Budget Model Improvements (#71)

In this podcast episode, we discuss a number of ways to improve the budget model. Key points made are:

  • It can be difficult to create a valid budget model with achievable target numbers.

  • Capacity planning is usually wrong in the area of salesperson productivity. Need enough staffing based on historical productivity levels.

  • Many models do not build in sufficient time to train up new staff to productive levels, or enough lead time to acquire and install fixed assets, or account for longer sales cycles.

  • The assumed employee turnover rate has to be realistic.

  • Step costing may come into play, where you need a major expenditure to achieve more sales.

  • The cost of maintenance increases as you approach a 100% utilization level in manufacturing.

  • May need more working capital, which requires additional financing; include a working capital calculation in the budget model.

  • Reduce the number of accounts being budgeted, to simplify the model.

  • Lock down accounts that involve fixed payment amounts, so that they are not accidentally altered.

  • Include a cost driver and set up formulas for related variable expenses, so that changes in the cost driver automatically alter the variable expenses.

  • Place all cost drivers in a single place in the model, to make them more accessible.

  • Have the budget analyst load most budget items on behalf of the manager, since most of them will carry forward from the prior year.

  • Integrate budget model results into the purchasing module, so that excess purchases are flagged.

  • Link the budget model results to the company’s compensation plans, so that employees are rewarded for adhering to it.

Related Courses

Budgeting
Capital Budgeting

Breakeven Analysis and the Margin of Safety (#70)

In this podcast episode, we discuss breakeven analysis and the margin of safety; how they are calculated and when they should be used. Key points made are:

  • Breakeven is the sales level at which a business earns a profit of zero.

  • Breakeven varies with the level of fixed costs and the gross margin percentage.

  • Breakeven is used for analysis; you can spot cases in which the cost structure of a business prevents it from ever earning a profit.

  • Breakeven can be useful for analyzing individual customer orders, since companies tend to take on unprofitable orders in order to fill their available capacity. Because of this, the highest profit level may be somewhat below the maximum capacity of a business.

  • New capital investments, especially for very expensive items, can increase the breakeven point.

  • The margin of safety is the amount by which sales can drop before reaching the breakeven point.

  • The margin of safety is useful for cases in which some recurring sales look questionable.

  • Breakeven analysis is not useful at the individual product level, since it tends to result in products being dropped that are actually contributing to the earnings of a factory. Therefore, try not to use it below the level of the product line.

  • Breakeven analysis can be run fairly infrequently, such as once a year, since fixed costs and gross margin percentages tend not to change much from month to month.

Related Courses

Business Ratios Guidebook
The Interpretation of Financial Statements

Listing on a Stock Exchange (#69)

This podcast episode covers the essentials of what it takes to be listed on a stock exchange, including the application process and listing fees. Key points made are:

  • Need to be on a stock exchange in order to increase your company’s stock trading volume. Institutional investors are usually not allowed to buy or sell shares anywhere else.

  • A company usually lists on a stock exchange in its own country, to reduce regulatory hurdles.

  • You begin by filling out a stock exchange’s listing application, after which the approval process can take up to six months.

  • The exchange assigns a listing analyst to your application, who will probably go through three rounds of questions before approving the application and passing it along to a supervisor for further review.

  • There are several thresholds that must be met before the application will be approved, including the following:

    • Total number of round lot shareholders (usually around 400 required)

    • Market valuation of the company, which is the total number of shares outstanding, multiplied by the market price of the shares

    • Must be profitable

    • Must meet or exceed a minimum stock price

  • A smaller company typically starts out on a smaller exchange; if it continues to grow, it may consider moving to a larger exchange.

  • There are ongoing standards to be met, of which the minimum share price is usually the most important.

  • Initial listing fees range from $50,000 to $250,000, while ongoing annual listing fees range from $28,000 to $500,000.

Related Courses

Investor Relations Guidebook
Public Company Accounting and Finance

Tax Technology (#68)

This podcast episode covers how you can apply the most current tax technology to the filing needs of a business. Key points made are:

  • Tax technology is based on compliance, filling out tax forms; regulatory complexity drives the output of these systems.

  • Tax technology tends to be 5-10 years behind other business systems.

  • It is relatively common for tax software to be tied into a corporate ERP system.

  • Tax laws are so specialized now that few people are authorities on all tax areas of a business.

  • An overriding goal for a public company is to make sure that there are no tax surprises, since the CEO and CFO are certifying that the financial statements are accurate. This means that incorrect tax filing calculations must be eliminated.

