“Well it’s getting close to year end and oh man, the audit is coming up next week. I guess we had better start to get ready.”  The shakes set in at that moment.  Want to not feel that way? 
 
There are several leading indicators that perhaps there is room for improvement in the audit process. These include an inordinate number of bookkeeping-oriented journal entries, variances from the pre-established plan that seem to happen every year, inability to finish the audit in a reasonable time frame, such as in time to meet required covenant deadlines, out of scope fees, and significant amount of timeframe between on-site auditor fieldwork and delivery of audited financial statements.  Do these matters sound familiar?
 
These delays are caused by significant bookkeeping issues not addressed by management during the year end process, inefficient or ineffective responses to auditor requests for information, and/or time lags in receipt of requests for information.
 
I’d like to offer a few suggestions to make the audit a much more manageable event for both you and the auditor. 
 
Why - My initial advice is to understand WHY the auditor is doing what they’re doing, WHY they’re asking the questions they’re asking.  If you understand the “WHY”, responses will be more accurate and targeted, mitigating the “back and forth” that tends to take place, and the efficiency will vastly improve.  If you don’t have somebody on board that has previously been an auditor, have an open dialogue with the auditors to express the desire to better understand the audit process with the goal of improving the process. 
 
Other questions to ask involve taking ownership in the entire set of books.  Many auditors know that certain clients struggle with certain accounting matters and without violating any independence matters, they will include as part of their scope preparation of an annual workpaper that helps the organization with the accounting for that particular matter.  For example, the auditor may maintain fixed asset records or prepare a prepaid expenses workpaper for the client.  Talk to the auditors about these matters, obtain an understanding of the accounting and develop a plan for preparing the workpapers as a part of the monthly or annual close process.  This will likely save the auditors time and possibly money.
 
Evaluate and develop a plan to perform the year end close - A full review and reconciliations of all balance sheet accounts especially should be performed. Of course, having a great understanding of revenues and expenses is essential too.  Many organizations only perform the necessary reconciliations of certain accounts in the general ledger once per year (or as stated above, they seek the help of the auditors) instead of monthly. Common examples include updating various receivable allowances, prepaid assets, inventory, various accrued expenses. In the world of financial reporting, that could be problematic if any of these areas have material transactions throughout the year.  The organization’s interim financial statements are likely to be inaccurate.  As far as how it impacts the audit effectiveness, the annual assessment may be much less efficient as ongoing review.
 
Identify significant “one time” events - These may include major new contracts, leases, debt, or new accounting pronouncements.  Make sure the accounting and reporting for these matters have been properly addressed.  It is a best practice to have an early discussion with the auditors. 
 
Identify internal or third party contacts that auditors need - Sometimes delays in the audit are caused by simple matters that could be mitigated with proper planning.  Examples include receiving back various audit confirmations from third parties that are traditionally hard to reach.  Identify past “problems” and put together a plan to reach out to these parties.  Coordinate necessary meetings with various executives or board members. 
 
Internal controls - Evaluate whether there have been any major changes in your internal controls or processes to record transactions. 
 
Evaluate the original requests for information (RFI) - You will receive a list from the auditor.  If nothing major changes, the list will likely be similar year after year.  Use that list to evaluate ways to prepare for the audit year round and prepare records on an on-going basis.  Take ownership for all tasks on the list, delegate tasks, include deadlines, and then stick to it.  Finally, and this seems insignificant or perhaps catering to the auditors too much, but organize your packet and titled responses in order of the auditor’s checklist.  They gave you a list, and you could respond with the information in the same organized fashion.  Believe it or not, this will help the process.
 
Process - As the audit progresses, there are inevitable questions and requests for additional information.  Keep a list and work diligently from that list. Audit teams will often “drive” this process by sending daily lists.  If they do not do that, then suggest it as a best practice.  Once an item is on a list, trust me it’s not coming off the list until the auditor is satisfied that the issue is addressed. Therefore, it’s best to take ownership in the daily list and treat each item as a “deliverable” to be addressed.  I’ve seen many times where an organization will respond to two out of five things on the list, for example,  and then ask for an updated list.  Next they act surprised when the other three items are still on the list. 
 
In this same category, keep lines of communication open about wrap up. When are draft deliverables going to be delivered? When is a final meeting with the owners or board of directors going to take place? 
 
