The biggest mistakes made by corporate accountants

The biggest mistakes made by corporate accountants
Over the next few editions, David Parmenter, CEO, waymark solutions, talks about the biggest blunders company accountants make and how to fix them.

1 Having over 80 account codes for profit and loss

Show me a company with less than 60 account codes for their P/L and I will show you a management accountant who has seen the light.
However, I have seen many charts of accounts with more than 300 expense account codes in the general ledger, with up to 30 accounts for repairs and maintenance.
Action:
Do not break down costs into a separate account unless they represent at least 1% or greater of total expenses. This will reduce your costs to somewhere between 40 to 60 account codes.
Do not break revenue into separate codes unless revenues represent over 3% of the total revenue. This will reduce your revenue to somewhere between 15 to 20 account codes. Have larger buckets to collect your revenue and expenditure and when you are asked a question, ask in return what decision is going to be made based on the information requested. A skilled management accountant can always investigate six weeks of expenditure and then annualise the number.
Had you captured that particular expenditure in a separate account code the balance in the general ledger could be wrong, as miscoding increases with the number of account codes.

2 Only forecasting to year end
Some corporate accountants reforecast year end numbers monthly. This is flawed on a number of counts.
Firstly, why should ‘one bad month, one good month’ translate into a changed year end position? We gain and lose major customers, key products rise and wane: this is the life cycle we have witnessed many times.
Secondly, the forecast is a top-top forecast (agreed by the finance team and senior management) with little input and no buy in from the budget holders.
Thirdly, two months before year end, management appear to ignore the oncoming year.
Action:
Forecast quarterly, six quarters ahead using a planning tool (not Excel) - a commonly accepted better practice. The trick to this rolling forecasting is to make it a fast, light touch, so that managers can do it quickly. Quarters 2 to 6 are not the important ones. The key is to get quarter 1 correct.

3 Investing in a complex general ledger (GL) and upgrading unnecessarily
If I owned an accounting package company, I would issue upgrades every time I wanted to improve my bottom line. Accountants shouldn’t waste money on GL upgrades, or worse - invest in a more complex GL. Yet corporate accountants will spend hundreds of thousands on a GL package when the core services could be delivered for a fraction of the investment.
The task of the GL is very simple: record the expenditure and revenue. Nowadays, it is not required to report the numbers, hold budget figures or be the enquiry tool. These are all done by user friendly tools.
Action:
You really only need to acquire a new GL if your existing one does not support 21st century accounts payable options. Stick with your existing system and maximise its use - especially all the accounts payable features such as storing scanned images of invoices, electronic ordering and receipting.

CIMA Insight May 2009

4 Letting Excel dominate the finance system
I wager that Bill Gates never, in his wildest dreams, thought that Excel would become the core financial system in many companies and that the models would reach gigantic proportions. This epidemic has a cure: a moratorium on new Excel models and a deadline to remove the rest that are used daily, weekly or monthly in deriving the numbers.

This is essential. KPMG has said that for every 150 rows of a spreadsheet there is a 90% chance of a logic error. Excel is great for doing a diagram or one-off costing, being a table of numbers. It is not, and never should have been, a forecasting or reporting system.

Excel has no place in reporting, forecasting, budgeting and other core financial routines. It was never intended for the uses we put it to. In fact many of us, if we worked for NASA, would be using Excel for the space programme. I would not like to be the astronaut in outer space, finding out that there is a 90% chance of a logic error for every 150 rows in the workbook.
Action:
We need to embrace the new tools that are available, including:
• a drill down tool so budget holders never need to look at the general ledger (G/L)
• a planning tool for forecasting and recording the annual plan
• a reporting tool to replace the procedure of dumping the monthly numbers to the G/L
• balanced scorecard tools for displaying performance measures.

5 Doing another annual plan – just like the last one
The annual planning process typically does not add value. Instead it undermines an efficient allocation of resources, encourages dysfunctional budget holder behaviour, negates the value of monthly variance reporting and consumes huge amounts of time from the board of directors, senior management team, budget holders, their assistants and of course the finance team.

When was the last time you were thanked for the annual planning process? At best you have a situation where budget holders have been antagonised, at worst budget holders flatly refuse to co-operate! The nightmare of three to four months arguing over resource allocation when nobody knows the answer, the endless cut-back rounds, the game playing, the spend it or lose it mentality is not befitting the 21st century. So why continue with this outdated, unproductive exercise?

The only things stopping us from making this change are the difficulties of:
• committing the time to understand the solution
• learning how to sell change
• finding the gap in our busy workload to make it happen.
Action:
The extermination of the annual plan was first written about by Jeremy Hope of the Beyond Budgeting Round Table. To test the hypothesis that organisations would thrive without an annual plan he went searching for organisations that have never had the process in the first place. These organisations exist and are thriving. The beyond budgeting movement has many converts and the best place to start this journey is to read Jeremy Hope’s articles - any search of the internet will find many.