  • The Big Four audit firms are taking the best tax talent away from corporations, so the corporate level of expertise is falling.

  • A tax department needs good policies and procedures, as well as data collection systems for both structured and unstructured data. It must have a high level of real-time access, combined with excellent data security. All tax filings should be based on a single database.

  • Best to use software as a service, in order to have a central database that is readily accessible from anywhere.

  • Tax software should include modules for data collection, project management, resource management, audit management, and tax filings.

  • Tax professionals will still use electronic spreadsheets, but should exercise tight control over them.

Related Courses

Corporate Tax Planning
Lean Accounting Guidebook

Value Stream Mapping (#67)

In this podcast episode, we discuss value stream mapping, especially in regard to how it can be used to improve accounting operations. Key points made are:

  • Value stream mapping shows where there is waste in a process.

  • The resulting chart identifies all steps in a process, as well as time worked and the amount of time spent between steps.

  • The time spent between steps is usually longer than the actual processing time. You can focus on fixing wait and queue times.

  • Need a consultant, the industrial engineering staff, or internal audit staff to develop value stream maps.

  • Should make changes following each mapping and then do the mapping again to see how the process has improved.

  • In the map, there is a block for each process, with additional information listed under each block.

  • The mapping process can also be used to drill down within a process step for a more detailed analysis.

  • A map can be used in several ways to fix different problems, so you need to prioritize your goals for what needs to be fixed.

  • Value stream mapping works best in high-volume processes, since you get the best payback in these areas. It is especially useful in the areas of billings, cash receipts, and payables.

Related Courses

Accounting Information Systems
Lean Accounting Guidebook

Obsolete Inventory (#66)

In this podcast episode, we discuss how to identify potentially obsolete inventory, who should examine it, and how to get rid of it. Key points made are:

  • Form a materials review board that examines inventory for obsolescence. This group includes accounting, engineering, materials management, and procurement personnel.

  • Run a where used report, which lists every product that is stated on a bill of materials. If something is not listed on a bill of materials, you can probably get rid of it.

  • Be sure to deactivate all bills of material when the related products are no longer being used; otherwise, the related parts will still appear on the where used report.

  • Run a last date used report, which states the last date on which a part was used. The oldest items on the last may be obsolete.

  • Leave count tags on inventory items after the last physical count. Later, see which items still have tags on them, which indicates that these items have not been used, and so could be obsolete.

  • Review engineering change order records, which state when certain parts are scheduled to be replaced with different parts.

  • Then summarize all potentially obsolete inventory items and give this report to the materials review board for a decision. The committee focuses in particular on what to do with high-dollar items.

  • Can sell off obsolete parts as service parts, or return them to the supplier (usually for a restocking fee or a credit), or sell them through an auction service, or bring in a salvage contractor, or donate them to a nonprofit in order to get a tax deduction. You could even just throw it away, since this frees up shelf space and reduces the amount of inventory that needs insurance coverage.

  • Review upcoming engineering change orders in advance, to see if any inventory will be rendered obsolete once the change orders go into effect.

  • Only design products using an approved parts list; tends to reduce the amount of different inventory items on hand.

  • Do not buy in bulk, since some of the inventory may never be used.

Related Courses

Accounting for Inventory
Inventory Management

Responsibility Accounting (#65)

In this podcast episode, we discuss the nature of responsibility accounting, and how such a system can be operated. Key points made are:

  • Every cost incurred must be the responsibility of someone within the organization.

  • A separate cost report should be issued to each responsible party, reporting on only the items for which that person is responsible. These reports may be laid out as profit centers, cost centers, or revenue centers. There will probably be only a few profit center reports, but there could be several hundred cost center reports. Revenue center reports are issued to the sales staff and product managers.

  • Allocating overhead within these reports is not a good idea. Overhead costs should only be reported to those people who are directly responsible for those costs.

  • The report format could be budget vs. actual, but a better approach is the 12-month rolling report, which is useful for spotting trends.

  • Set up responsibility reports in the reporting writing software of the accounting system, so that they print automatically as a batch.

  • Could issue responsibility reports in batches, with each batch associated with a different level of the organization.

  • When it appears that no one is responsible for an expense, have the CFO assign it to someone.

Related Courses

Accounting Information Systems
New Controller Guidebook

SFAS 141R, Business Combinations (#64)

In this podcast episode, we discuss the new requirements of SFAS 141R, Business Combinations. Key points made are:

  • Most assets and liabilities associated with an acquisition transaction should be recorded on the acquirer’s balance sheet at fair value.

