WHY SALES EXCEPTION REPORTING can pay for itself! – (Part II)

Image result for stacks of paperwork

If you did not read the blog post last week regarding the Sales Exception Reporting mechanism, please go back and read it now.

We ended our discussion last week by stating that for the Sales Exception Report to work you have to set certain criteria.  In most large companies with a big product ‘catalog’ they have some kind of grouping.  Let’s take a cosmetics company.  They will group their product as follows:

  • Face
  • Lips
  • Eyes
  • Hair

You might call these ‘departments’ just as you would in a Department Store.  So let’s set up our report as follows:

  • For ‘Face’ Department show all sales with Gross Margins less than zero or greater than 50%.
  • For ‘Lips’ Department show all sales with Gross Margins less than 5% or greater than 30%
  • For ‘Eyes’ Department show all sales with Gross Margins less than 2% or greater than 60%.
  • For ‘Hair’ Department show all sales with Gross Margins less than 0% or greater than 25%

Now we have the parameters for our new report.  For some, you may need to ask your software vendor to design and deliver the report.  You may be able to build an Excel spreadsheet that can handle it but a hard coded report is preferable as long as it is not cost prohibitive.

Accurate cost of goods sold per unit of measure of product is critical.  If you don’t have an accurate and reliable (not perfect) costing system, the report will not be effective.

In reviewing your report, you are looking for two things:

  • Is the cost right
  • Is the Selling Price Correct

Compared to fifty years ago when prices did not change from day to day at the grocery store or the gas station, prices were much more stable.  But now, even with the technology that allows price scanning (UPC Coding) we believe we are keeping up.  But a price scan depends on what a human being entered into the system somewhere along the line.

Who among us has not been to the grocery store or a big box hardware center and seen the price ring up incorrectly.  The item has been put on sale based on the signage where you picked it up but the sale price has not been entered.  Conversely,  prices increasing the Selling Price may not have been updated.  Someone needs to monitor how items are being priced and more significantly, losses that may be generated through bad costing or errors in unit sales price.

Sales Exception Reporting is the essence of ‘Management by Exception’.  Not looking at everything but just those things you defined as outside the expected result.

If you have any questions on this topic, please feel free to contact me.

WHY SALES EXCEPTION REPORTING can pay for itself! (Part 1)

Following up on last week’s blog, ‘What is my real Net Cost’, I wanted to discuss how Sales Exception Reports can be utilized not just for analysis, but to catch what could be substantial billing errors.  (See example spreadsheet below.)

While many Controllers sift through stacks of reports, how many can find Selling Price errors that, if corrected, could stem further losses.  During my career with a publicly held company we were so fortunate to have some very smart people, programmers and developers, who understood accounting and the needs of the Sales Division.  One of the very best sales management tools they developed was a report issued weekly that looked at product sales, by invoice line (remember, as discussed in the previous post, you must be engaged in transactional posting).  It then compared the unit selling price to the unit cost of sales.  Further it generated a column for Gross Margin Dollars and Gross Margin Percent.  Remember, there is some setup work for a report like this but it is based on simple queries that most programmers could easily create to generate this report.

Let’s look at a a couple of simple  examples:

Example 1:  We have a new product……………Mops.  We paid $3.97 for the mops and sold them for $4.50 with a Gross Margin Percent of 11.78%.  Does that meet the company’s expectations of profit for that product?  The Sales Department should know the answer to that question.  But the question needs to be asked.

Example 2:  The Sales Department was successful in promoting sales of pails this month.  They were budgeted to sell 115 and sold 129.  However, much to the Sales Department’s dismay they actually lost money on the sales.  The Sales Exception Report tells them that they purchased the pails for $2.01 each and sold them for $1.75.  The scenarios leading to lost profits can be many.  Here are some of them:

  • The Selling Price is incorrect.  Someone incorrectly keyed it into the system
  • The Cost is wrong.  It’s possible that the P.O. for the pails showed $1.01 and the Vendor charged $2.01 (we all know that happens)
  • Freight cost was not considered.  Freight is one of the most confusing concepts within a lot of inventory and accounts payable groups.  FOB, Prepaid, Freight Allowance, etc.  If your P.O.’s don’t properly record the freight cost, if any, it will lead to costing errors.

