But often people either do not communicate these procedures or simply don’t follow them consistently.
Even when everyone is aware of and follows the established protocol, your system may be flawed. Before we show an example, you need to know how to manage cash flow.
Know How to Manage Cash Flow
We all know that cash is king – liquidity is essential for survival. Many entrepreneurs only know how much is in the bank, but they don’t understand how much cash they actually have. So, how does one manage cash flow?
First, you need tools.
Here are a few tools that can help a company manage cash flow:
Then you need to manage and work your operating cycle. Your operating cycle is “how many days it takes to turn purchases of inventory into cash receipts from its eventual sale”. It indicates true liquidity – how quickly you can turn your assets into cash. Calculate how long your operating cycle is using the following formula:
Watch your expenses carefully. If you do not have an eye on SG&A and procedures on what can be purchased, then you risk racking up unnecessary overhead. Think about too much inventory, unnecessary equipment replacements, extreme marketing budgets, etc.
Another method to manage (and improve) cash flow is to collect quicker. This is a great method to use if you are in a cash crunch and can only make small improvements. For example, there is a $10 million company that collected their accounts receivable every 365 days. They had a lot of cash tied up. If they improved their DSO 5 days, that would be an extra $137,000 of free cash flow.
While we never aim to scare our clients and readers, we have a huge plethora of war stories about what happens when companies don’t have internal controls. Just in my 18+ years of experience, I’ve compiled all the crazy stories for you today.
What Happens When Companies Don’t Have Internal Controls
So, what happens when companies don’t have internal controls? They open themselves up for theft, embezzlement, and liability. If there are no controls over what’s going on inside, then there is no control over cash flow, profitability, etc. It also “gives permission” to your team to do as they please and when it pleases them.They may or may not be making decisions in the best interest of the company.But without internal controls, they are likely less careful with the decisions they make.Have you ever noticed how easy it is for a child to spend their parent’s money, but if it was their own money they are less likely to spend frivolously?
War Stories | What Happens When There Are NO Internal Controls
In my experience, I have gathered so many war stories on what happens when there are no internal controls. Read about some of my most unforgettable below.
My Most Trusted Accountant and Advisor
Many years ago, while I was part of the audit team, I had a client who had the same accountant for 20+ years – we’ll call her Sheila. She has been with the company since it opened its doors and was the owner’s most trusted confidant and advisor. Sheila was in complete control of the receivable and payables.There was no oversight over Sheila’s position. When I started to look at their accounting records, there were several red flags…
Sheila was very defensive and abrasive when I came into the office and during the review phase of the engagement.She mentioned several times it was okay for me to work remotely.She wanted me to sit outside of her office, even though her office was large and had a meeting table and several chairs. Intuitively, I knew something was off with her.
I also noticed that the company cut thousands of checks every month to different companies. Sheila cut them and signed them herself.The business owner trusted Sheila and gave her access to manage the bank account and accounting records.
The biggest red flag was discovered during the audit of the transactions.There were several inconsistencies with who the checks were being written to and how they were recorded in the accounting system.It appeared Sheila would have the checks payable to herself and immediately go back into the system and change the name to a made-up vendor.After months of due diligence and investigation, it was discovered that she had stolen at least a quarter of a million dollars in just the last 10 years of her employment. While this hurts the owner, the owner gave less trust at face value and implemented internal controls to regain trust in accountants.
Creating Checks and Balances with Internal Controls
In another instance, the Chief Operating Officer of a company approved several supplier invoices.The accounts payable department processed the invoice and paid the supplier without further questioning. It took at least a year before the company learned that the COO created this false company, approved the invoices and received payments for personal gain.
Therefore, it is critical to have internal control at all levels of the company with different teams in place to create the check and balances it needs.Internal control would the purchasing group validate the supplier, approve the purchase order before submitting the order to accounts payable.Generally, operations would have received a receiving document once goods/services have been provided with a signature of the person receiving the goods/services.Accounts payable would receive the final invoice and match it against the approved purchase order and receiving document.
