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.


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.



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’!.





So you are at Month End closing and the Cost of Goods Sold seems really distorted.  As a result, your Gross Margins are badly understated versus budget and prior year.  You go to research and find that someone on the Accounting Staff has made an entry debiting COGS and crediting an inventory account on the balance sheet.  Your system will give you the name of the person making the entry based on his login credentials.  You have a conversation with the accountant and he has no recollection of why he made it, and there is no documentation.  Anybody in a manufacturing environment has probably been through this scenario at least once or twice.  I know I have.  Manual entries to Cost of Goods Sold can wreak havoc as they can in other areas like Prepaid Asset accounts, etc.

I recently ran into a problem like this with a client.  The Staff Accountant responsible for moving certain things off the balance sheet into COGS (this had to do with Work in Process) was constantly making Journal Entries….and then turning right around and reversing them.  You could see a pattern occuring in the G/L Account Detail.  And why was this happening……………..because the accounting department could never get in agreement with the Controller about how much the month end entry should be.  Sometimes the entry was backwards, or sometimes the entry was to the incorrect entity.

I wanted to scream STOP!  But first, Full Disclosure.  I used to be guilty of this.  Just opening up the G/L JE screen and keying in a JE I hoped would fixed the problem.  Then reversing it and finally, taking myself down the black hole of JE confusion.  At that point, I would have to print out the detail and try to work myself back to ‘zero’ impact.

What is wrong with this picture?  As Controller, you need to stop the wave of manual JE’s entered by your staff and make sure that there is documentation for it.  If you set up twelve recurring monthly entries for depreciation, there should be a document in the file supporting your depreciation calculations.  If there needs to be a correction to COGS, then there has to be written documentation supporting it.

At my former company, they had a great, low tech method (eventually we took it all to PDF’s) that anyone starting out can use.  We labeled a file Jacket ‘Journal Entries’.  All Journal Entries were documented on a JE work sheet similar to ledger paper.  Behind that worksheet was supporting documentation.  Sometimes just an explanation written below the debit/credit would suffice.  For instance, ‘accrue January telephone expense’.  At the end of the month, we would remove the JE documentation from the file jacket and place it with our Month End closing workpapers.  The jacket was then empty and ready for the next monthly accounting period.

If you are working in an organization that pays close attention to the monthly Financial Statements ( and of course, they should be) start controlling the manual JE’s.  It’s good for you the Controller and it’s a great tool for your Accounting Staff who will learn that the General Ledger is not a playground for JE’s.  And no Journal Entry should be made unless it has been researched and approved.  This is not a small thing.  Taking your financials from materially accurate to materially not accurate needs to be prevented at all costs.






Many of us have been through the discovery of an employee who steals.  Sometimes, it is really difficult because it is someone we know and work with.  If you read the latest version of  The Global Report on Fraud you will discover that few businesses have escaped this problem.  Why is employee theft so rampant?  Many studies have estimated that one in four employees steal on some level from their employers.

I’ve devoted other columns to prevention techniques, strengthening of Internal Controls and especially segregation of duties.  However, today I want to discuss the ‘aftermath’.  When confronted with the facts, what are you going to do with a key employee, for instance, your only staff payroll person?  What about the Accounts Payable person falsifying invoices and presenting them to the company for payment (to her).  And, she’s your only A/P person and has become much more knowledgeable about the system and its inner workings than you are.

So here is a little quiz for you…………………pick the right answer for your company:

  1. Move them out of their department and away from tasks that involve cash.
  2. Leave them in the department but demote them and hire someone to take their place.  They can train the new hire.
  3. Put them on probation for sixty days and monitor them very closely.
  4. Fire them immediately

Which answer did you pick?  1…..2…..3…..4….?

If you picked any number other than ‘4’……………..my question to you as a Management Consultant is:  ‘ARE YOU CRAZY?’

First, if you think that the other employees in your company are not watching every move you make, you are most likely mistaken.  News that an employee has been caught stealing can travel like wildfire even if you have tried to keep everything about it secret.

Second, anything other than firing the employee will be a signal to a lot of people that they can rationalize some very bad behavior.

Third, allowing the employee to remain in any capacity is like poisoning the well from which you drink the water.  I strongly advise against it.

Several years ago, a long time dedicated employee and single mother of three was caught taking a check, endorsing it and depositing it to her account which was discovered during a reconciliation process.  Her boss felt terribly sorry for her because he knew she was in rough financial shape.  You can agree not to prosecute.  You can agree to not challenge unemployment and you can even pay some severance (I advise against that) to help the employee while she finds another job.

However, before you write a glowing letter of recommendation or tell a caller checking her references that you regret she resigned and she was a great employee, please CONSULT YOUR ATTORNEY.

Finally, remember one thing, your leadership and management skills are on the line here.  Show decisiveness in dealing with incidences of fraud.  You will be respected for it.







I’m working for a rather large client right now to help them build out a corporate infrastructure in a newly created headquarters operation.  There is a lot of involved,  in depth accounting required.  However, because of turnover they have realized that they must document their accounting and finance processes, policies and procedures.  This is an enormous job that we will be undertaking.  Many businesses, large and small, simply do not have an accounting manual or anything close to that.

Let’s imagine that tomorrow, your boss comes to you and says you need to create an Accounting Manual and an Operations Manual and you have three months to get it done.  Where would you start?

First, don’t start from ‘Ground Zero’.  Take a look at Steven Bragg’s work which can be found at http://www.wiley.com.  I have his Fifth Edition of Accounting Policies & Procedures and it is a great publication.  Use its’ many templates and forms and customize them to your particular company.  You will be light years ahead of starting from scratch.  There are other manuals you might already have on your bookshelf.   Many of them are really very good.