Read Hope’s work 'Reinventing the CFO: how financial managers can transform their roles and add greater value', Harvard Business School Press, 2006.

6 Breaking the annual plan into 12 before the year starts
As accountants we like things to be neat and tidy. Thus it appeared logical to break the annual plan into 12 monthly breaks before the year had started. We could have been more flexible. Instead we created a reporting yardstick that undermined our value to the organisation. Every month we make managers all around the organisation write predictable variance analyses such as ‘it is a timing difference….’; ‘we were not expecting this to happen…’; ‘the market conditions have changed radically since the plan…’ etc.
Action:
If you still need to perform an annual planning process you can at least remove the need for 12 monthly targets arising from this process. We should instead report against more recent targets derived from quarterly rolling forecasting process. This change has a major impact on reporting. We no longer will be reporting against a monthly budget that was set, in some cases 17 months before the period being reviewed.


CIMA Insight June 2009

7 Giving budget holders an annual entitlement
Doing an annual plan is misguided enough but to compound it with asking budget holders what they want and then, after many arguments, giving them an ‘annual entitlement’ to funding is the worst form of management.

I use portioning out a birthday cake at a nine year old’s party to explain the problem with an annual plan. A clever parent says to party goers: ‘Here is the first slice, if you finish that and want more, I will give you a second slice.’ The annual planning process divides the cake up and portions all of it to the budget holders.

Like nine year olds, budget holders lick the edges of their cake so that even if they do not need it all, nobody else can have it. Why not, like the clever parent, give the manager what they need for the first three months, and then ask what they need for the next three months and so on. Each time we can apportion the amount that is appropriate for the current conditions.
Action:
The better practice is to tell budget holders that we are aware of their annual request but will only fund what they need to run the next quarter. This small but significant change means:
• ‘spend it or lose it’ can no longer work, as budget holders find it nearly impossible to hide their reserves in the next three month period
• budget holders are encouraged to seek funding for initiatives that were not in the annual plan, as long as they have a sound fit with the organisation’s strategic objectives
• budget holders will stop asking for an annual entitlement they do not definitely need as the real budget setting takes place once a quarter.

8 Budgeting at account code level
Why should we set targets at account code level? It was done by our forefathers so we followed in their well trodden steps. It makes no sense.

Having budgets at account code level has encouraged budget holders to allocate expenditure to an account that has room for it. This undermines the purpose of the general ledger (G/L) which is to account for costs and revenue in the right areas.

You don’t need a target or budget at account code level if you capture trend analysis effectively in the reporting tool. We need to apply Pareto’s 80/20 rule and establish a category heading which includes a number of G/L codes.
Action:
Limit the number of categories in a budget holder’s budget to no more than 12. Have a budget category line if the account code is over 10% of the total - for example, show a revenue line if the account code is over 10% of the total revenue. If the account code is under 10% consolidate it with other account codes until it forms a category representing over 10% of the total.

Map the account code expenditure history to these categories. A planning tool can easily cope with this issue without the need to revisit the chart of accounts.

9 Producing numbing monthly financial reports
Many management reports are not a management tool. They are merely memoranda of information. Too many of our reports are issued well after the die is cast. Management reports should encourage timely action in the right direction, by reporting on those activities the board, the management and the staff need to focus on.

Many monthly finance reports prepared by the finance team are never read. They include endless detail, often as a result of having a common template for all subsidiaries regardless of size. The result is a consolidated pack with a four to five page essay, consolidated numbers and a copy of each subsidiaries submission. I once saw a 140 page pack!
Action:
Reduce the finance pack down to fewer than ten pages. Eliminate the essay and simply have a small comments box on each statement. Only have one page to summarise the subsidiaries results and only include the large ones and any others that are in trouble. Small subsidiaries that are performing well do not need to be included in the pack.

A wise CFO has said: ‘Educate and engage with senior and middle management. Find out and assess what they really need to manage the business and ruthlessly eliminate the eye-sight ruining and worthless pages that engineers and middle management are so fond of.’


CIMA Insight July 2009

10 Reporting on the wrong performance measures
Many companies are working with the wrong measures, many of which are incorrectly termed key performance indicators (KPIs). Year after year accountants and other senior officials have added additional suites of measures. This has lead to a confusing potpourri of performance measurement and reporting, with none of the measures tied in to the critical success factors of the organisation.