Properly designed, the Sales Exception Report can lead to some serious cost savings.  When I recommended using the report to the owner of my company (a large privately held enterprise) he invested in having the report designed for him.  His comment, ‘it almost paid for itself in one day’.

Some of you may have access to these reports.  But what makes an ‘Exception’ Report?  Many of you may have seen Invoice Registers during your career.  The reports came in and there might be 500 invoices to pour through to see if everything looks right. (What if there were 1,000 invoices to review?) Then we moved into the era of ‘Management by Exception’.  Instead of looking at the good and the bad, let’s just look at the bad.  Who decides what’s bad?  You do.  Your Sales group does.  Owners and Executives will.

So, take a look at my simple example created in Excel.  As previously stated, the Sales Exception Report probably should be generated through a set of queries reduced to a well designed report.  It is not meant for Excel.  It really is part of your data analytics management.  Thing Big!

Next week, we will discuss setting criteria for your report.  No criteria and the report becomes an Invoice Register once again.

https://onedrive.live.com/redir?page=view&resid=2962BCBB16FDD425!1662&authkey=!AFsGbYilU2AGMOc

The Mystery of ‘WHAT IS MY REAL NET COST’ and how to solve it….

Image result for product costing template

 

I am a member of the Linked In group ‘FSN’.  It is comprised of accounting and finance professionals from all over the world.  How amazing that a Controller in South Africa may be struggling with the same problems a controller in Georgia struggles with.

So, let’s talk about one of the most challenging topics of all.  ‘What is my real true cost of product ‘x’?’ There have been thousands of pages, posts, classes, books written on costing.   Job costing software is challenging but if not set up properly is a waste of time and money.

Don’t forget that the true cost of the products and services you sell must be defined in order for selling decisions to be made, especially in industries with very fluid markets.  Cost really matters. Many of these industries sell commodities like food, where the market moves several times a day.  Knowing the real cost is critical to measuring profits.  The question is HOW DO WE ARRIVE AT THAT NUMBER? How would I?

  1. Remember, accounting is as much art as it is science.  If it wasn’t we wouldn’t be arguing as much as we do on how to get to the correct numbers.  There are many and varied philosophies about the proper method of cost accounting.
  2. Legacy systems and costing methods may be outdated, especially if you inherited it.  If you did not develop the system, you need to understand how costs are applied.  Perform your own due diligence on the cost system and methods.
  3. Form a ‘Cost Advisory’ group which includes your staff accountant(s) and managers from the production side and put them to work exploring whether costs make sense.  The advisory group must become experts on cost.  Have them review Monthly Costing reports to be sure the costs make sense.  Next week’s topic will be ‘Sales Exception Reporting’ .  With Sales Exception reports you can isolate where products were sold for less than their cost or whatever criteria you designate (less than 0% Gross Margin, etc).
  4. Do you have the option for Transactional Posting?  Some companies do not post by transaction.  But transactional posting is the life blood of cost analysis.  Without it, you are looking into a barrel of costs, none identifiable.
  5. Consistency is the key to meaningful cost reporting.  Maybe I should have put this as #1 but if your cost methods apply freight cost inconsistently you have a really big problem.  (I am referring to inbound freight). For example, companies that own their own trucks might not apply freight cost to product their trucks deliver to their inventory point.  The only freight added is when a third party carrier is paid.  I run into this from time to time and I can assure you, this is the wrong method.
  6. You must get into agreement with management on what costs will form the building blocks of your net cost by product.  Generally speaking, it is the indirect costs of overhead that are the sticking point.
  7. Finally, make sure you confer with your outside accounting firm and involve them in these conversations prior to making any major changes.

