Tag Archives | accounting department

You Can’t Afford Not to Spend Money on the Accounting Department

As a former CEO to some CEOs, this Blog is to my counterparts that “don’t know what you don’t know.”  I have seen time and time again closely held businesses that have experienced growth make the same mistakes over and over again. To the CEO that believes bookkeeping is a necessary fixed cost that should be minimized, here is a money making tip. You can’t afford not to spend money on the accounting department if you want to be successful.

The Big Mistake

Your company has grown over the years; you have experienced good times and maybe some bad times. Additionally, you have taken a nice paycheck and sometimes, some nice bonuses.  You got used to a certain life style. And you did all of this with a bookkeeper that does not cost you much.  But your company has grown. Still in the back of your mind, you know something tells you that you are not comfortable with your accounting records. But you elected to keep cost down for the bookkeeper and you do not spend much on accounting.

You Can't Afford Not to Spend Money on the Accounting Department

My Tax CPA Does It All

Maybe until now, some of you have your outside CPA that prepares your tax return also prepare year-end financials. This is not a knock-on tax preparers, but your CPA that prepares your tax return is an expert in one of many fields CPAs work in. For example, I am a CPA, but there is no way I would prepare my own tax return. Tax laws change way too often. I just want to maximize my deductions and pay my fair share of tax, but not more than that. That is why I have my tax CPA prepare the tax return.

But over the course of my career, I have found that most tax CPAs do not have operational expertise. They have not run a manufacturing or service business, nor have they had any P&L responsibility. The Tax CPA is considering accelerated depreciation, maximize expenses, etc. This is quite the opposite from a management set of financial statements. The role of the CPA Tax preparer is totally different from a “operational” CPA, Controller or even CFO.

Minimizing the Back Office For the Wrong Reasons

Most CEOs that I have worked with argue to minimize the cost of the back office. That includes the cost of preparing financial and accounting records. But think about this… The Securities and Exchange Commission (SEC) does not require public companies to prepare their financial statements according to Generally Accepted Accounting Principles (GAAP) because they pulled this out of thin air as another way to regulate.  The SEC requires public companies to prepare their accounting records and financial statements based on GAAP because it is the best way to present fairly the results of your financial operations to third parties reading your financial statements.  In other words, It’s the RIGHT way to keep your books!

In some cases where there is significant debt and exposure, some banks also require that the company present your accounting records based on GAAP – regardless of whether it is a Public or Private company.  Some debt situations even require an audit. The banks simply make it one of the covenants related to your debt. When you present your books and records per GAAP, you have accurate financial statements, everyone is assured your accounting is correct.


Click here to download: The Smart Back Office for SMBs


The Importance of Using GAAP

So, if a lot of brain power has been put into coming up with GAAP, and the general consensus is that GAAP is the right way to present your financials and accounting records.  Why would you as CEO not require that your financial statements be presented per GAAP?

I have been an “operational” type CPA for over 27 years now. In addition, I have held the office of CEO twice. I have used my expertise in public company environments and private companies both as an employee and as a consultant in the U.S. and in other countries. I have seen many very successful small, medium and large private companies and they were all keeping their financial records per GAAP. Yet, I have NEVER seen a significant company (not a micro or small business) be successful and properly run without keeping their books and records per GAAP.

So why is it that CEO’s of closely held (private) business still permit their accounting records to be kept some other way?   The answer: they do not want to spend money on a fixed cost such as accounting. But they will spend money on the sales team, hunting leases, extravagant meals or parties.

Not getting the basics down – such as GAAP – leaves money on the table when you are exiting the company. Increase value with our Top 10 Destroyers of Value whitepaper.

You Can't Afford Not to Spend Money on the Accounting Department

You Can’t Afford Not to Spend Money on the Accounting Department

These are real life examples and outcomes of minimizing the cost of your accounting department that I have lived…

The service company incorrectly books gains on U.S. dollar receivables. In conclusion, they had to reverse $8 million from earnings.

I have seen this one several times. The company does not have some large assets on the balance sheet, because their tax preparer said they used accelerated depreciation. As a result, the balance sheet assets are severely understated. Hint: your value is understated. IT’S ABOUT THE MONEY DUDE!

The manufacturing facility does not properly accrue costs. As a result, their margins are way off, and the CEO wondered why they were always short on cash.

The company did not properly reconcile accounts including cash. This led to fraud.

The company did not properly recognize revenue. In conclusion, the company was understating revenue by millions of dollars.

I can go on and on with more real-life examples.