There are several things I learned about internal controls when I was in audit and now even as a CFO.
Trust Your Gut
If your gut is telling you something is wrong or off, it is worth investigating. When I have followed my gut, I have either found something wrong or found comfort that everything is okay. But those few times I did not trust my intuition, I missed steps to prevent fraud, etc.
Never Do Anything Without Oversight
As a CFO, business owner, entrepreneur, and accountant, I have learned that no one is too high not to have oversight. If I cut all the checks and sign them, that leaves it all up to me. Thankfully, I know myself and I would never do anything criminal! However, not all people are like me. There are, unfortunately, individuals that are motivated by rationalization, pressure, and/or opportunity. Oversight helps protect all parties – even yourself.
So that is what happens when companies don’t have internal controls – lack of control.
Hiring is an important aspect in a company’s development. When you know it’s the right hire, it can benefit the company in countless number of ways, such as saving money, increasing productivity, and improving employee morale. However, when done incorrectly, it can damage the company significantly. A company should always be able to determine whether the person they hired is truly beneficial to their organization. Below you can find some tips that can help you know whether your new hire is a correct fit for your company or not.
Is it time to hire?
Is it time to hire? Do you feel theres a need for an extra hand in the workplace? Or maybe you need a fresh mind to help your creativity? If the answer is yes, then it is time to hire. If you are constantly feeling burnt out and frequently running out of creative ideas, then extra help is crucial. Without extra help, the quality of your work may hinder and that could essentially lead to lower companyperformance.
Adding a new member to your team can have a significant impact. Hiring a new employee can help increase efficiency, performance, and creativity. By hiring a new employee, you decrease project work time, bring in new ideas, and get a brand-new perspective.
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When You Know It’s the Right Hire
A new hire should be an asset to the company. They should provide value and bring in more than they cost. Finding the right hire might be difficult, but once you find the right hire, it will be all worth it.
A new hire should always have the correct skillset, be reliable, and produce quality work. A new employee should be comfortable in the job and everyone in the office should be comfortable with him. A recent hire should be able to provide quality work and should be adaptable to various circumstances and scenarios. He should be easy to train as well as being comfortable to learning new things at a constant pace.
When you know it’s the right hire, you should feel at peace. There shouldn’t be any conflict in your mind. The hiring text books will tell you that there’s a science to hiring. But you have to realize that you are a human dealing with humans. At some point, you have to trust your gut feeling.
Signs It’s NOT the Right Hire
You can tell in the first few weeks of employment whether the new hire is a good fit. Even if they have a superb skillset or amazing abilities, sometimes it could be their mindset that could be unsuitable for the company. Their approach to the job and their character can be a huge predictor whether someone is fit for the company or not.
Here are some signs that he is not the correct candidate:
Work for their own benefit and not for the company’s.
Define what you’re looking for Think of what the ideal candidate would look like. Completely define what duties and responsibilities you are looking for and add these to the job descriptions.
Attract a large pool of applicants Attract the maximum number of applicants that your time and budget allow. Research what type of job posting resources would work best for your company and use those.
Compare Applicants Rank the qualified candidates in order from most to least suitable. Implement various levels of screening in order to waste less time with under-qualified applicants. After you narrow down your list of applicants, create an assessment test that measures how they would perform in an actual job situation
Sell your ideal candidate. Once you have your ideal candidate, sell him the job. Remember that hiring someone is a two-way street. Communicate your strong vision and mission for your business with enthusiasm and sincerity. The strongest candidates will always have more opportunities, so make sure you convince the candidate that this job is the one he should be taking.
As a financial leader of your organization, it’s important that you understand how your time works and what you are spending your time on. In today’s blog, we’re taking a look at when to outsource accounting or specific tasks and services and why outsource at all. Before we go into when, first, let’s understand, what is outsourcing? Many of you have heard the term, but don’t really know what it means.
Outsourcing is simply delegating and paying someone outside of your organization to do a service for you that you cannot do or do not have time to do.