My recommendations to you are based on how I would approach a consulting project with a client who needs help determining his real costs.  Inspect the template I imaged for this post to further understand the vital need to know your cost.  And remember, “one man’s true cost can be another man’s garbage”.

 

 

 

The Real Road to a FAST CLOSE………….really!

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There are books on the Fast Close.  There are seminars and webinars.  We come home with great pointers and ideas.  Now we are going to have internal financials produced on the fifth day after Month End.  But somehow we just never get there.  Isn’t it all just so frustrating?  If you are the Controller you are most likely on the front lines of the Month End Close.  Many controllers working for privately held companies end up closing various sets of books, sometimes including  truly diversified business types.  And, if inventory is involved, that adds another layer of complexity.  Here’s what I have discovered and learned observing CFO’s I’ve been associated with:

  • Consider issuing a set of Preliminary Financial Statements with the following caveats:
    • These statements do not reflect the following: (Example)
      • Depreciation Expense
      • Insurance Expense
      • Other Allocations
  • Review all your POST CLOSING Journal Entries
    • Can your software generate automated entries for the Month triggered by the Closing Process?
    • Are you making entries or reconciliations at month end that could be moved to mid-month as long as there’s 30 days between reconciliations?
  • Can you create a ‘CLOSING’ Team, even if it’s just you and one other person.
  • Do you have a MONTH END CLOSING set of Checklists that can be ticked off as processes are completed?

Start ‘GRADING’ your Closing team as a whole after the  FINAL Financial Statements for the period have been issued.

Then go through the same processes shown above next month and every month.  Continue to look for the ‘constraints’ that slow down the closing process.  Then do something about them!  And, as always, consult your outside Accounting Firm to be sure you are on the right track.

ARE YOU READY TO BE THE NEXT CFO?

Like Controllers, many CFO positions are not as clear cut as you might think.  Some CFO’s manage HR or I.T.  Others operate strictly within the arena of financial matters, short term and long term financing and Treasury.  For many, the progression from Controller to CFO seems clearly a natural one.  But is it?  Sometimes I think we may wonder what skill set it takes to be the Chief Financial Officer of any company. And, I have observed a number of them from my position as Controller.  Most CFO’s don’t get involved in the transactional side of the business.  You don’t see them writing up Journal Entries or getting ‘into the weeds’ of accounting.  Leaving all that behind is not everyone’s cup of tea.  Yes, the title and even the salary level is tempting.  So is the open door to senior management.  But before you attempt the jump, ask yourself this:

  • Do I have a strong background in finance?
  • Did I spend time working in public accounting?
  • Am I a CPA?
  • Can I converse with senior management about complex financial transactions?
  • Do I understand the requirements of good leadership?
  • Am I willing to invest time becoming educated in all aspects of the position?
  • Can I put together a financial model in Excel?
  • Am I familiar with securing financing through various debt instruments?
  • Do I have strong analytical skills, for instance the ability to review financial statements and comment on them?

There are many other questions you might ask yourself as you aspire to become a CFO.  And, if you can’t answer yes to many of these questions, find a way to solve that problem.

 

 

 

 

 

WHY ARE PURCHASE ORDER POLICIES SO HARD TO FOLLOW?

 

It seems that we often live in two worlds, at home and at work.  There is the world of ‘what should be’ and then there is the world of ‘what is’.

Purchase Orders are a very good case in point.  So, I will tell you a story of one of my first encounters with this issue.  When I took the position of Controller at a very large, successful privately owned company they were using a very strict P.O. policy.  There had to be a Purchase Order for everything.  It wasn’t long before I observed accounts payable bills like Utility bills (from the power company and the phone company) with P.O.’s attached.  What sense does that make?  When you see this, you can be sure that no common sense logic is being applied.  This is a terrible waste of an employee’s time.  Then there are the a/p expenses incurred where someone who should have gotten a P.O. did not.  The invoice does not reference a P.O.  The processing employee then writes up a P.O. and attaches it.  What have we accomplished here?

