Large consulting companies make money by promising change. Over the years, consultants and business academics have generated countless buzz words. For example, ‘paradigm shift’ (big in the 90’s), ‘just in time inventory’ (that’s still around), ‘prospecting’, vertical integration, etc. In the La Quinta add I referred to in Part I, the consultant believes the answer is ‘synergistic integration’. What does synergistic integration mean? Probably it means different things to different people. What it means to me is the favorite (and easiest) solution of many consulting companies. Cutting costs by cutting employees. But a controller who is already inside the organization should be able to achieve needed change if they are capable of and understand how to effect change. Cost cutting and streamlining often go hand in hand as owners and management seek lower overhead costs.
Most consultants rely heavily on checklists and documentation. Their documents have been honed and sharpened over a period of time and eventually become templates for how they approach a potential client hiring them to help improve operations. It is the creation and use of these templates that will be instrumental in organizing and executing your approach to any given area requiring improvement. Your focus as a controller will most likely not extend to bottlenecks on the factory floor, although I am sure some controllers with specific knowledge of their industry may become involved. But generally speaking, ‘Think Like a Consultant!” is dedicated to administrative work flow, including (but not limited to) working capital, cash flow, inventory, AR and AP required improvements.
Consultants are generally brought in because management has identified a problem. Possibly the accounting firm conducting the annual audit has identified a weakness in internal controls. Or, as I stated in Part I, there may be some kind of morale problem which is usually not in a controller’s power to fix. Sometimes consultants are hired to help a company achieve economies of scale. Below I am going to present TWO scenarios that you, as controller, may encounter.
SCENARIO I –
Background: You work for a privately owned company with 45 separate retail and wholesale facilities. You are the controller for the company and work in the corporate office. You have been with the company for just under a year. The owner is not happy. He has just discovered that a duplicate payment has been wired, each for $100,000. He asks you ‘how could this happen’? You tell him you will investigate. You go straight to the Accounts Payable department and ask how this happened. Everyone in A/P is stunned. This is the first time they have heard about it. You say, ‘I need an answer right now. I have to report back immediately’. The first thing the A/P department does is pull the vendor file. There are two bills for $100,000 each. Both are dated the same date, same invoice number, same amount. One is obviously a duplicate. All the proper approvals are present. It is obvious what happened. The vendor submitted an invoice directly to the corporate office and it was paid. No Purchase order had ever been assigned. The payment was made on the last day of the month. The vendor did not receive payment according to terms and their system generated a duplicate invoice which was mailed to your company. It happens. You explain to the owner what happened. Oh, by the way, you have already called the vendor and they are willing to wire back the money immediately.
You draw a sigh of relief and report back to the owner. He is satisfied. You go back to work.
Does this sound familiar to you?
SCENARIO II –
You work for a privately owned company with 45 separate retail facilities. You are the controller for the company and work in the corporate office. You have been with the company for just under a year. The owner is not happy. His Credit Manager has reported to him that at one of the wholesale sites, the manager shipped $225,000 worth of product to a single customer who had no approved credit. The customer had promised to pay the store manager as soon as he received payment for the merchandise to be resold. The entire balance is comprised of only one product. A very high dollar specialty product contained in small bottles. As controller, you are responsible for managing interim and final year end inventories. The product was shipped over a small window of time at least eight months ago. The owner wants to know how you missed what would have been an obvious inventory shortage. You tell him you will investigate.
Obviously, the manager has violated the most basic of internal controls, failing to enter the shipments into the company’s computer system. Furthermore, the manager has violated basic credit policy. Subsequently the manager will be written up and placed on probation. During your investigation, you discover that the count team assigned to that location was given a physical inventory count sheet which had the names of all the products that should be located at the wholesale site. Next to the name of each product was a blank line and at the end of the blank line the correct Unit of Measure of the product based on how it is carried in inventory. As is the procedure, the count team leader asks the manager to review the physical inventory count. When the manager sees the specialty product line is still blank, he tells the count team leader that the product has been delivered but not invoiced yet due to a pricing dispute, so they should add it back to the count sheet. The count team leader does not question this or notate this on his report back to the Corporate Inventory Department. As a result, no shortage is shown.
You report this back to the owner. By now, fortunately the customer has sent a check for 50% of the outstanding balance of $225,000 and has promised to pay in sixty days. The owner is satisfied with the outcome. You draw a sigh of relief and go back to work.
Does this sound familiar to you?
As time marches on, the owner’s concerns grow about how well his company is being protected from risk. And, that is when many owners call in the consultants. All I can say to you, as the controller, don’t let this happen to you. It may not end well.
Look at the two scenarios above. Do you see anything wrong with how the controller handled the situations in Scenarios I and II? I’d love to hear your opinion. All of us who have served in the ‘Controller Army’ know that most days we are just putting out fires. From the moment we walk in the door, all our plans made on the drive to work seem to fall apart. You cannot be effective if you are in constant reactionary mode.
Next week, in Part III…………..we will look in depth at how documentation, checklists and an understanding of processes can turn you into an internal consultant. By the way, a reminder. The most important word in your ‘consultant’ arsenal is ‘Why?’.