  • Any noncontrolling interest in the acquiree is valued at its fair value.

  • The acquisition method is now used, instead of the purchase method.

  • Everything should be valued as of the acquisition date.

  • The cost of the acquisition is charged to expense as it is incurred, because these expenditures do not meet the definition of an asset.

  • In-process research is recognized as an asset; it is amortized or written off later.

  • Contingent consideration (an earnout) is to be recognized up front, at its expected fair value.

Related Courses

Business Combinations and Consolidations
Mergers and Acquisitions

Investor Relations: Guidance (#63)

In this podcast episode, we discuss the need for issuing earnings guidance to the investment community, including tips regarding the nature of that guidance. Key points made are:

  • Need guidance to keep investors from making guesstimates about company performance; without guidance, there will be more stock price volatility, which attracts short sellers and drives away institutional investors. This in turn drives down demand for the stock, which reduces its price.

  • Smaller companies have no analyst coverage, so they need to use guidance to fill in the knowledge gap.

  • Do not provide guidance when you are not sure about future performance, such as when the company is engaged in a series of acquisitions.

  • If the quality of guidance issued is poor, avoid issuing it until you can improve the company’s forecasting systems.

  • Guidance is usually for a range of projected results, with the range widening for periods further in the future. Guidance could be stated in dollars or percentages.

  • An alternative is to just discuss the company’s general strategy, or to release a range of operational information that analysts can use as the basis for their own financial models.

  • Need to keep providing guidance for a long time; otherwise, the market will react negatively, resulting in a price decline.

  • Should release guidance right after the quarterly Form 10-Q report is released.

  • More frequent updates tend to reduce price volatility.

  • If analyst estimates look wrong, issue guidance to put them back on track.

  • Never issue aggressive guidance, since the stock price will spike and then crash when the company cannot meet its own estimates. Avoiding aggressive guidance also reduces the risk of having fraudulent financial reporting.

  • Best to issue guidance that is slightly conservative.

Related Courses

Investor Relations Guidebook
Public Company Accounting and Finance

Accounting Standards Codification (#62)

In this podcast episode, we discuss the structure of the accounting standards codification that has been produced for all GAAP accounting standards. Key points made are:

  • All GAAP accounting standards are now located in a single database, which is indexed using a standardized coding structure. The web address is asc.fasb.org.

  • The codification reorganizes GAAP into about 90 topics.

  • Some SEC content is provided, though there are no governmental accounting standards.

  • Top level topics appear down the left side of the web page. Information categories are broken down further within each topic. There are also hyperlinked cross-references to other topics.

  • You can drill down as many as four levels within the coding structure.

  • There is a search feature that allows you to enter the original accounting standard, which produces the new codification reference.

  • This is a much better approach to researching standards than the old system, where you needed to wade through a number of possible sources.

Related Courses

GAAP Guidebook

Business Valuation (#61)

In this podcast episode, we discuss FASB’s statement number 141R, as well as the need for business valuation services when engaging in acquisitions. Key points made are:

  • The original Statement 141 addressed the use of fair value when recording a business acquisition.

  • The revised Statement 141R included a number of changes, including the following:

    • Changed the definition of a business.

    • Equity securities issued as part of an acquisition are valued on the closing date.

    • Includes an estimated fair value for any earnout provisions.

    • Acquisition costs are charged off separately.

    • In-process R&D is valued and carried on the balance sheet.

    • The allocation of the purchase price is about the same as before; includes fair values for tangible assets and intangible assets.

  • When deriving a valuation for acquiree assets, can use a valuation firm to develop a valuation report. This report is more defensible, since these firms have a lot of expertise. A valuation project typically takes 4-6 weeks, and costs $15,000-$30,000.

Related Courses

Accounting for Intangible Assets
Business Combinations and Consolidations
Business Valuation
Mergers and Acquisitions

Profit Recovery: Vendor Relationship Management (#60)

In this podcast episode, we discuss how an examination of the relations between a company and its vendors can uncover profit recovery opportunities. Key points made are:

  • Conflicts of interest between a company and its vendors can cause major expense increases.

  • Companies tend to look for fraud internally first, which means that vendor investigations are delayed or never happen at all.

  • A common profit recovery scenario is when a company makes duplicate payments to a vendor, which has not sent them back. This could be a vendor error, or it could be fraud.

  • It is difficult to spotlight cozy relations between company staff and vendors, but you can use the Internet to uncover some of these relationships.

  • Need strong procurement practices to examine vendor relationships on an ongoing basis.

