Metrics (Cash Flow) and Excel Risk Mitigation (#29)

In this episode, we review the ways in which Excel spreadsheets can fail and how to mitigate these risks, and also discuss the essential metrics relating to cash flow. Key points discussed concerning Excel risk mitigation are:

  • Excel is useful for rapid system construction.

  • It is possible to set up data validation in Excel, but this feature is rarely used.

  • A general failing is the high degree of company-wide access to Excel spreadsheets.

  • A user can have a false sense of security when using Excel, not realizing the ways in which it can issue false results.

  • The best risk mitigation approach is to identify the most critical spreadsheets in the business and focus on improving them; review for complicated formulas that are likely to fail.

  • There are spreadsheet problem detection products on the market that can be applied to Excel.

  • Use the Excel feature to view all formulas; makes it easier to peruse them.

  • Look for hard coded figures within a range of formulas; more prone to error.

  • Investigate cells containing high-dollar values.

  • Conduct data analyses for large data sets within a spreadsheet.

Key points relating to the metrics for cash flow are:

  • Always use a few cash flow measurements as a basis of comparison to other metrics.

  • Cash flow return on sales; shows the amount of cash generated as a percent of sales.

  • Cash flow return on assets; less subject to manipulation than return on investment metrics.

  • Fixed charge coverage; use it to see if most of a firm’s cash flow is used to pay for its fixed expenses.

  • Cash to current assets ratio; a high proportion of cash indicates a high level of liquidity.

  • Cash to current liabilities; provides a very conservative view of cash requirements.

  • Cash flow to debt ratio; see if there is sufficient cash flow available to pay down debt obligations.

Related Courses

Business Ratios Guidebook
Introduction to Excel
Excel Formulas and Functions

Metrics (Liquidity) and a Review of Accounting in 2006 (#28)

In this episode, we review the key accounting events during the past year, and also discuss the key metrics for liquidity. Key points discussed concerning accounting events are:

  • Enron and Worldcom jail terms were handed down.

  • There were a series of stock option manipulation frauds.

  • The SEC issued new compensation disclosure rules.

  • FIN 46 was issued, involving off-balance sheet reporting requirements.

  • Issues with the existing lease and pension accounting standards were discussed.

  • The industry dealt with ongoing complaints about the requirements of Sarbanes-Oxley section 404, pertaining to systems of control.

Key points relating to the metrics for liquidity are:

  • The current ratio is not a useful indicator of liquidity, since it includes inventory, which is not liquid.

  • The quick ratio is better, since it removes inventory from the calculation.

  • A comparison of sales to assets can be plotted on a trend line; the proportion should be about the same over time.

  • The days of working capital ratio indicates the amount of working capital needed to support one day of sales.

  • The accounts receivable collection period indicates the average number of days during which an invoice is outstanding, before it is collected.

  • A comparison of sales to inventory can be plotted on a trend line, to indicate the ongoing investment level of a business in inventory.

  • The accounts payable days measurement can be plotted on a trend line to highlight any changes in payables duration.

  • The risky assets conversion ratio shows the percentage of low-value assets on a company’s balance sheet.

Related Courses

Business Ratios Guidebook

Metrics (Inventory) and the Risk Assessment Suite, Part 2 (#27)

In this episode, we delve further into the risk assessment suite, and also describe the most useful metrics for inventory. Key points discussed relating to the risk assessment suite are:

  • It was created in response to high-profile audit failures.

  • It requires a more robust understanding of the client, its risk management practices, operating environment, strategy, and competitive factors.

  • The client will likely be required to complete a questionnaire pertaining to the preceding items.

  • There is a new focus on auditing the financial statement presentation and disclosures.

  • The auditor will need to ask more questions about a client’s internal controls.

  • It requires consideration of a client’s internal controls as part of an audit.

  • More attention must be paid to the risks of material misstatement of financial statements.

  • Link the audit program to an increased need to address the risks of material misstatement.

  • Work by the client to assist the auditor can reduce fees; it may also be possible to reschedule the audit to assist the auditor.