Examining Your Daily Routines
For example, think about your daily routines. Think about what you currently do. The list may add up quickly if you’re like me and wear many hats.
Put a star next to the things that you struggle to find time to do in the first place.
In your personal lives, it could be mowing the lawn or changing your car’s oil or cooking yourself.
For example, I find myself as a business owner operating a franchise struggling to find time to really prep and cook dinner each night. So what we do often is go out and pick up food – essentially paying someone to cook our food for us. We could either dine there or take it home.
It’s all about time value. Are you spending your time on what you or your company values most?
When examining your daily routines, do you catch yourself saying “I don’t have time…”?
“I don’t have time to mow the lawn.”
“There’s no time to clean my house.”
“I don’t have time to close the books because I’m out there running my business.”
Whatever those time consuming tasks are, it may be worth outsourcing to another person or agency.
For example, you might have to hire a bookkeeper in your organization for them to come out and enter the transactions on a daily basis. For me, that’s important to outsource because I need to be thinking at a higher level as a Controller/CFO – not entering transactions. There will always be someone less expensive to do that.
So really when we say we don’t have time, it is because of one of several reasons. We don’t want to spend our time on something else if someone else can do it for cheaper (and if it energizes them more). Plus, it may be time to start outsourcing accounting when you want to:
Make more money for you
Bring you more value
Do what you enjoy doing more
For example, entering transactions for month close is dry work and it wears on me. But I love coaching leaders how to be more effective in their roles and make their decisions more impactful. If I’m bombarded with transactions, I cannot coach leaders – which is more valuable to me and the bottom line.
On a personal note, when I do not have to cook dinner, I have an opportunity to spend more time with my kids. It also frees up my time to help my kids with homework and build memories with them. I can also read a book for personal growth or enjoyment. There’s so many opportunities out there for you to actually do things that you actually enjoy.
[box] Outsourcing accounting is just one area where you may add value to your company. Continue to do things that add value or free up your time so that you may add value. Click here to download our guide on how to be a trusted advisor to your CEO to help them improve your company’s value.[/box]
Why Outsource At All
One of the top reasons why companies outsource at all is that they may be more efficient. When I outsource, I am hiring someone that might be more knowledgeable. If I am a business owner who does not know how to record certain transactions, then consider the time it will take to learn that skill (and the time you are not spending on improving profits and cash flow). Even if you wanted to implement Quickbooks so that you can start recording transactions (a one-time set up), it may be worth handing that off to someone more knowledgeable in Quickbooks so that you can focus on other things you are more knowledgeable in.
Those are things you consider when to start outsourcing.
The goal is to create more time, more energy, and free you up to do something that can potentially make you more money.
Examples When Considering Outsourcing
To further explain the need to outsource, it’s important to consider roles outside of the accounting and finance departments.
If you are a good sales person for your organization, then you don’t want to spend your time behind a desk all day trying to enter your transactions. If you don’t have a lot of transactions, then that’s a perfect sign that you need to get out there and start making those sales for increased transactions for your business to actually record.
Outsourcing is a Key to Growing
I think that outsourcing is a key to growing. It is no different from a leader wanting to delegate the tasks that…
You just don’t have any time to do
You need others to do so that you can focus on what you are great at doing from a very high level
Now, at The Strategic CFO, we have several ways for you to tap into or start outsourcing individuals so that you can actually build on your business.
Take 3 months off to travel through Europe (I wish!)
Need extra help because your company is going through an audit for the very first time
Life happens regardless of what you plan for. That’s why we’re here to step in when you need it. We will come in and help you with getting the helping hand you need to be more efficient with your current team. Need hiring and training? We do that too. These are all different reasons why you may need to outsource. We are here as a boutique firm to help you.
There are also opportunities for you to come in and take workshops at our office, in an online setting, or at your office. For example, you can learn about what your leadership style is. Are you a Type A person that can’t just let go of doing the little tasks? By learning about yourself, you start to outsource or delegate what you are not strong at and focus on what you are great at. As a result, you can continue to grow the business.