Second,  don’t think you can just copy  your documentation verbatim.  To document processes and procedures, you have to spend time interviewing people who are involved in the work you are documenting.  You will quickly find that not everything in a book you are using relates directly to your line of business.  You must CUSTOMIZE, CUSTOMIZE, CUSTOMIZE.  That takes time.  However, if you don’t you will be caught in the act of short cutting your way through the project.  USER input is critical.  Users will need to test your processes & procedures  for relevance and accuracy.  Users will have to keep you updated on changes in a process, policy or procedure.  You might consider forming a USER Committee to help you build the necessary manuals.

Third, three months is an ambitious timeline for such a large project.  If you have a Microsoft Exchange Server you might want to use a shared drive to put your documentation out there for employees in an electronic form. (Always check with your I.T. department before you begin uploading to the drive).   If you have a website, take a look at getting your employees behind a locked door requiring log-in with user name and password required.  (Be sure you get the o.k. from your I.T. Department).

Fourth, you must realize that an Accounting Manual or Operations Manual cannot become a static set of documents.  Don’t pat yourself on the back and think ‘job well done’ when the deadline is met.  The end of the project timeline also means the beginning of a commitment to update, edit and modify the manuals you and your committee  have created.  Obviously, it would be much easier if it was all in electronic form.  Doing the same for printed manuals is almost impossible in a big company because of the large number of books that may have to be updated, reprinted and distributed.

It’s quite a project but the payoff should be substantial.  Truthfully, you may have a working manual at the end of ninety days,  but you probably still have work to refine it.  Remember, as controller, you simply don’t have the time to do it all.  Delegating some of this work, with your oversight, will be key to meeting any deadline you might have.





If you’re not a fan of Kevin Spacey as the devious maniac & master manipulator  Frank Underwood in Netflix’s ‘House of Cards’ , let me give you some background. He was a powerful congressman slated to be tapped for Secretary of State.  However, the President’s Chief of Staff ruled him out.  Now he’s been sworn in as Vice-President, after murdering two people who were obstacles to his goals.

It’s a great series but Vice President Underwood is a scary guy.  The congressional in-fighting, the backstabbing and ‘take no prisoners’ mentality is a frightening look into the way things are at some level in too many good companies (and to some extent in Congress).  We’ve seen it on full display in ‘Mad Men’, and the sarcastic and cynical t.v. hit ‘The Office’. So what does that have to do with you as a Controller or Accounting Manager?  If your office is a kingdom of kindness, cooperation, teamwork, and respect…..then the answer is nothing.  But if there are few days that go by that you aren’t dealing with complaints by one employee against another i.e. the  smooth talker, the slacker, the sneaky one……let’s talk!

One of the biggest challenges trained accounting people face is moving into management positions and then dealing with their direct reports.  As a CPA with a BBA in Accounting, I can tell you that there wasn’t one single course available to deal with handling personnel.  I don’t remember ever seeing any CPE offerings on the subject.  We are born knowing how to breathe, but not how to manage. There are stacks of books, reams of papers and countless experts regarding inter-personal behaviors in an office setting.  You may have even found some that have helped guide you in managing your people so at least some work gets done. Recently, the Wall Street Journal published an article about ‘bad bosses’ and that the day of the ‘command and control’ boss is gone.  If you think barking orders will insure they are obeyed you may have a ‘dinosaur’ attitude of days past.  But it is you who is risking extinction.  The collaborative voices of your employees, marshalled against you can cost you your job.  I’ve seen that happen more than once. From my perspective, after having managed as a Controller in a very large privately held company, here are some of the things I believe must happen if you plan on getting anything done:

1)  Meet with your direct reports on a routine basis.  I know it’s not easy but meet at least once a week.  Schedule your meetings at 4:00 p.m. assuming quitting time is 5:00 p.m.  This way people will be less likely to ‘digress’ and you can manage your meeting to a goal of one hour.

2) Make sure when you are hiring that you have a written, very detailed job description available for the candidate.  The better people understand what is expected of them, the less conflict there is about job duties down the road.

3) Be fair and not petty!  The worst kind of manager is one who is petty.  It kills respect for you, it kills morale and it kills motivation.  Enforce the office policies firmly but fairly.  What is petty?  Denying an employee a few hours off to attend their child’s school program because they were late the day before.  Constantly denying people the equipment they need to get the job done because you worked there five years before you had one.  Get my drift?  Petty is small and mean acts against the people who work for you.

4)  During Staff meetings put as much as you can on the table about what’s going on in the company that you can share.  Keeping secrets, knowing more than they do, is also petty in this day and age of fast moving events and storms of information.  If you keep secrets when you don’t have to, so will your employees.  Count on it.

5)  Do not over share personal information about yourself.  If an employee tells you about her husband’s big promotion, or a big inheritance, be happy for them.  But do not share your life on Facebook or Instagram.  Reserve that for ‘family’ only groups.  My sister had a new manager who shared constant pictures of her children to her telecommuter employees, including a picture of her son on the operating table as he was carried in for a tonsillectomy!  But then when my sister needed time off for personal reasons it was denied.  So how do you think she felt about seeing more of her manager’s family pictures?  This is the kind of behavior that drives employees crazy and can lead to serious problems such as being pulled in by HR and questioned about your behavior.

The conversation in the arena of business management and productivity practices is gaining a lot of ground these days.  Do you really want to be like the president of AOL who fired an employee during a company wide conference call?  Maybe he was trying to prove how powerful he was.  He just proved what a terrible leader he is.  As Controllers, Accounting Managers, CFO’s, we can do better than that.

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