Key points discussed related to metrics for inventory are:

  • Inventory turnover is useful for seeing how much inventory is needed to support sales.

  • The proportion of old inventory on hand is needed to call attention to the need to eliminate inventory. The percentage of returnable inventory is a more specific variation.

  • Inventory accuracy is needed by the purchasing and picking staffs, and reflects inventory record accuracy.

  • Inventory availability is needed to see if there is a problem with delivering to customers on time.

  • The percentage of warehouse utilization is needed to plan for additional investments in warehouse space.

  • The cubic volume of warehouse space used is useful for adjusting the warehouse racking systems to accommodate more inventory.

Related Courses

Business Ratios Guidebook
Inventory Management

Metrics (Payroll) and the Risk Assessment Suite, Part 1 (#26)

In this episode, we give an overview of the risk assessment suite, and also describe the most useful metrics for the payroll function. Key points discussed relating to the risk assessment suite are:

  • The cost of audits for a public company can be three times the cost of audits of privately-held companies.

  • There is a disparity between the need for higher levels of assurance arising from audits and the pressure on auditors to keep their prices down.

  • The risk assessment suite revises auditing standards to make audits more comprehensive.

  • As a result of the risk assessment suite, audit planning will likely start sooner, so audits will also start sooner, and auditors will be more inclined to finish all audit work while still in the field.

Key points discussed related to metrics for payroll are:

  • Use the number of manual paychecks cut per 1,000 payees

  • Use the number of W-2c forms issued per 1,000 payees

  • Use an error summarization system to self-report payroll errors, and then issue an aggregated report by error type.

  • Use payroll outsourcing costs by month, divided by the number of payees; track on a trend line.

  • Use the total payroll department cost divided by the total number of payees; track on a trend line.

  • Use the number of W-2 forms downloaded by employees, divided by the total number of payees; useful when posting W-2 forms on a central site, where employees can readily access them.

Related Courses

Business Ratios Guidebook
Payroll Management

The Fast Close, Part 10 (#25)

In this episode, we cover improvements to the billing process, and make final comments about the fast close. Key points discussed concerning billing are:

  • Issue invoices as early as possible, so there is no backlog going into the closing period.

  • Stay late on the last day of the month to process billings, and start again early the next day, to stay ahead of the billing rush.

  • Assign extra staff to the processing of invoices during closing day, to ensure that they are completed on time.

  • Minimize the verbiage entered on invoices, so that they can be processed quicker.

  • Use special invoice templates for special-request customers, to enhance processing speed.

  • Delay the issuance of month-end statements to customers until after the close.

General comments concerning the fast close are:

  • The key issue is to shift closing work forward into the month, to reduce the work load on closing day.

  • Fast close processes are inexpensive.

  • Fast close concepts are all about process improvements.

Related Courses

Closing the Books
The Soft Close
The Year-end Close

The Fast Close, Part 9 (#24)

In this episode, we talk about the techniques that can be used to improve the closing process for payroll. Key points discussed are:

  • A somewhat inaccurate approach is to accrue for commissions based on the historical commission rate.

  • When the commission structure is more complex, calculate commissions just before the close, and complete the calculations for the final day of the month during the close.

  • Require employees to enter their hours worked into an online timekeeping system, and remind them to do so several times as the month-end approaches. Then accrue an estimated wage amount for anyone who did not enter their time for the last few days of the month. This results in a fairly accurate overall wage accrual.

Related Courses

Closing the Books
The Soft Close
The Year-end Close

The Fast Close, Part 8 (#23)

In this episode, we discuss how to improve inventory record accuracy, which can have a massively positive impact on the speed of the close. However, the improving inventory record accuracy is a prolonged process that will undoubtedly take months, and consume the time of the best warehouse workers. Key points discussed are:

  • Install inventory tracking software that records inventory locations.

  • Create unique rack locations in the warehouse.

  • Number the racks, as well as the bins within the racks.

  • Lock down the warehouse with fencing.

  • Consolidate parts into a single location, or as few locations as possible.

  • Assign part numbers to all inventory items.

  • Verify the unit of measure for every inventory item.