  • A conflict of interest may be OK, as long as the company is getting a good deal; verify whether this is the case with benchmarking, or use a full audit to search for anomalies.

Related Courses

Cost Management
Purchasing Guidebook

Lean Accounting (#59)

In this podcast episode, we discuss how lean accounting works, and the circumstances under which it works best. Key points made are:

  • Lean accounting is a management system designed to operate in conjunction with lean production techniques.

  • Lean accounting is oriented toward making internal corporate improvements.

  • It issues reports much more frequently than the monthly reporting used by a financial reporting system.

  • The focus is on the cost of goods produced, as well as on processes.

  • Lean accounting tends to result in reduced inventory levels, which can negatively impact profits in the short term.

  • Lean accounting tends to reduce assets and headcount.

  • Lean accounting is most useful where lean production is used; works in manufacturing and service environments.

  • Lean accounting makes it easier to identify opportunities for revenue increases and cost reductions.

  • With lean accounting, you may not need to track as many individual transactions.

  • Lean accounting requires a significant new project installation, possibly on a pilot basis, with a full roll-out at a later date.

Related Courses

Lean Accounting Guidebook

Investor Relations: Forward-Looking Statements (#58)

In this podcast episode, we discuss the background for investor lawsuits against companies, and how the use of forward-looking statements and cautionary statements are designed to avoid those lawsuits. Key points made in the episode are:

  • There used to be many lawsuits from investors when a company’s stock price dropped, so companies tended to avoid making any public statements that could worsen their legal outcomes.

  • Under the 1995 Private Securities Litigation Reform Act’s safe harbor clause, companies can issue forward-looking statements, as long as they are identified as such, and are accompanied by cautionary statements. These cautionary statements can refer to a complete set of identified risks, such as a firm might identify in its annual Form 10-K.

  • Forward looking statements include financial projections, plans, statements about future performance, and discussions of the underlying factors associated with those projections, plans, and/or statements.

  • The cautionary statements may be bigger than the rest of a press release.

  • You should clear all public releases with the company legal staff, to avoid shareholder lawsuits.

Related Courses

Investor Relations Guidebook
Public Company Accounting and Finance

Target Costing (#57)

In this podcast episode, we discuss, the nature of target costing and how the process functions. Key points made are:

  • Most of the cost structure of a product is already built into it during the design stage. Any later cost variances cannot usually be mitigated.

  • Target costing is about deciding what price the market will bear, and designing a product to sell at that price, with a predetermined margin. If the targeted margin cannot be achieved, then the product is not released.

  • Target costing involves extensive market research, market share analysis, and feature analysis.

  • The determination of all component costs during the design stage is the role of the cost accountant. This person will need to compile cost estimates at different volume levels, to arrive at more accurate margin models.

  • It will likely take multiple design iterations to arrive at the targeted product margin.

  • The design team includes engineering, production, purchasing, marketing, and accounting personnel.

  • It may be acceptable to reduce a product’s reliability and durability in order to reach a targeted margin. Other options are to substitute parts, change distribution channels, and outsource production.

  • There will be a series of milestone reviews, at which the team must meet an incremental target margin goal. If this cannot be done, the project will be shelved, though it may be restarted if the circumstances change.

  • This approach can greatly increase profits, but it requires massive inter-departmental cooperation.

Related Courses

Activity-Based Costing
Cost Accounting Fundamentals

Inventory Record Accuracy (#56)

In this podcast episode, we discuss the actions you need to take in order to achieve a high level of inventory record accuracy. Key points made are:

  • Inventory tracking software must track inventory by bin location, and update the inventory records immediately when changes are made.

  • The rack layout needs room for forklifts, a slow-moving inventory area in the back, and a small parts area.

  • The rack location code should begin with a letter for the aisle location, then a number for the specific rack in the aisle, and then a letter for the level designation within each rack.

  • Rack numbers should offset each other on each side of the aisle, so that pickers can pick from both sides as they walk down an aisle.

  • Both the bar code and alphanumeric rack location code should be printed on each rack label.

  • Lock down the warehouse with a fence and gate to eliminate intrusions.

  • Consolidate the same parts in one place.

  • Assign part numbers to everything in the warehouse.

  • Verify that the unit of measure assigned to each part is correct.

  • Pack the parts in containers, seal the containers, and label them with the contents.

  • Conduct an initial count and load the results into the inventory database.

  • Conduct cycle counting; train the warehouse staff to do it and investigate any variances found.

  • Audit inventory record accuracy every week, post the results by employee, and pay bonuses for the best results.