From my extensive research, very few organisations monitor their true KPIs. The reason is that very few organisations, business leaders, writers, accountants or consultants have explored what a KPI actually is. I have come to the conclusion that there are four types of performance measures:
• Result indicators (RIs) – tell staff what they have done.
• Key result indicators (KRIs) – give an overview of past performance and are ideal for the board as they communicate how management have done in a critical success factor or balanced scorecard perspective.
• Performance indicators (PIs) – tell staff and management what to do.
• Key performance indicators (KPIs) - tell staff and management what to do to increase performance dramatically.
Action:
Read Kaplan & Norton’s book ‘Translating strategy into action: the balanced scorecard’ and my book ‘Key performance indicators – developing, implementing and using winning KPIs’.

11 Selling change by logic
Nothing was ever sold by logic! You sell through emotions. Remember your last car purchase? The car sales person identifies and exploits emotional drivers. To a 23 year old IT geek, they will point out the 180 BHP, the low profile tyres, and say that this car needs to be driven by an excellent driver as it is quite dangerous. To me, having spotted the grey hair, they will point out the six air bags and tell me that this car has enough power to get you out of any trouble you find yourself in and you will never loose traction with those tyres.

Many initiatives driven by the finance team fall at this hurdle because we attempt to change the culture through selling logic, writing reports, issuing commands via email. It does not work.
Action:
We need to radically alter the way we pitch a sale to the senior management team and the board. We first have to make sure we have a good proposal with a sound focus on the emotional drivers that matter to them. We then need to focus on selling to the thought leader on the SMT and board before we present the proposal. This may involve informal meetings, sending copies of appropriate articles, telling better practice stories.

All major projects need a public relations machine behind them. No presentation, email, memo or paper related to a major change should go out unless it has been vetted by your PR expert. They are experts on emotional drivers. All your presentations should be road tested in front of the PR expert. Your PR strategy should include how to sell the change to staff, budget holders, SMT and the board.

12 Allowing month-end reporting to go past three working days
When I was a corporate accountant each month end was a disaster waiting to happen. You never knew when and where the next problem was going to come from. Things always appeared under control two or three days away and yet each month we were faxing the result five minutes before the deadline. Our fingers were crossed as a series of late adjustments had meant that the quality assurance work we had done was invalid and we did not have the luxury of doing it again. Does this sound familiar?

Quick month-end reporting has been around since the early 1990s when far seeing CFOs starting looking at the concept of ‘day one’ reporting. However this has been superseded by those who have developed systems capable of giving the CFO a full accrual net result, at any time, during the month! The virtual close, as it is called, is performed by Cisco, Motorola, Oracle, Dell, Wells Fargo, Citigroup, JP Morgan Chase and Alcoa.

Up to 70% of a corporate accountant’s time is spent on month-end reporting, the annual accounts and the annual planning process. When were you last thanked for any of these tasks?
Action:
You need to attack the month-end.


CIMA Insight August 2009

13. Spending months on the annual accounts
The annual report, while an important legal requirement, does not create any value within your organisation. Thus seldom will your team have received any form of gratitude for it in the past. Accounting functions therefore need to find ways to extract value from the process while at the same time bringing it into a tight time-frame.

How many times has the final year end audited number been within 5% of the month 12 number? We spend far too much time chasing our tail. There is absolutely no reason in 99% of cases why the first cut off year-end for internal reporting should not be the same as the last cut for external reporting.

Allowing the auditors the luxury of a leisurely year-end sign-off based around their workload provides them with many months of hindsight where unrecorded liabilities and the like are there for all to see. It is daft to air problems for that length of time!

Action:
Make it a level playing field and request a sign-off within 15 working days of year-end. Understand how to perform a year-end inside 15 working days post year-end by attending my course Quick month-end reporting.

14. Using the Julian calendar as a reporting tool
Julius Caesar gave us the calendar we use today. It is not a good business tool because it creates 12 dramas a year for the finance team and budget holders, with each month being slightly different.

Between three and five months every year will end on a weekend, and finance teams often find that the month-end processes are smoother for these months. Why not close off on the last or nearest Friday/Saturday of every month like many US companies do? The benefits of this include precise four or five week months, which make comparisons more meaningful. This also means that there is less impact on the working week as the systems are rolled over at the weekend.

Otherwise every month is a drama because we close on a different calendar day. Every month we have to issue detailed instructions to do on Thursday what you did on Wednesday last month.

Closing off at the weekend can be done for all sectors; some will require more liaison than others. It would also make a big difference in the public and not-for-profit sectors. You simply present June’s result and balance sheet to the board. You do not need to highlight the 2 July close. At year-end the missing two or extra two days of income and balance sheet movement will be taken up in the auditor’s ‘overs and unders’ schedule.

