Think Like a Consultant! “How to Streamline Your Company from the Inside” – Part III

As we move into Part III, it’s time to follow up on the ‘scenarios’ presented in Part II.  We presented two different scenarios in which the Controller reported back to the owner his/her findings on two fairly significant (at least to the owner) mistakes that occurred.  In both cases, the Controller gained understanding of how these events happened.  However, there was no INVESTIGATION!  The controller did not ask ‘Why’ (or, how did this happen and what can we do to prevent this from happening again?)  I would want to insure it wouldn’t happen again, just to prevent the pain and embarrassment of events like this that fell under my watch.  with that said, let’s explore Scenario I.

As you will recall, in Scenario I, the company paid the same bill twice resulting in a duplicate payment of $100,000.  Based on the annual earnings of the company, this was a material event.  In fact, the $100,000 was to pay for a capital investment.  It’s time to have a meeting which includes your purchasing agent/employee and your Accounts Payable Department.   Does your company have a documented Capital Expenditures process?  A good process includes a ‘Faceplate’ that includes the justification for the expenditure, what division the expenditure is for, as well as signature lines for top management/owner(s).  Once the sheet is approved, it should be returned to the Purchasing Manager.  At that time, a P.O. should be written.  If the P.O. is electronically generated, a copy should be marked as the ‘Payment Copy’ (in the absence of a software solution provided for tracking these kind of payments).  In the case of a manual P.O. from a P.O. book, it should be policy as to which copy is attached to the Vendor invoice.  It should be the policy that when the vendor invoice is received it should be routed to the Purchasing Manager who checks it for accuracy against the P.O. and attachs the payment company.  Policy would prevent the creation of additional payment copies which would flag when a duplicate invoice was presented.  As the Controller, it should be your responsibility to insure that invoices of any amount are not paid twice.  It is one thing to pay a $75.00 invoice twice and quite another to pay a $100,000 invoice twice.  It may be necessary to have some different policies in Accounts Payable based on the amount of vendor invoices. Before you develop or change any policy or procedure, you should always get input from the employees in Purchasing and Accounts Payable.  Feedback and input is critical to creating an efficient and streamlined organization.  It doesn’t mean you have to act on every idea or concern however, you need to hear them.

DIAGNOSIS:  Either you had no policy in place, with procedures for handling payments of capital expenditures or they were not followed.

In Scenario II, there were numerous violations of policy and internal control procedures.  However, that said, as the Controller, you need to know that people who want to steal or mishandle assets will always be a part of the equation.  They are the ones that have no respect for rules, policies and management authority.  Therefore, there must be ways to monitor constantly by keeping a close watch on your inventory assets (or your cash).  Scenario II involves missing inventory.  The manager was put on probation and one would hope someone in HR or Management will monitor the employee.  Where do you as controller fit in?  It’s time for a meeting.  You have a problem with your Inventory team.  Not everyone on a count team is trained to conduct inventories so as to reveal cover ups.  In Scenario II, the count team took the word of the manager and essentially aided in falsifying the inventory.  I am not saying they were complicit, which generally they are not.  Simply  uneducated in why, when confronted with a manager asking them to write down a number on the physical inventory count sheet representing product they cannot see, they should call you.  Therefore, the weak link is really the count team.   Meet with all persons that participate in inventory audits and review the event.  Talk about how important it is to report a problem with an inventory count.  Also, emphasize that their notes about any ‘outside the norm’ counts are so important.

DIAGNOSIS:  Your count team had a lack of training to prepare them for handling the events described in Scenario II.

DOCUMENTATION REQUIREMENTS:

SCENARIO I:

Before you begin developing forms/checklists, you have to begin with a written policy.  If you’re looking for help on how to do this, enter Capital Spending Policy or Capital Expenditures Policy into your favorite search engine (Google, Bing, etc.).  You should find plenty of ideas.  If you need some help with this, just leave a comment.

SCENARIO II:

Your count teams need the following:  Written policy on how they will plan and execute the physical inventory.  A printed worksheet listing the products at a given location.  Sheets to attach notes, drawings, etc.  A Physical Inventory CUTOFF Worksheet.  There should always be a count team leader responsible for collecting all the information.  Please note that the Physical Inventory CUTOFF Worksheet should reflect cutoff numbers of invoices, receiving documents, credit memos, etc.  It should also be signed by the Location manager as well as the Count Team Leader.

Again, you can probably find some of these by using a search engine.

REFERENCEThe Accounting Procedures Guidebook by Steven Bragg covers almost every subject a Controller will be exposed to.  In addition, he has some wonderful forms peppered throughout the guidebook.  You should be able to find everything you need to know in his Chapters on Inventory and Capital spending.  I’ve read every page as a result of purchasing it through CPE Link for a self-study course to earn CPE’s.  It reads like a consultant’s guidebook.

Why Cash is Always King! – Part IV

In the past, I have heard some accounting people say that capital spending should not exceed your prior year depreciation expense.  When I think about that rule of thumb, I am not sure what difference it really makes.  There are many aspects to capital spending, some related to Sec. 179 of the Internal Revenue Code.  Under Sec. 179 some investments can be expensed in the current year.  However, you should always consult your CPA/tax preparer before making any capital investments based on Sec. 179.  The lease versus purchase is sometimes a complicated decision and is best left to a discussion with your CPA.

For any business owner, deciding whether or not to make a capital investment is based on two things.  The first is, does the company have the money or access to money that will allow the purchase?   Second, will it produce revenue directly or indirectly?  Is it a replacement item (your delivery truck is on its’ last leg and must be replaced) or an expansion (your current delivery truck can’t get around to all the customers on a timely basis).  When I was growing up, my father, an attorney, always drove a new car. He believed that clients didn’t want to hire an attorney who didn’t look successful.  Is that true anymore?  Do we base our decisions on how successful someone looks?

For larger companies, there should be a formalized capital projects processes and procedures. For instance , a request can be created, either on paper or electronically, for the capital item.  Information attached to the request ideally would  contain at least 3 bids/quotes.  Sometimes, the item is so specialized that there may be only one source for it.  The bid is then circulated to a group of approvers, generally the controller, CFO, President, COO, etc.  This keeps all members of senior management in the loop.  Once it’s approved, then a purchase order should be prepared. But all of the processes and procedures pale in comparison to making the wrong decision about a capital investment.  Strategic  capital spending is critical to the success and survival of any business.  The most important part is the justification process where there is a dialogue that thoroughly explores the need for the investment.  If you want more information on setting up a capital projects procedure, send me an e-mail at judith.sherling@cpa.com.

In closing my series on WHY CASH IS KING! I want to emphasize one thing.  You cannot save yourself into a profit.  Too many controllers and other management level people turn themselves in to penny pinchers.  That is not what cash flow management is about.  It’s about MANAGING the money available and making sure that dollars invested in inventory and fixed assets have been deployed to maximize income.  Remember, as controller or owner, you should always be able to answer the question ‘how much am I owed?’ and ‘how much do I owe?’.

Next week, I’ll start my newest series called ‘THINK LIKE A CONSULTANT – HOW TO STREAMLINE YOUR COMPANY FROM THE INSIDE’. 

Stay tuned.

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