  • Part the parts into boxes or bags, and record the amount on each box or bag (facilitates counting).

  • Count everything and enter it into the tracking software, including inventory locations.

  • Conduct an ongoing series of cycle counts and review the reasons for any errors found.

  • Do spot counts, calculate inventory accuracy, and post the results in the warehouse.

  • Pay cash bonuses to the warehouse staff for high levels of inventory accuracy.

Related Courses

Closing the Books
The Soft Close
The Year-end Close

The Fast Close, Part 7 (#22)

In this episode, we discuss how the payables function can be streamlined, so that the time associated with it as part of the closing process is minimized. Key points discussed are:

  • Create an accrual for receipts when there is a purchase order, so that receipts can be priced based on information contained within the purchase order. Works best when structured as an automated report, thereby eliminating calculation time.

  • Create a contract summary file and accrue whatever has not yet been billed to the company. This is useful when accruing for services billings.

  • Some accruals are more facts-based than others, so start with accruals that are solidly based on purchase orders, and then work down through less-certain payables accruals until you reach a point of discomfort with proceeding further, and stop.

  • Use negative approvals for payables, so that invoices are logged into the accounting system as soon as they are received.

  • Reduce the number of required payables approvals, so that invoices are processed more promptly.

  • Use evaluated receipts, where payments to suppliers are based on receipts, rather than supplier invoices.

  • Use procurement cards to minimize the amount of payables activity.

  • Set up a web page and have suppliers enter their invoices directly into your accounting system through the web site.

Related Courses

Closing the Books
The Soft Close
The Year-end Close

The Fast Close, Part 6 (#21)

In this episode, we discuss how the use of journal entries can be altered in order to improve the closing speed. The general concept is to only create journal entries for larger amounts, ignoring all smaller ones that will have a minimal impact on the financial statements. Key points discussed are:

  • Reduce the number of journal entries by eliminating those having a minor impact on the financial statements.

  • Schedule an accruals review once a quarter, to see if any accruals can be eliminated.

  • Eliminating journal entries reduces the risk of not reversing accruals, since there are fewer accruals to be reversed.

  • Use a standard list of journal entries, to ensure that the same entries are made every month.

  • Assign responsibility for journal entries, where only one person can make entries. Doing so eliminates the risk of duplicate entries.

  • Create standard journal entry templates, so that the same formats are used on a consistent basis.

  • Set a journal entry reversing flag in the accounting software, so that each accrual is reversed automatically.

  • Set up recurring entries for those journal entries that do not change much from period to period.

  • Create a definition for those accounts that tend to confuse people.

Related Courses

Closing the Books
The Soft Close
The Year-end Close

The Fast Close, Part 5 (#20)

In this episode, we discuss how issuing a comprehensive financial statement package prolongs the time required to close the books. A better approach is to use a two-stage release of information, where the core financials are issued at once and everything else is issued later. Key points discussed are:

  • Use the accounting software’s report writer to develop reports that will be issued more than once.

  • Exclude operational information from the financial statements, since gathering this information can be a slow process and the information collected from other parties may be incorrect.

  • Release extra information in a separate report, preferably after the core financials have been released. Or, issue operational information once a week, thereby keeping it entirely away from the financial statements.

Related Courses

Closing the Books
The Soft Close
The Year-end Close

The Fast Close, Part 4 (#19)

In this episode, we discuss how the centralization of the accounting function can be used to enhance the closing process. The following points are made:

  • The closing process is unusually slow in a multi-division company, because each division has to close its books first and then forward its results to the parent entity, which then has to conduct its closing process. The situation is especially slow when each division uses its own accounting software, procedures, and chart of accounts.

  • A lesser enhancement is to impose a common chart of accounts and accounting procedures on all company divisions.

  • The best approach is to centralize all accounting functions. Doing so eliminates all variability by using one set of procedures and a single chart of accounts. It also reduces the number of people involved in the closing process. Further, transactions are stored in one database, making it easier to research problems. With a single location, workflow management software can also be used, making it easier to track the progress of the monthly close.