If you do not have your financial statements presented per GAAP, how are they prepared and presented? Do you really know your margins in your P&L. Do you really have all your assets, liabilities and equity presented correctly? Is your P&L, Balance Sheet and Cash Flow statement presented correctly? Guess what? Your ratios that your controller or CFO should be analyzing are not correct.

Leadership Needs to Believe in GAAP

Why do you think Exxon, Walmart and all other public company CEO’s believe in GAAP?  I have also seen many small, medium and large closely held private companies keep their accounting records per GAAP.  These are all successful companies. They know their margins, they know where cash is, they know their ratios and guess what, they know how to forecast!

I have also seen time and time again good companies that have been around a while and have experienced growth, and NOT prepare their financials per GAAP.  And every one of these CEO’s and companies has the exact same issues.

  • They really don’t know their margins in their P&L
  • Some companies don’t even really know their actual revenue
  • There is always that doubt in the CEO’s mind as to what is really going on in the business
  • The CEO lives a stressful life
  • Every time there is even the slightest decrease in margins, there is even a bigger disproportionate stress on cash
  • If your books are not per GAAP, then most likely they are not on the accrual basis; if that is the case, then you are 60-90 days behind your business
  • Having your books on an accrual basis is just the first step. There are many other accounting rules, procedures and pronouncements to get your books per GAAP. Just because they are on accrual basis, does not mean they are per GAAP. GAAP “rules” actually change frequently

You Can't Afford Not to Spend Money on the Accounting Department

In Summary

In my consulting business, I have seen CEOs that are “smart” as in they know what they don’t know. They bring us in to get the problem fixed. Although it takes time and money, the CEO is fully supportive and we get it done. These are the companies that grow and ultimately have a successful liquidation event. Or they leave a well-run machine to their family or employees.

But it shocks me to continue to see companies as large as $120 million in revenue, with a couple hundred employees that have not professionalized their accounting department. No one knows the true margins. Everyone stresses out about the “accounting records.” There are no correct historical financials, and most certainly, there are no forecasts. Unfortunately, there is no analysis of the business at all. In some high margin “hot” industries, this works for a while. The sins are buried. But millions of dollars are lost without knowing it. But, since ultimately everything ends up in cash, when that “hot” industry has even a slight downturn, the CEO feels the cash crunch.

Whether you are trying to increase the value of your company or positioning it for sale, this issue of unknowingly leaking cash is a destroyer. Learn how to tighten your belts and increase value with our Top 10 Destroyers of Value whitepaper.

Don’t be Cheap

Don’t be cheap. Spend the money (which is usually less than the hunting lease) to get your books and records based on GAAP basis.  Get your priorities straight.  Continue to have a professional accounting department in your business. YES, you will spend more than you are currently spending. But you can’t afford not to spend money on the accounting department!

Consider this… I had one investment banker with a very large firm tell me the difference in a valuation of an acquisition target from a company that has accounting records per GAAP and solid accounting department versus one that does not have a professional accounting department and accounting records not per GAAP is a difference of 20%-30%.  I had another investment banker tell me the difference in valuation is “one turn of EBITDA”. The use of EBITDA and multipliers is often used in valuation.

So if your company generates $2 million EBITDA and the multiple used is a 5, then your value would be $10 million with a professional accounting department and books per GAAP. In comparison, your value is $8 million with an unsophisticated accounting department and accounting records not per GAAP. I don’t think your professional accounting department will ever cost you $2 million per year! But not having it will.

Not having your financial records per GAAP is one of the destroyers of value. If you want to protect the value of your company, download the free Top 10 Destroyers of Value whitepaper to learn how to maximize your value.

You Can't Afford Not to Spend Money on the Accounting DepartmentYou Can't Afford Not to Spend Money on the Accounting Department

Share this:
0

Productivity of an Accounting Department

Most people (especially those outside the finance side of the business) see the financial function as a cost center. Although an accounting department does not generate any revenue, it has the potential to dramatically improve profitability. Think about this: you should be able to convert 1-2% of sales into profits if the department was more productive. The productivity of an accounting department is directly linked to the improvement of profits and cash flow – the bread and butter of financial leaders.

How Productive Is Your Accounting Department?

Before you attempt to improve the productivity of an accounting department, assess how productive or unproductive it is currently. First, log what is working and what is not working. By going through this process, you will allow yourself or the financial leader of your company to fully evaluate what is going on. There are a couple areas that you can start considering when asking the question: how productive is your accounting department?

If you find that your accounting department is productive, brainstorm ways to make it more productive. The great thing is that there is always room for improvement.

