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 III

Continuing on from Part II of ‘Why Cash is Always King’, let’s discuss what is referred to as ‘obsolete’ or ‘unsalable’ inventory.

Using the ‘inventory turns’ method of analysis, hopefully you have some idea of how you are doing. Buying inventory sometimes presents significant challenges, especially if you are in a highly volatile market. Volatile markets are often a challenge for companies that buy and sell commodities. For instance, a wholesaler providing milk and eggs to grocery stores faces prices changing every day. Sometimes those changes can be significant. National drug store chains sell gallons of milk as loss leaders. The small grocery down the road, they’re probably selling on the high side of the milk market. But no one wants to be left with unsold milk and eggs at the end of the day. Knowing how much to buy each day or each time can be key to reducing losses related to unsalable inventory (outdated milk and eggs).

Let’s look at a more common small to medium size business challenge. For instance, let’s say you are the Controller at ‘My Doll Shop’. Last year, Doll ‘X’ was a very sought after item and purchasing couldn’t even secure all the inventory you needed. However, a few weeks after Christmas purchasing had the opportunity to buy up a significant number of Doll ‘X’. But this year, little girls have their hearts set on ‘Doll ‘Y’. No one is interested in last year’s big hit, Doll ‘X’. My Doll Company is now the proud owner of some obsolete or slow moving inventory. One good thing about dolls, they are not perishable. They won’t rot on the shelves. But, you have dollars locked up in those dolls. Too many owners and managers simply ignore the problem because they have much more pressing issues to deal with. But if that obsolete and slow moving inventory isn’t dealt with, it takes up space. And, if the company is waiting for the Doll ‘X’ rage to come around again, they are probably in denial.

First, someone in your company, if not you, should have the task of addressing obsolete inventory and how to move it. Can it be sold on E-Bay? There’s work involved but E-Bay gets you a worldwide audience. Could you have a really big sale? I don’t have all the answers to this problem but ignoring it will certainly translate into losses at some point. Manage your inventory every day!

Oh, by the way, if you are the newly hired controller, and you’re working for a company that carries inventory, one of your first objectives should be to familiarize yourself with the inventory and, I would also recommend that at the end of the next accounting period (hopefully at the end of the month) you make sure that a physical inventory is scheduled. Once the inventory is completed, it should be compared with the book inventory to determine any gains or losses. And, very importantly, find out how much of that inventory is obsolete or unsalable. It’s far too often a neglected area of the company’s working capital investments.

In Part IV, the final post on CASH, we will look at FIXED ASSETS and the perils of both spending too much or too little.

Questions? Please feel free to comment, ask questions, or suggest other topics.

Why Cash is always King – Part I

ProfitHaving worked most of my career in the agribusiness field, I have found the ‘Limiting Factor’ theory applicable to many areas of business.  The ‘Limiting Factor’ is a simple concept.  A plant needs many different types of nutrients (food) to grow.  You can supply all the nutrients it needs, except one.  Without that one, the plant cannot grow, in spite of everything else having been done correctly.  So all the other things you did right, they do not count!  The same with cash.  No money, nothing else really matters.

Even large businesses struggle with Working Capital needs

If the entrepreneur is the heart of the business, cash is the blood.   Lack of working capital is not just a start-up issue.  It confronts owners everyday, in spite of our low interest rate environment.  Where are the money ‘pits’ that working capital is usually trapped?

  • Inventory
  • Accounts Receivable
  • Fixed Assets

The pits mentioned above are, by no means, all of them but are generally the largest ones.  In future posts, I’ll talk about how a business can do a better job of managing their liquidity.  Ask yourself, is your banking arrangement facilitating your ability to grow your business, meet payment deadlines and invest in the future?  Just because you’ve done business with them for the last ten or twenty years does not mean you should be comfortable.  Do you have just one lender?  Should you?

The Cash Conversion Cycle

Simply put, the Cash Conversion Cycle is a measurement of how long it takes to convert the dollar invested into inventory back into cash.  Accounts payables affects the ratio as well.  You can probably find a more detailed explanation by googling it.  Many business owners understand that money tied up in Accounts receivables and inventory must be freed up as quickly as possible to continue financing the business.  Obsolete or damaged inventory takes up space and is no longer worth its original cost.  Accounts Receivables moving well past terms are problematic and may indicate you won’t be turning the receivable into cash as soon as you had expected.  A/R and Inventory are areas that owners and managers must be vigilant about.  Fixed Assets present a somewhat different issue.  There are really two types of assets – those that can directly produce income and those that do not.  For instance, a new (or used) delivery truck in addition to the one you have is an expansion.  If the truck has been added to service new accounts, and generate new or additional business, then that asset has income producing properties.  However,a fancier car for a manager or owner rarely translates into additional, measurable  income for the company.  Unless the company can clearly afford such a fixed asset investment, non-income producing asset expenditures should be avoided.

Unless your company is rolling in money, paying attention to cash flow should be a top priority.  More on this subject in future posts.

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