Debrief after the audit - As soon as possible after the audit is completed and the audited financial statements are delivered, have a quick meeting or phone call to discuss the results of the process of the audit.  It will be fresh on everybody’s mind.  To be honest, there are likely other matters to discuss anyway, such as tax returns, other reporting, or even other audits, such as employee benefit plan audits.
 
These are a few high-level matters to address.   Implement these steps, and the process is likely to be a more gratifying process for both parties, and the value of the audit will increase with improved collaboration, communication, and hopefully higher-level feedback from the audit firm. 
 
If you are especially struggling with this process, some planning with your auditors will be very helpful.  If you want assistance as a representative of the organization, of course, I’m available to offer audit process assistance or coaching. 

If you have other ideas that would be helpful to others, please feel free to post comments on this site. 

I meet with a lot of executives, nonprofit board members, peers and members of the business community.  Everybody waits.  Besides waiting in traffic (especially here in Boston!), waiting in line, waiting for tonight’s game, and waiting for the weekend, we wait for the next round of financial reporting – weekly dashboards, monthly financial statements, quarterlies, and “the audit”. Hey even AC/DC wasn’t havin' no fun waiting round to be a millionaire!  So much waiting.
 
Meanwhile, decisions need to be made with or without timely data.  Some decisions can’t wait. Decisions around product pricing, when to press collection issues, staffing, purchasing, and strategic decisions such as acquisitions, expansion, financing, etc.  Timeliness impacts all these matters, either by making decisions without the data, or delaying progress until the data is available. 
 
Why? What’s the struggle, and what can be done?
 
First, understanding what’s a reasonable schedule will help. Secondly, having the right system in place to efficiently and accurately generate data, and thirdly, having the right people in place to help stick to the schedule. I think the first point sets the tone.  If you’re a CEO, owner, or board member, you SHOULD expect timely financial information.  Significant delays usually indicates there is something wrong in the system somewhere.
 
If all this sounds familiar and you want to do something about it, it is very reasonable to set expectations and implement a plan to accomplish the goals you’ve set.  What makes sense for a reasonable deadline for a monthly close and delivery of a financial statement package for an average company? “It depends”.  I hate that answer, so I think a general rule of thumb is somewhere between 15 and 30 days, depending on the complexity, and if you’re not seeing that timeline, it may take a few cycles to get there. I’ve seen some companies close their books as quickly as 10-15 days, but I do think it’s difficult for the “everyday” company.  Incidentally, for public filers, a quarterly 10-Q is due 45 days after quarter end, and that report is incredibly comprehensive, so for a non-public filing, I think the above timeline makes sense.
 
Is your company closing their books with accurate data within this rule of thumb?  If not, and you would like to do that, I think you start with setting expectations, and work backwards to set mini deadlines needed for all the major milestones needed in order to close the books. 
 
An overly simple example may look like the following, in reverse order, in terms of the number of days after month end:
 
25 Days          Issuance
22-25 Days     Final Review
20-22 Days     Preparation of “Management Discussion & Analysis” or CFO Report
17-20 Days     Preparation of financial statements package
17 Days          Initial review by Controller and/or CFO
5-17 Days       General Ledger reconciliations and Other Journalizing
10-15 Days     Close Accounts Payable
3-5 Days         Close Accounts Receivable and Revenues
 
If this sort of timeline does not seem feasible, then the company’s leadership group should assess barriers. 
 
-What is holding us up? 
-What can be done?
-Are there ways to accelerate the process, such as use of estimates?
-Are vendors holding us up, and can we have a conversation with them about the problems they’re creating?
-Is additional training necessary?
-Do we have the right people?
-Is there technology available that can help us?
-Is there unnecessary work being done that could be eliminated to accelerate the process?
 
Sometimes a fresh set of eyes can help assess the processes and barriers, as well as nudge the team towards different expectations.
 
While we’re on the topic, what should be in a standard regular reporting package?  That could be a standalone subject.  To truly understand a company’s entire financial condition, leadership should be reviewing a balance sheet, income statement, statement of cash flows, and possibly a schedule of equity activity.  Certain corporate structures have different names for these statements, but hopefully this is clear.  I frequently encounter companies that have standard reporting packages that do not provide the reader with the opportunity to understand all of the financial issues of the company. I oftentimes find that companies will monitor income statements but again, that may not review the full picture.  If the company is enduring collections issues, that’s not going to come up in a review of the income statement, as an example. 
 