By making this change you are beginning to create 12 non dramas a year, the El Dorado of all corporate accountants.

Action:
Contact your general ledger provider and ask who uses your G/L and closes on a set day each month. They will link you to them and you will see at first hand the benefits.

Choose which day. It is best to be the nearest rather than the last ‘Friday’, ‘Saturday’, ‘Tuesday’ to month end etc. The last Saturday can have you closing six days before month-end, whereas the preferred option of nearest Saturday will only be a maximum of two working days out.


15. Letting emails dominate our day
Why do we, as accountants, need to see our emails 24/7? Are we that important that looking at our emails at the weekend is essential? Nobody dies, or is at the risk of death because we have not looked at our emails. And looking at emails first thing in the day is the most destructive habit you can have. You have guaranteed losing, forever, at least one hour, going nowhere quickly.

Action:
For eight weeks take up this challenge. Look at emails two or three times during the working day and never before 10.30am. Eliminate weekend email correspondence. After that time you will thank me!


CIMA Insight September 2009

16. Not producing daily / weekly decision based reports
In leading organisations, decision based information is based around daily / weekly reports on progress in critical success factors (CSFs). In one company the SMT has a daily 9am news report followed by further weekly information. All managers can contribute to the monthly management meeting to discuss results.

I believe you have arrived as a corporate accountant when your management team intuitively understand at the time whether the month is a good or bad one, enabling them to do something about it.

Senior finance people should insist that assistant accountant level staff be engaged with staff across the business so that they can discover what is really happening.

Here’s a quote from a wise CFO: ‘There are highly intelligent people in key parts of the business with great systems and a finger on the pulse of their part of the operation. So don’t be an isolationist bean counter, but network and forge relationships with marketers, logistics, and production people. Be prepared to use their systems and information to add depth and quality to your forecasts. You’ll get a better result, gain respect across the business and have more fun if you make the best of what’s out there. These connections need to happen at all levels of the finance team.’

If this networking is ignored, finance will always be on the outside and always the first to look like chumps when that session with SMT starts getting heated.

Action: Corporate accountants should look to provide the following daily and weekly reporting:
• yesterday’s sales reported by 9am the following day
• transactions with key customers reported on a weekly basis
• weekly reporting on ‘late projects’ and ‘late reports’
• reporting some weekly information on key direct costs
• daily / weekly reporting on the KPIs.

17. Not adopting the purchase card – a free accounts payable system
The average cost of the whole purchase cycle has been estimated at between £45-£60 per transaction. Pretty horrific when you realise that a high portion of your transactions are for minor amounts. The bulk of invoices can be for low value amounts, especially if consolidated invoices have not yet been organised. Remember it costs the same to process a £10 transaction as it does a £100,000 transaction.

In addition, is it appropriate to request that budget holders raise an order for a £20 transaction? Surely the purchase order system would work better if it focused on the larger invoices, where 100% compliance was a given.

Purchase cards are different from a credit card and are here to stay. There are three liability options - limited to genuine business; company has sole liability; and individual has sole liability. They work particularly well with high volume, low value items purchased through the same suppliers as the supplier will be able to insert general ledger (G/L) code information on the transaction.
For example, organisations have given their national stationery supplier the G/L code for stationery and the department codes associated with purchase cards. The purchase card is certainly a way for you to take control of processing these minor value / high volume transactions, where they cannot be organised through an electronic consolidated invoice.
Action:
Look at BetterManagement where I have explained this process in a free web seminar and article.

18. Not celebrating enough
I once came across an accounting team who were too busy to even organise their Christmas celebration. The marketing department organised it for them. Some accountants have yet to realise that a celebration is a great communication and motivational tool.

By being too busy to celebrate your achievements you are effectively saying you have nothing to celebrate.

Action:
Schedule your next celebration and make it happen. Invite members of the senior management team along. Suggestions include:
• celebrate every project completion
• hold a staff meeting in a café once a month and treat the team to coffee and muffins
• set up a regime where birthdays are celebrated
• for Christmas give your staff options – for example cinema tickets instead of a Christmas function
• praise team members’ achievements during team meetings.

19. Getting sucked into activity-based costing / activity-based management
Jeremy Hope of the Beyond Budgeting Round Table has pointed out the fallacy of activity-based costing. These systems cost a lot to put in and maintain, provide information of dubious quality and are run 24/7 when you only need such information infrequently.

If you feel it is necessary make sure you have sorted out all the other areas I have mentioned in this series first. After which read Jeremy Hope’s work. I am sure you will have second thoughts.

Action:
Read Jeremy Hope’s book ‘Reinventing the CFO’ from Harvard Business School Press.

CIMA Insight October 2009

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