Is there a difference between margin vs markup? Absolutely. More and more in today’s environment, these two terms are being used interchangeably to mean gross margin, but that misunderstanding may be the menace of the bottom line. Markup and profit are not the same! Also, the accounting for margin vs markup are different! A clear understanding and application of the two within a pricing model can have a drastic impact on the bottom line. Terminology speaking, markup is the gross profit percentage on cost prices or cost of goods sold, while margin is the gross profit percentage on selling price or sales.
Effective Ways to Optimize Profitability
So, who rules when seeking effective ways to optimize profitability?. Many mistakenly believe that if a product or service is marked up, say 25%, the result will be a 25% gross margin on the income statement. However, a 25% markup rate produces a gross margin percentage of only 20%.
NOTE: Want the Pricing for Profit Inspection Guide? It walks you through a step-by-step process to maximizing your profits on each sale. Get it here!
(Try the calculators at the bottom of the page to discover for yourself which is better!)
Steps to Minimize Markup vs Margin Mistakes
Terminology and calculations aside, it is very important to remember that there are more factors that affect the selling price than merely cost. What the market will bear, or what the customer is willing to pay, will ultimately impact the selling price. The key is to find the price that optimizes profits while maintaining a competitive advantage. Below are steps you can take to avoid confusion when working with markup rates vs margin rates:
Define the markup percentage as the increase on the cost price. The markup sales are expressed as a percentage increase as to try and ensure that a company can receive the proper amount of gross profit. Furthermore, markups are normally used in retail or wholesale business as it is an easy way to price items when a store contains several different goods. Now, look at the markup percentage calculation.
[box] Markup is great. But if you aren’t intentionally pricing for profit, then you’re missing out on some opportunities for big improvements. Click here to download your free Pricing for Profit Inspection Guide now. [/box]
How to Calculate Markup Percentage
By definition, the markup percentage calculation is cost X markup percentage. Then add that to the original unit cost to arrive at the sales price. The markup equation or markup formula is given below in several different formats. For example, if a product costs $100, then the selling price with a 25% markup would be $125.
The purpose of markup percentage is to find the ideal sales price for your products and/or services. Use the following formula to calculate sales price:
Sales Price = Cost X Markup Percentage + Cost = $100 X 25% + $100 = $125
As with most things, there are good and bad things about using markup percentage. One of the pitfalls in using the markup percentage to calculate your prices is that it is difficult to ensure that you have taken into consideration all of your costs. By using a simple rule of thumb calculation, you often miss out on indirect costs.
[box](NOTE: Want the Pricing for Profit Inspection Guide?It walks you through a step-by-step process to maximizing your profits on each sale. Get it here!)[/box]
Markup Percentage Calculation Example
For example, Glen started a company that specializes in the setup of office computers and software. He decided that he would like to earn a markup percentage of 20% over the cost of the computers to ensure that he makes the proper amount of profit. Furthermore, Glen has recently received a job to set up a large office space. He estimates that he will need 25 computers at a cost of $600 a piece. In addition, Glen will need to set up the companysoftware in the building. The cost of the software to run all the computers is around $2,000. If Glen wants to earn the desired 20% markup percentage for the job, then what will he need to charge the company?
(Looking for more examples of markup? If so, then click here to access a retail markup example.)
First, Glen must calculate the total cost of the project which is equal to the cost of software plus the cost of the computers. Find the markup percentage calculation example below.
$2,000 + ($600*25) = $17,000
Then, Glen must find his selling price by using his desired markup of 20% and the cost calculated for the project. The formula to find the sales price is as follows:
In conclusion, Glen must charge the company $20,400 to earn the return desired on cost. This is the equivalent of a profit margin of 16.7%. For a list of markup percentages and their profit margin equivalents scroll down to the bottom of the Margin vs Markup page, or you can find them using the above markup formula. Using what you’ve learned the markup percentage calculation, the next step is to download the free Pricing for Profit Inspection Guide. Easily discover if your company has a pricing problem and fix it.
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