Other key components of a quality monthly financial reporting package may include some sort of dashboard with key performance indicators that helps financial statement users understand the story behind the numbers. 
 
By the way, I’ve focused on monthly financial statements, but certainly, there is certain helpful data that may be available more quickly, such as drivers of the business – certain inventory turnover, widget sales, other customer encounters, etc.  As the financial statements are being generated, data starts to come together for review.  Therefore, leadership should not have to “wait” for all the data. 
 
A lot of companies struggle with this, and they don’t even know they’re struggling.  They may think it’s normal to wait 90 days for normal financial data. It’s not. It doesn’t have to be that way.  With some planning, you can have the data you need to run your business when you need it.
 
“No Waiting” signs are awesome.  Flock to those checkout lanes.  What are you waiting for?
 
 

You’re just getting out of college and starting a career.  Congratulations!  Perhaps you’ve been in a career for a while but you have questions.  What’s next?  How do you pursue what you’re meant to do?  I want to encourage you to don’t stop thinking about it.
I’ve thought about a few things that I hope encourages even one person to step out of their comfort zone.  I’ve tried to tie this using an acrostic for the word CAREER.  Hey, maybe some of the words are a bit of a stretch but hopefully there’s a thought within the message that can resonate at least a little.

C – Career goals (ok really could not find a synonym for Goal that starts with a C. Email me with ideas) - Figure out how to articulate your goals that once achieved will give you satisfaction. Of course, I could talk about money and how to earn the money you want, but the earnings alone will not give the satisfaction.  Doing what you’re meant to do and helping people using your talents – that’s the stuff. 

A – Ask a mentor - Find a mentor that can talk to.  This is a hard topic.  Finding a person you can have open conversations with is key.  This is probably not a immediate boss, but it could be if you think that person can set aside their biases of trying to keep you on staff at your current employment above all other counsel. Family member? Friend?  I hope you can find somebody that will be an encouragement to you. I’ve recently been around a lot of entrepreneurs. Some “young”; some “young-at-heart”.  It’s an impressive population: people building businesses from scratch!  They all have mentors though.  They’re finding people that have gone ahead of them and they ask questions!  

R – (be) Regarded - add value – learn technical skills that help you be the best you can be. You’ll know it in your heart. Are you learning skills that somebody else is telling you that you need or are you thriving in developing a skillset that you’re excited about?  There’s no doubt that work life can be a grind. You’re probably not going to “love” every minute of your work day, but are you excited about your workday in the mornings? How about Sunday afternoons when you know Monday is coming?  Are you excited about tomorrow’s upcoming meeting?  Does the work energize you?  Ask those questions and respond.

E – Excellence - Work hard! No matter what!

E – Engage - Keep talking to your mentor.  Days turn into months, which turns into years.  These are likely ongoing thoughts and you’ll always want to be talking about these matters with somebody that can help you.  Don’t let others define “it” for you, but do let them give counsel.

R – Reach! Go for it!  Take a risk, think outside the box. No regrets.  Maybe it’s being the best you can be at your current setting. Maybe it’s making a change.  Maybe it’s an even BIGGER change.  I don’t know what that means for you, but you will. 

I hope that you keep thinking, keep challenging and pursue the career that you’re meant to have.

It’s a commonly used phrase that I did not coin, but I use it all the time.  “What gets measured gets managed.” 

Over my career, I have worked with for-profit organizations as well as non-profits.  No matter the corporate structure, all organizations need to live within their means in order to continue as a going concern.  Many organizations I’ve worked with have expressed concerns about a lack of cash.  They may say it in different ways – no money for pay raises or new programs, dwindling bank account, not hitting budget, etc. – but the gist is the same.  Something seems off. 

I have found that often it’s due to a lack of awareness of the driving forces of their business or policies and procedures are either not in place or they’re being ignored.

This article is a high-level summary of helpful hints if you’re struggling with cash flow.

Overall, your company needs to apply a disciplined approach to the organization.  What gets measured really does get managed if you are committed!  As I see it, the following is a brief list of high level strategies to review, all of which is a separate topic that warrants further discussion:

1. What are your financial objectives? Good budgeting is necessary in order to quantify goals and to set the stake in the ground for management.
   