Track your accounting department’s productivity by using KPIs. For help, download the KPI Discovery Cheatsheet!

productivity of an accounting departmentTips to Improve Productivity of Accounting Department

While there may be a million little things that you can do to push the needle a little, we have found that there are a few focus areas that allow you to take the biggest strides ahead. When improving the productivity of an accounting department, start by using best practices, training and developing your team, automating as much as possible, communicating effectively, tracking progress, and outsourcing. Finally, walk through your accounting department to ensure maximum profitability.


Click here to download: The Smart Back Office for SMBs


Use Best Practices

The best way to accomplish this first tip is to continually read up on, research, discuss, learn from thought leaders, and attend events to catalog the best practices used by others to attain a productive accounting department. In addition, if you keep ahead on implementing the best practices, you should be able to accomplish company goals quicker. According to GAAP, some best practices include regularity, consistency, continuity, and recording sales when they are certain.

Training & Development

Unfortunately, some employees are simply not going to do the dirty work of reading up on the best practices. They are leaving that up to you ­– the financial leader. Those employees are going to continue to do exactly what they have done in the past; and therefore, reduce the chances of being more productive. So, it is up to the financial leader to provide training and development for the team. If the team hears and learns the same training and development sessions, then there is a huge opportunity to create a more synergized accounting process.

In his book The 7 Habits of Highly Effective People, Steven Covey says that synergy “is the habit of creative cooperation. It is teamwork, open-mindedness, and the adventure of finding new solutions to old problems. But it doesn’t just happen on its own. It’s a process, and through that process, people bring all their personal experience and expertise to the table. Together, they can produce far better results than they could individually. Synergy lets us discover jointly things we are much less likely to discover by ourselves.” The more your team is on the same page, the more productive your accounting department.

Automate

One of the great things about technology is that you can automate almost everything. While that could be bad news for those of you whose jobs could be automated, it is great for the productivity of an accounting department. Rather than laying off those employees, strategize how you can transition those people into more value-adding roles.

Communicate with Team

There’s a joke that you can tell extroverted accountants from introverted accountants by whose shoes they look at – their own or the other person’s. All jokes aside, it is critical that the financial leader get themselves and their team out of their office to communicate. During the hour or so when you take lunch or get coffee, ask one of your team members to join you. In addition to getting to know them better, see if they have any ideas about how to make the department more productive.

Identify Skills of Team

Part of communicating with your team includes identifying the skills of your team. Understand what talents they may have that was not on their resume. Assign projects to them in areas that they excel. Ask questions like: What’s the first thing that you like to do at the beginning of the day? Or if there is something that you could do all day, every day, what would that task be? When you identify the skills, talents, likes, and dislikes, you will be able to further develop your team.

Have KPIs

Identify those key performance indicators (KPIs) that indicate the productivity of an accounting department. Once you have identified them, use and track them. If you find your department sliding backwards, reassess and start the process over again.

If you are struggling to identify and track the KPIs that indicate the productivity of your accounting department, click here to access your free KPI Discovery Cheatsheet!

Outsource

If a specific job or task is not a core function of the business, explore whether it can be outsourced. For example in our retained search business, we have discovered that many companies are outsourcing their accounting departments to countries like the Philippines and Germany because it is more cost-effective for their organization. While that decision may be outside the norm, it is an opportunity to step up and be a financial leader. Outsource tasks and roles that can be accomplished at the same quality for a lower cost.


Click here to download: The Smart Back Office for SMBs


productivity of an accounting departmentWalk-Through Process

Finally, generate a list of topics to run through when evaluating the productivity of an accounting department. The Journal of Accountancy developed a questionnaire as part of a walk-through process checklist that can be accessed online (we have also included it below). When you ask yourself these questions, you’ll be able to better gauge the productivity of your accounting department and exactly where you need to focus.

Time

  • How much time are you spending on any given task?
  • Is it labor intensive?
  • How many people participate in the process?
  • Does it take excessive time to complete?
  • Is there a duplication of effort?
  • Are too many handoffs occurring?
  • Are roles and responsibilities clearly defined?
  • Is anyone performing similar tasks?
  • Are roles and responsibilities appropriate?
  • What is slowing down the process?
  • Do you require needless reviews or approvals?
  • What are the busiest times of the day, week, month and/or quarter?

If there is a task or job that is time intensive, judge if that job could be automated, outsourced, or done quicker. The goal is to reduce the cost associated with that task or job. Unfortunately, you are going to find that there are jobs that simply cannot be trimmed as they are essential to the business itself. That’s okay! But try to find and reduce the costs associated for as many tasks as possible.