  • Review the warehouse manager based on record accuracy performance.

  • Expect to take at least six months to reach 98% inventory record accuracy.

Related Courses

Accounting for Inventory
How to Audit Inventory
Inventory Management

Targeted Collections (#55)

In this podcast episode, we discuss several methods for concentrating your collection efforts in order to maximize the amount of cash collected. Key points made are:

  • The strategy is to pull in the largest amount of cash for the least effort, and in the least amount of time.

  • Use automated dunning letters for lowest-dollar invoices.

  • Call larger accounts first, then call smaller accounts only if there is extra time left over.

  • Dump smaller accounts onto a collection agency after relatively minimal collection efforts.

  • For the largest accounts, contact them before the due date to ensure that the invoice is scheduled for payment, send an aging report to the sales staff, talk to customers about your payment procedures, volunteer to have someone pick up the check, or suggest an ACH debit, or a credit card payment. In short, do whatever it takes to bring in the cash on time.

  • Log in cash receipts immediately, so that these invoices disappear from the overdue invoice reports seen by the collections staff.

  • Review the complaints and deductions databases to spot issues that might result in delayed customer payments.

  • Assign the best collections people to the biggest accounts.

  • Send issues to other departments if non-payment is caused by them.

  • Keep small-dollar invoice collections within the accounting department; reserve large issues for other departments.

  • If nothing else works, send accounts to a collection agency at once, rather than waiting for a prescribed period of time to pass.

Related Courses

Credit and Collection Guidebook
Effective Collections

Payroll Cycles (#54)

In this podcast episode, we talk about optimizing the use of payroll cycles, and point out a legal issue that can interfere with one of the more common payroll cycles. Key points are:

  • A payroll cycle is the length of time between payrolls, such as weekly, once every two weeks, semi-monthly, and monthly.

  • Less total annual accounting effort is required to prepare the longer payroll cycles, since there are fewer of them.

  • Every two weeks or semi-monthly are generally the most tolerable for employees.

  • A two-week payroll cycle gives employees two paychecks per month, plus two additional checks over the course of a year.

  • The semi-monthly payroll can cause a problem, because (depending on the dates) it may sometimes require employees to wait too many days from when a pay period ends to when paychecks are issued. Therefore, a two-week cycle is the best combination of processing efficiency and compliance with the law.

Related Courses

How to Audit Payroll
Optimal Accounting for Payroll
Payroll Management

Best Practices Problem Avoidance (#53)

In this podcast episode, we talk about the various techniques that can be employed to improve your odds of installing best practices. Key points made are:

  • Determine who manages the process to be changed. Could be trouble if you are impacting the area of responsibility of another manager. If so, try some other best practice.

  • You may not be in the right; review the issues of other parties to see if their concerns about a best practice are valid.

  • If you have not installed a best practice before, obtain lots of advice before proceeding.

  • Space out installations, so that the department has a chance to settle down in between major changes.

  • Slice up large projects into smaller pieces, so that some items can go live sooner. Improves the odds of overall success.

  • In-house capacity impacts your ability to complete installs; need to free up staff time.

  • Each successive project frees up more staff time, making it easier to work on the next project.

  • Review projects for dependencies, and verify in advance that you can work through them.

  • Verify that a new best practice integrates into the corporate system of controls.

  • Stick with off-the-shelf software; it rarely makes sense to develop a customized solution.

  • Maintain a full list of best practices to work on, so that you can easily switch over if there is a problem with the current project.

  • Chat with other managers periodically to see if any of them are interested in a best practice.

Related Courses

Accounting Information Systems
Lean Accounting Guidebook

Profit Recovery: Internal Auditing (#52)

In this podcast episode, we talk about how the internal auditing function can be used to increase the amount of profit generated by a business, by looking for excessive expenditures. Key points made are:

  • Internal auditing was usually held back from profit recovery work by the focus on control improvements that was initiated by the Sarbanes-Oxley Act.

  • Profit recovery is a great way to pay for the internal auditing department.

  • Profit recovery could be a separate function within the internal auditing department.

  • The work could be done by the procurement department, but internal auditing is the better option.

  • Can use control work to find departments that are in trouble, and then use profit recovery analyses to help them fund control fixes.

  • Could outsource profit recovery work to a third party and still generate a net profit by doing so.

  • Can pair the internal auditing staff with the third party recovery firm, to learn best practices.

  • Profit recovery work could be delayed if these tasks are mixed in with other priorities in the internal auditing department.

Related Courses

Cost Management Guidebook