   
2. Right people in the right places – Finding quality staff that fit well within the organization is key. There’s a reason there are so many placement recruiters in the market. Good people are hard to find, and it is very time consuming to find them. People that both understand financial matters and can articulate them in a way that is easy to understand can make an immediate impact on an organization’s results.
   
   
3. Good protocols around purchasing, billing, and payroll – I’ve seen companies see immediate improvement with setting good systems in place and then enforcing them. Setting deadlines, purchasing limits, hiring discipline etc. will make a big impact.
   
   
4. Good reporting and monthly close process – leave it to the accountant to talk about GAAP (generally accepted accounting principles) but accounting concepts are there for a reason. It standardizes all financial transactions and when properly presented, helps a manager understand how revenues match up with expenses. Many of my readers will say that sounds so basic but I’ve learned that many organizations are challenged with this. I hear it all the time: “We do financial statements once a year for the audit”, or “We’ve never looked at our balance sheet”, or “We only do cash basis and convert to accrual basis at year end.” These are common situations I encounter. Without complete financial statements, it’s difficult to understand the financial story. I’ve found that once financial statements are developed they start to tell a story that management didn’t previously see.
   
   
5. Follow up and follow through – When prepared properly, balancing succinctness, quality, & effectiveness, financial reporting and the results will tell a story. It’s important to put systems in place to review these results, drill down to key drivers, and ask managers to make necessary changes to respond to shortfalls, etc.
   
   
6. Respond to changing conditions and opportunities – an organization’s operations are fluid. Change is constant. It’s important to remain flexible while at the same time remaining committed to living within its means. Challenges and/or opportunities will come up. Having good information will help management respond effectively.
   
   
7. Repeat, repeat, repeat – Once systems are in place, it will be important to remain committed to these disciplines as tried and true best practices. I’ve seen companies lose their way, and upon further review, usually something on this list was dropped in one way or another.
   

Each of these matters can and should be further analyzed, and there are likely other best practices to consider.  I do know that these best practices work. I’ve seen it multiple times. I’ve had clients look back and wonder what took them so long to implement these best practices. 

If these topics resonate, and you think you need some help, I would be happy to discuss. I can help with processes, financial reporting and analysis or helping you find the right people.

Send me a note with your thoughts. What other topics would be helpful to you?

February 5, 2018

I’ve spent 25 years supporting organizations in several capacities. One of the matters that I’ve been routinely asked about is how to evaluate the business office’s internal controls to mitigate the risk of fraud or human error.  It can seem overwhelming to balance practicality, due to limited staffing, with implementing an effective set of internal controls.

Without being too technical, accounting transaction cycles are generally organized as a.) revenues and receipts, b.) expenses and disbursements and c.) payroll.  Others cycles may include accounting for fixed assets and even cash management.  The overarching key is to ensure that one person does not have control over the entire cycle – initiation of the transaction, recording of the transaction and review/monitoring. A quick example likely clarifies this concept:  On their own, a person should not be able to set up a new vendor, order goods or services from that vendor, receive the invoice from that vendor, pay the invoice by writing/signing the check and mailing it, record the expense and disbursement in the general ledger, and then eventually receiving and reconciling the bank statement to the general ledger.  There is too much room for error or worse, theft, with that much oversight in the cycle.  Therefore, it’s important to have “multiple sets of eyes” involved with all those steps.  It will reduce the risk of error and risk of fraud. This example scenario actually happens all the time (but not with my clients!).  When I’ve advised organizations to split up those duties the common response is “Our accountant would never steal corporate money. He/she is too honest! We don’t have any staffing that can help, so why do we need to make the changes?”  100% of people currently on this earth make mistakes, and studies show that a very high percentage of corporations are unknowing victims of some sort of fraud. If your accounting staff do indeed maintain the highest level of integrity, a good set of controls will at least help to protect them from being too quickly blamed as thefts!  Best case scenario is that your systems will be a little more mistake proof. 

With all this in mind, the American Institute of Certified Public Accountants has issued a little-known set of examples that can help an organization evaluate its systems.  The organization issued the guidance in its not-for-profit section but it really applies to all businesses.  The guidance provides suggestions for how to split up operational duties for an organization that has two, three or four people available, respectively.