The whole purpose of Purchase Orders can be summed up in the need to be sure there is appropriate authorization for certain types of expenses and secondly, it helps prevent duplicate payments.  Purchase Orders are an integral part of Internal Control.

All of us, the controllers of the world, probably have some differing ideas about the best approach.  I agree that there is not a ‘one size fits all’ solution.  But here are some of my recommendations:

  1. All purchases for Inventory must have a P.O. number on the supplier invoice.
  2. All purchases for Capital Expenditures must have a P.O. number on the vendor invoice.
  3. All purchases for expenses over ($XXX.XX) must have a P.O. number.  You could devise a number for office supplies as a limit that is different from plant supplies as a limit.
  4. Recurring expenses such as lease payments, utilities, salaries, contract labor, should not require a P.O.
  5. Contracts that cover accounting fees, legal fees, consulting fees should not have a P.O.

It’s a simple policy and one that might cover a high percentage of spending in your organization.  In the case of  No. 1, the P.O. should disclose the terms, quantity, price, shipping costs, etc.  Then that P.O. must be referred back to when the invoice is received to be sure you are being billed on the correct basis.

In the case of No. 2 – there should be no exception to this rule (or almost none).  These are purchases that are almost always planned and pre-approved.

I firmly believe that Controllers should not value form over substance.  Just writing a p.o. because the policy says you should no matter what ……………… that is ‘form over substance’.  Maybe this is a great time to ‘audit’ your Purchase Order policy.  See how that policy is being complied with.  You might be surprised.

 

 

 

WHEN YOUR BALANCE SHEET’S OUT OF BALANCE and other small horrors!

 

I can’t think of anything more embarrassing then sending your Financial Statements to your lender and having some junior accountant point out that your balance sheet is out of balance.  Once a reviewer sees that, it throws the entire set of Financials and accompanying schedules, if any, into question.

As one of three CPA’s reviewing our company’s financials, the first thing we did was to check that the Balance Sheet was not out of balance and that the Net Income on the Balance Sheet matched to the Net Income on the Income Statement.  These are very simple steps that can help you discover any anomalies you might have in your financial reporting system.  My advice to you is to never let your financials go to your lender without having gone through the above recommended steps.

In most cases, faced with these problems, we contacted our software vendor for them to see if there had been an underlying programming issue.  You should be especially vigilant in this area after a recent upgrade.  Version upgrades can play havoc with your reporting system and you can be easily caught off guard.

Here are some other areas you should verify:

  • Does A/R on your balance sheet reconcile to your A/R Aging Report
  • Does A/P on your balance sheet reconcile to your A/P Aging Report
  • Do your Inventory Accounts on your Balance Sheet balance to your Inventory Detail Reports
  • Do your Fixed Assets on your  balance sheet reconcile to your Fixed Asset Reports

The above four recommendations should be standard checks and balances performed each month immediately after closing.

I know many companies go through extensive reviews of their monthly Financial Statements.  If you work for a smaller privately held company, you should be doing the same.  Here are some other steps I highly recommend:

  • Review your Cost of Goods Sold on your Income Statement and make sure it looks reasonable.  If you are able to produce a Sales Report that reflects the Total Sales, Total Cost & Total Profit by Line Item, compare the ‘Total Cost’ on the report to your Total COGS on your Income Statement.  Any differences probably represent Manual Journal Entries to the COGS account(s).   Additionally, some could be Inventory Adjustments.  They all need to be investigated.
  • I always review the Bad Debt Allowance and make sure it represents the correct amount.  For instance, if you accrue 1% per month for your Bad Debt allowance, that should be easy enough to test.
  • If you are applying an Administrative Charge, say 2% per month, check the calculation just as you would the Bad Debt Expense.

The more you can test on the Financial Statements before they are presented to management, owners or lenders, the better off you as the Controller will be.

Have any of us not regretted missing something that came back to haunt us.  Unless you just started yesterday, I’m guessing the answer to that question is a big ‘yes’!.

 

 

 

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