  • The main problem with centralizing the accounting function is the process of converting over. It can be smoother to centralize one function at a time, such as all the customer billings, then all payroll, and so forth.

  • Can also compress the number of people involved in the closing process until an optimum number is reached.

  • When acquiring other businesses, consider centralizing their accounting functions as soon as they are purchased.

Related Courses

Closing the Books
The Soft Close
The Year-end Close

The Fast Close, Part 3 (#18)

In this episode, we discuss more closing activities that can be completed prior to the end of a reporting period. Doing so can greatly increase the speed with which financial statements are created. The following points are made:

  • Calculate the interest rate on debt in advance. This is especially useful when no changes in the debt balance are expected near the end of the month.

  • Calculate accrued vacation in advance. This could be so steady a number that no changes are needed from month to month. A “use it or lose it” vacation policy makes the task easier, since the upper end of the accrual is capped.

  • Have billable employees update their billable hours throughout the month, so there is little left to do at month-end.

  • Reconcile accounts early, which also allows more time to research reconciling items. Late changes to accounts are dealt with in the following month.

  • Use a closing checklist that starts about 10 days prior to month-end, to make sure that all advance activities are completed on time.

Related Courses

Closing the Books
The Soft Close
The Year-end Close

The Fast Close, Part 2 (#17)

In this episode, we discuss a number of closing activities that can be completed prior to the end of a reporting period. Doing so can greatly increase the speed with which financial statements are created. The following points are made:

  • Review all expenses to rebill to customers several days in advance, such as travel and entertainment rebillings. Doing so can result in much cleaner billings to customers.

  • Partially complete commission calculations and splits for all sales other than those occurring in the last few days of the reporting period.

  • Review employee hours to be billed out, and clean up any errors found. This task could be done on a weekly basis.

  • Complete financial statement schedules in advance, such as operational reports.

  • Create a separate subdirectory in the computer to store each month’s reports; doing so tends to avoid confusion with using the wrong reports.

  • Conduct a daily online bank reconciliation, so that reconciling items have been dealt with prior to the end of the reporting period.

Related Courses

Closing the Books
The Soft Close
The Year-end Close

The Fast Close, Part 1 (#16)

In this episode, we introduce the concept of the fast close, where the financial statements are produced on a vastly accelerated basis, usually in a single day. The main points covered in the episode are:

  • The soft close may be an option, where some closing entries are avoided in order to accelerate the closing speed, though at the price of producing a less accurate outcome

  • The main problem with closing the books is jamming too many activities into the closing period

  • The basic solution is to shift most activities out of the closing period

  • This solution can involve the use of more estimates, in such areas as reserves and accruals

  • Most actions can be completed a day or two in advance of the closing period

  • Can review financial statements in advance for errors, so that error correction activities are reduced within the closing period

  • Doing closing work early is less of a rush, so the results tend to contain fewer errors

  • Even if the results produced are slightly incorrect, it is usually possible to fix them in the following reporting period

Related Courses

Closing the Books
The Soft Close
The Year-end Close

Controls for Fixed Assets (#15)

In this episode, we discuss the controls associated with fixed assets. Several controls are useful for monitoring which assets are purchased and disposed of, as well as for maintaining security over them. Key points made in the podcast are noted within the following general classifications:

Acquisition controls:

  • Use an annual capital budgeting process to approve purchases, to ensure that purchases are matched with available funding

  • Make it harder for sudden asset purchases to be approved, since they might otherwise sidestep purchasing controls

  • Use a capital request form that details the need for asset purchases

  • Use a hurdle rate for discounted cash flow analyses, which can identify marginal asset requests

  • Lock down access to the fixed asset master file, so that no one can make adjustments to hide asset thefts

  • Review all changes to the fixed asset master file, to spot unauthorized changes

  • Create ID tags for all fixed assets and log them, so that each asset can be tracked over time

  • Assign responsibility for all fixed assets to employees

  • Use a formal transfer document to shift responsibility for a fixed asset to a different manager

Security controls:

  • Restrict access to fixed assets, such as the admin area or the tool crib, to reduce the risk of asset theft