In order to spur some thought, I’ll give one of the examples.  If you have three people available in the business office, the guidance offers the following suggestions:

1. Executive Director/Chief Executive Officer
   1. Sign contracts
   2. Make compensation adjustments
   3. Sign checks
   4. Complete deposit slips
   5. Perform interbank transfers
   6. Perform analytical procedures of internal financial reporting
   7. Review monthly bank reconciliations
   8. Review wire transactions
   9. Review account activity
2.  Accounting staff
   1. Write checks
   2. Reconcile bank reconciliations and petty cash
   3. Record accounting transactions in general ledger
   4. Distribute payroll
3. Accountant/other (receptionist or other administrative personnel)
   1. Process and approve payroll
   2. Process vendor invoices
   3. Mail checks
   4. Assist with performing analytical procedures
   5. Approve invoices for payments
   6. Disburse petty cash
   7. Open mail and log cash receipts
   8. Receive and open bank statements

Seems practical, right? Receipts, disbursements, payroll and cash management are appropriately split up in the best way possible with the limited staffing.  Each organization is different, so the guidance can be modified for the applicable situation.

I think it is good to periodically evaluate your controls even if you have no concerns.  Hopefully these examples can kickstart some questions and ideas.  Email me, and I’ll be happy to help if you have questions about your systems.   

Karl@BakerCFOadvisory.com

We're all beginning a new year personally, but professionally too.  Others may be deep into their fiscal year.  No doubt the days are filled with challenges, problems, opportunities and decisions to be made.   Is there an effective partnership between the CEO, the CFO, and the senior management team?  What should an organization expect from a CFO?

I've identified a few matters:

1. Make complex simple - finance and accounting can be dry, boring and overwhelming to people that are simply trying to do their best in running an organization day in and day out.  A CFO should be able to reduce all the noise and help organizational leadership understand financial matters in an easy to digest way.  I've mentored a lot of people in my career, and I've always told them to "make the complex simple".  Very often if an organization gets into financial trouble, it's because of poor leadership and either intentionally or unintentionally ignoring the financial signs.  Your CFO should be a confidant and collaborative resource to help make decisions from a financial perspective. We as CFO's should be great communicators.  (If you happen to be a college student reading this, take a public speaking course!)

2. Help organization understand how to achieve it's financial goals - "It's not in the budget." Budgeting is an entirely separate subject, but I have a few very brief thoughts here. Unfortunately, sometimes the budget is seen as a tool to restrict bad behavior.  The budget should be supported by an achievable plan, however.  The budget is simply the quantification for your operating plan.  However, leadership should always be in tune to great business opportunities.  For example, a budget may include a planned expenditure. However, opportunities may arise to spend money differently that in the long run will save a company significant dollars.  Just because that expenditure is not in the annual budget doesn't mean it shouldn't be evaluated as a good opportunity.

3. Leadership and mentorship - we should always be working to replace ourselves and to help our colleagues be the best they can be and achieve their goals. The CFO should be in tune with their staff, to help them be the best they can be. 

4. Effective business operations - A CFO is responsible to oversee business operations in an efficient and effective manner.  Financial reporting should be accurate, mistakes kept to a minimum and assets safeguarded. The day to day operations of a CFO is likely more than just "debits and credits" but somebody has to think about these matters!  A CFO should ensure that good processes are in place to mitigate the risk of errors, theft, and intentional inaccuracies.  I've found that it's simply a matter of establishing specific processes to be followed in accordance with a prescribed timeline.  An effective system will almost certainly result in timely and accurate reporting, which will give company leadership the information they need to make quality decisions.

This is not a comprehensive list by any means but these items are a good start.  Do you see little value in collaborating with your CFO because they aren't helpful or too busy being in the weeds? Do you dread meetings with him or her because they talk in accounting mumbo jumbo?  Does the business office not seem to have a voice?  Does it seem difficult to obtain accurate financial reports in a timely manner? If you answered yes to these questions, then you probably have some hard decisions to make.  My experience is that company leaders that are experiencing these issues struggle with what to do.  Congratulations if these are not familiar issues!  I say, "life doesn't have to be that hard!"  Quality financial leadership can make a pretty big impact almost immediately!