Yeah, no. And I think that's key. They're working with all the stakeholders. you know, there's a lot of individuals involved and, making sure to get alignment across everybody. because if you don't have that, your life's going to be difficult. there's going to be a lot of challenges and just, you're going to have to, you know, make subsequent changes that aren't easy to do. [00:40:21] And so really getting that alignment across all of them to start with is so key. and I like what you said as well about, aligning with your comparables. you know, it's something, we actually have here at NexHealth now, a product that we look to be launching next year. There's a public comparable out there who has something relatively similar that we look at. [00:40:40] And, their accounting methodology is a little bit different than what we're planning. And so we're already trying to lay the groundwork now to set that up to say, okay, well, this is what we're going to be comparing ourselves to and the type of metrics and making sure that we don't, end up at a situation down the road, showing performance to our board, comparing to this comparable, that's completely different. [00:41:04] And now we're showing apples and oranges that doesn't provide useful information and really making sure that we get ahead of this now before we're even in market with the product. [00:41:15] **Erik:** yeah, when I just, I go through our audits every year, I actually have a meeting with our auditor typically before the start of Q3.just to put it all on the table. Hey, these are the technical accounting topics that I think you'll want to spend some time on. cause I'm being, I'm just being intellectually honest too. [00:41:33] **Matt:** Like I don't figure it out at the end of the day anyway. So I might as well just like do the hard stuff first and try to get it out of the way before the end of the year.We're having the same conversation with our auditor about, you know, this new product, and we don't have a lot of details yet to share with them. A lot of it's still being sorted out, but we've given them the very high level, Hey, this is what we're thinking. This is what initially kind of our preliminary thoughts are just to get the idea in their head. [00:41:58] **Erik:** There's nothing worse than surprising your auditor with, a new line of business or a very complicated transaction the first day they're out there with field work.you know, your auditor will be much more friendly to you, with that early and often communication.I don't like surprises for my auditor, so I try to do the same for them basically. Right. Yeah. [00:42:17] **Matt:** exactly. I think surprise is a word that, should never be in the same sentence as auditor. that's a very good outcome. [00:42:25] **Erik:** We are at our final segment of the show. This is a segment we call finance leaders are fun too. And so here we ask our guests, share a funny accounting story, share an unusual expense report, that will bring us some joy as we think about our profession. [00:42:43] **Matt:** back in my time in public accounting. there was somebody I knew who, told the first year on their team, they were at the client sites, just a few blocks away from the office here in San Francisco. And so, I asked them to go back to the office and get some supplies, you know, notepads, pens, papers. [00:43:01] they also asked if they can get them a box of tick marks. And so the new hire went back to the office, got the supplies they needed and was looking around in the storage room for a box of tick marks. And, went to somebody and said, do you know where I can find some tick marks? And that person also had a pretty good sense of humor and told him, ah, you gotta go down to the sixth floor. [00:43:21] That's where the tick marks are. I'm pretty sure that individual spent about two hours in the office looking for tick marks until they finally found somebody who told them, to go back to the audit site. And, the team made a little bit of a joke on them. So, you know, a joke you can play on, maybe some of your new hires now [00:43:38] that's hilarious. Oh man. good old fashioned, you know, hazing in audit [00:43:42] Yeah. Yeah. [00:43:43] **Erik:** Yeah.well, Matt, thank you very much for joining us on our show today. [00:43:47] I thought everything we discussed and you shared was super insightful. best of luck in your implementation of NetSuite and NexHealth. [00:43:54] **Matt:** Yeah. Thanks, Eric. Great to be on here and great talking with you about these topics. 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