Necessity

  • Is the step or process necessary to the company’s success?
  • Can you eliminate it without causing any damage?
  • Do you have more tasks to do because of a single task?
  • Is duplication of information necessary?

Automation

  • Can you automate a task?
  • Are you keying in the same data into multiple places? (For example, the accounting system, an Access database, spreadsheets, etc.)
  • Does a backlog exist?
  • How often are your deadlines missed?
  • Where is there a breakdown of a streamlined process?
  • Is there a person or a job that stops the production of financials?

Value Adding

  • Does a task add value?
  • How accurate is the data?
  • How much value can come from automating/outsourcing/etc.?

Conclusion

Streamline your accounting department by asking questions, automating, outsourcing, and find more profits and cash flow. Don’t continue to just be a cost center… Transform your department into a value-adding entity within the company! For help and tips to track your transformation, you need something to measure your performance. For help, download our KPI Discovery Cheatsheet and start measuring your accounting department’s KPIs today.

Productivity of an Accounting Department

Productivity of an Accounting Department

Share this:
0

7 Warning Signs of Fraud

warning signs of fraudUnfortunately, companies of all sizes can become victims of fraud. In fact, a study on fraud published by accounting firm KPMG International found “a very large increase in cases involving the exploitation of weak internal controls by fraudsters up from 49 percent in 2007 to 74 percent in 2011.” Thus, internal controls are a first line of defense and are important in any size organization. So, implement them to reduce the opportunity for fraud. Whatever the size company, there are some warning signs of fraud that are important to pay attention to.

7 Warning Signs of Fraud

1.  Is the person reconciling the bank statement also a check signer?

These are important duties to segregate. When combined, a person signing a fraudulent check can go on without being detected.

2.  Does your company have several bank accounts?

Multiple bank accounts make inappropriate movements of cash harder to detect. So, make sure you understand the business need for each bank account the company has and use as few accounts as possible.

3.  Do you have a budget to compare with your actual financial results on a monthly basis?

This is an important control in the detection of unauthorized transactions.

4.  Have you noticed a controlling personality or secretive behavior on the part of an employee?

This may be a sign that a person is being deceptive or needs to control people or the environment in order to conceal their activity.

(Have you ever heard of skimming fraud? It’s the most difficult fraud to detect.)

5.  Are there accounts on your financial statements that you do not understand?

Ask! If your question is not welcomed or answered to your satisfaction, then pay attention to this response.

6.  Financials that are not timely or closed on a monthly basis.

Lax or non-existent cut offs leave room for inappropriate entries in months long gone.

7.  Are employees related in your accounting department?

Part of a functioning internal controls system is the need for collusion in order to circumvent controls.

The Fraud Triangle

What is the motivation for an employee to steal?  The fraud triangle shows us 3 following conditions:

  • Pressure (motivation or intent to steal)
  • Rationalization (justification of dishonesty)
  • Opportunity (ability to carry out misappropriation of company assets.)

Well designed internal controls serve to mitigate the opportunity for fraud in your organization.

(Have you every wondered does fraud follow economic cycles?)

How to Reduce Fraud

What can you do to reduce the chance for fraud in your organization? First, remember that internal controls are necessary for all size organizations. Check out the following ideas that you will find helpful as you assess controls in your organization:

Live Ethics in Your Corporate Culture 

A culture of ethics starts at the top and you start by demonstrating it on a daily basis. We cannot emphasize this enough as it sets the bar for acceptable behavior in your organization.

Trust is Not a Control 

Trust is not a control, so design internal controls. Then put them in place for the position. Thus, they should not be for a particular employee, regardless of how trusted that employee is.

Pre-Employment Screening

Conduct pre-employment screening including background checks as appropriate.

Utilize Entire Team

If you do not have enough employees in accounting, then utilize others as part of your control system.

Have Different Signers

If your bank account reconciler is a signer, then find a different signer. Segregate the check cutting, signing and reconciling duties from each other.

Unbiased Reviewer

Have the company bank statements go unopened for review by someone in a management position who isn’t cutting or signing checks.

Choose Signers Carefully

Understand what authority signers have with company bank accounts and choose signers carefully. Add extra controls to your corporate bank accounts – an example is precluding any counter withdrawals so that all bank account withdrawals go through the check writing process.

Anonymous Alert System

Set up an anonymous way for your employees to alert you of any concerns/suspicions related to potential fraud within your company. Then take these alerts seriously.

Segregation of Duties & Controls

Segregation of duties and internal controls protect both your employees and the company.