  • Attach RFID tags to fixed assets, with a link to an alarm system that will be triggered if they are taken off the premises

  • Audit all fixed assets on a rolling basis

Disposal controls:

  • Review whether any assets on the premises are no longer needed, and so can be sold

  • Require a disposition form for all fixed asset disposals, with manager approval required

  • Make sure that the cash received from a fixed asset sale matches the sale document, to spot instances of employee theft of the proceeds

Related Courses

Accounting Controls Guidebook
Fixed Asset Accounting
How to Audit Fixed Assets

Controls for Payroll (#14)

In this episode, we discuss the controls associated with payroll. This is an area in which fraud is more likely to occur because of such activities as buddy punching and the use of ghost employees, so controls are unusually necessary. Key points made in the podcast are noted within the following general classifications:

Manual system controls:

  • Verify that all time cards have been received from employees by matching them to the employee list

  • Verify all hours worked, and especially overtime, with supervisors

  • Gain proper approval for all pay rate changes

  • Have a second person verify all payroll calculations

  • Have recipients sign for their paychecks, to ensure that payments are not going to ghost employees

  • Compare cashed paychecks to the list of distributed checks, to see if additional checks were issued

  • Compare the addresses on employee checks, to see if more than one check is going to the same address

  • Look for double endorsements on checks, which are an indicator of ghost employee arrangements

Cash payment controls:

  • Have recipients sign for the amount of cash issued to them

  • Use a bill and coin requisition form, with approvals, to request the cash to be used for payments to employees

Computerized system controls:

  • Use a smart time clock to eliminate the need for manual approvals

  • Have supervisors manually override the smart clock to allow overtime selectively

  • Install biometric clocks to eliminate buddy punching

  • Install a surveillance camera over the time clock to foil buddy punchers

  • Review the payroll register for errors

  • Use variance reports to detect incorrect payments

  • Review self-service entries by employees and managers for errors

  • Install limit checks on self-service screens to control the date entry process

  • Email all payroll changes made back to the people requesting changes, to ensure that the changes match their intentions

  • Install extra controls over direct deposit change transactions

  • Do not use deposit slips for direct deposit information (use a cancelled check instead)

  • Look for duplicate pay-to bank accounts, which can indicate ghost employee transactions

  • Limit access to the employee master file, and keep a log of changes to it

  • Compare the company phone list to the payroll register, to see if anyone was excluded from a payroll, or if ghost employee payments are being made

Related Courses

Accounting Controls Guidebook
How to Audit Payroll
Optimal Accounting for Payroll
Payroll Management

Controls for Accounts Payable (#13)

In this episode, we discuss the controls associated with accounts payable. There are many possible controls that may be used, but the accountant needs to be aware that employing all of them could seriously reduce the overall efficiency of the department. Key points made in the podcast are noted within the following general classifications:

Manual controls:

  • Install three-way matching for larger expenditures

  • Institute a duplicate invoice search

  • Store unpaid invoices by date, to ensure that those items to which early payment discounts apply will be paid on time

  • Roll out negative approvals, to streamline the invoice approval process

  • Store blank check stock in a locked location, to prevent theft

  • Restrict access to the signature plate

  • Maintain a log of all checks that have already been used, to spot illicit removals

  • Review supporting documents before signing checks

  • Limit the number of check signers to a small number of rigorous signers

  • Never sign blank checks

  • Perforate cancelled checks, to keep them from being submitted for payment

Computerized controls:

  • Conduct automated three-way matching

  • Automatically scan for duplicate invoices

  • Lock down access to the supplier master file, so that no one can alter pay-to addresses

  • Track changes that have been made to the supplier master file

  • Adopt a standard naming convention for suppliers in the supplier master file, to prevent the creation of duplicate supplier records

  • Scan the supplier master file for duplicate supplier records

  • Compare supplier to employee addresses to see if there are any matches

  • Install the positive pay system

Electronic payments:

  • Install an ACH debit filter to restrict deductions from a bank account

  • Minimize the amount of cash in the checking account to cover just current liabilities, to minimize the risk of large additional charges being made against the account