If you want to reduce the fraud or detect fraud in your company, then check out our free Internal Analysis whitepaper. We have designed this whitepaper to assist your leadership decisions and create the roadmap for your company’s success!

warning signs of fraud
Strategic CFO Lab Member Extra
Access your Exit Strategy Checklist Execution Plan in SCFO Lab. The step-by-step plan to put together your exit strategy and maximize the amount of value you get.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

warning signs of fraud

Share this:
3

Cost Center

See also:
Cost Driver
Variable vs Fixed Cost
Sunk Costs
Activity Based Costing vs Traditional Costing
Removal Cost
Profit Center
Responsibility Center
Adding Value as a Financial Leader

Cost Center Definition

In accounting, a cost center is a type of responsibility center. A responsibility center is an organizational subunit the manager of which is responsible for certain financial and non-financial performance measures. For accounting purposes, consider a responsibility center – in this case a cost center – a distinct entity within the context of the larger organization.

Furthermore, a cost center is an organizational subunit that incurs cost but does not directly contribute to the company’s profits. In fact, a cost center may not generate any revenues at all. The manager in a cost center has the authority to incur costs related to normal business activities and operations. Furthermore, a cost center manager’s primary goal is to contain and control the subunit’s costs. As a result, the manager of a cost center is evaluated on the basis of cost containment and control.

Download the free Know Your Economics guide to monitor what’s happening in your business. 

Cost Centers and Discretionary Cost Centers

In addition, make a distinction between cost centers and discretionary cost centers. The difference is with the relation between inputs and outputs in the production process.

When there is a well-defined relation between inputs and outputs in the production process, the organizational subunit is a cost center. For example, a manufacturing process is a regular cost center because each unit of output requires a measurable input of raw materials and a measurable amount of direct labor time. Furthermore, in this type of process, it is easy to see the relationship between the cost-incurring inputs and the revenue-generating outputs.

When there is not a well-defined relation between inputs and outputs in a business activity, the organizational subunit is a discretionary cost center. A good example of a discretionary cost center is an administrative department where the work of the administrators is not clearly linked to any tangible or measurable output. It is not easy to see the relationship between the cost-incurring inputs and any type of revenue-generating outputs.

Examples

Cost centers are typical business units that incur costs but only indirectly contribute to revenue generation. For example, consider a company’s legal department, accounting department, research and development, advertising, marketing, and customer service a cost center. The managers in charge of these departments can control and contain costs – and they are evaluated on their ability to control and contain costs. But there is not much they can do to directly impact the company’s revenues. If you want to identify your cost centers and know how they fit within your economics, then download your free guide here.

cost center

Strategic CFO Lab Member Extra

Access your Projections Execution Plan in SCFO Lab. The step-by-step plan to get ahead of your cash flow.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

cost center

Sources:

Hilton, Ronald W., Michael W. Maher, Frank H. Selto. “Cost Management Strategies for Business Decision”, Mcgraw-Hill Irwin, New York, NY, 2008.

Barfield, Jesse T., Michael R. Kinney, Cecily A. Raiborn. “Cost Accounting Traditions and Innovations,” West Publishing Company, St. Paul, MN, 1994.

 

Share this:
1

How to Develop a Daily Cash Report

Learn how to develop a daily cash report in today’s blog. Use the Daily Cash Report to report on the daily cash balance and to help manage cash on a weekly basis. This tool is especially useful when entering a situation where active cash management is required for your daily cash flow. The daily cash report template is used best as a tactical, active cash management tool. Knowing your daily cash position as well as your weekly cash commitments will give you added impetus to collect money and/or to generate revenues.

How to Develop a Daily Cash Report

Why use a daily cash report? Often CFO/Controllers when facing a cash crunch manage cash by reviewing the online bank balance. Though easy to do this number is not accurate. It does not take into consideration outstanding checks. Another symptom of a cash crunch is that accounting falls behind in processing information. By preparing this daily cash flow forecast or projection you force the accounting department to stay current with posting transactions.

This tool is also helpful when used in conjunction with the Thirteen Week Cash Flow Projection. It is helpful to think of the 13-Week Cash Flow Report as giving you the strategic big picture needs, while the Daily Cash Flow Report provides a more tactical level measure of your firm’s cash position. You can tie a week’s worth of cash receipts and cash disbursements as reported in the Daily Cash Report to the 13- Week Cash Flow Report….

More at WikiCFO.com

For more tips on how to improve cash flow, click here to access our 25 Ways to Improve Cash Flow whitepaper.

How to Develop a Daily Cash Report
Strategic CFO Lab Member Extra

Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

How to Develop a Daily Cash Report

Share this:
0

LEARN THE ART OF THE CFO