  • Install password access to the electronic payment software

  • Have the bank call the CFO or controller for verbal approval of large electronic payments

  • Review repetitive payments on a regular basis, to ensure that they are still valid

Related Courses

Accounting Controls Guidebook
Accounting Information Systems
Optimal Accounting for Payables
Payables Management

Collection and Cash Receipt Controls (#12)

In this episode, we discuss the controls associated with collections, cash receipts, and petty cash. The main concept is to avoid cash-related controls by keeping cash off the premises, usually by encouraging the use of ACH payments or payments into a bank lockbox. Key points made in the podcast are:

Collection controls:

  • The collections staff is not allowed to handle cash receipts, since this presents a temptation to steal the cash and use credit memos to cover up the theft

  • The collections staff can only create credit memos without approvals that are relatively small; all others require management approval

  • Management approval is required to assign invoices to a collection agency, because of the significant collection fees charged

Cash receipts controls:

  • Two people open the mail, to reduce cash and check pilferage

  • The mailroom staff creates a list of all cash and checks received, of which it retains a copy

  • The mailroom staff endorses all received checks as being for deposit only

  • The cash receipts clerk matches all checks entered into the accounting system to the list provided by the mailroom, to look for anomalies

  • Compare the bank deposit slip to the cash receipts journal, to see if the courier removed any cash or checks

  • Force the cash receipts clerk to take vacations, which may uncover instances of lapping fraud

  • The cash register clerk gives a receipt to every paying customer, so the customer can compare the receipt to the amount paid

Petty cash controls:

  • Don’t use petty cash at all

  • Assign responsibility for the petty cash box

  • Document all disbursements from the petty cash box

  • Audit the petty cash box

  • Place a contact switch under the petty cash box, so that an alarm will sound if the box is taken

Related Courses

Accounting Controls Guidebook
Accounting Information Systems
Credit and Collection Guidebook
Optimal Accounting for Cash

Controls for Billing (#11)

In this episode, we discuss the controls associated with billing. The key points made in the podcast are divided into three parts, which are for manual systems, computerized systems, and general controls.

The controls related to a manual billing system are:

  • Verify prices being billed against a standard price list

  • Proofread larger invoices prior to mailing, to minimize errors

  • Have the originating salesperson verify invoices, to spot errors

  • Verify any unusual payment terms

  • Verify the applicable sales taxes being charged

  • Stamp each envelope with “address correction requested”

The controls related to a computerized billing system are:

  • Print and review the invoice preview report to ensure that all items to be billed are accurate

  • Reduce access to the billing software, to minimize the risk of fraudulent billings

The controls relating to all types of billing systems are:

  • Segregate the billing and collection duties, to keep anyone from falsely issuing a billing and then collecting the related funds

  • Compare contract prices to what is being used for the prices on the most recent invoices

  • Monitor customer complaints regarding invoices

  • Issue month-end statements to customers, to see if they can spot any errors

  • Compare the quantities shipped to the quantities invoiced

  • Clean up the invoice format to make it easier for customers to read

  • When entering an invoice into a customer’s online payment system, print the confirmation page to verify that it was entered

  • Segregate credit memo creation from the cash receipts function

  • Require approvals for the creation of larger credit memos

  • Charge credit memos against salesperson commissions, so that they have an incentive to investigate the memos

  • Audit a selection of credit memos

Related Courses

Accounting Controls Guidebook
Accounting Information Systems
Credit and Collections Guidebook

Controls for Shipping (#10)

In this episode, we discuss the controls associated with shipping. This process begins with a verification that customer credit has been approved, proceeds to picking from stock, and ends with packages being prepared for delivery to customers. Key points made in the podcast are:

  • Verify that all sales orders are approved in advance by the credit manager, to ensure that shipments are only made to creditworthy customers

  • Audit sales orders for a credit approval stamp, to verify that the shipping manager is looking for the authorization stamp before mailing packages to customers

  • Compare picked items to sales orders to ensure that picks are correct

  • Investigate the reasons for product returns, to see if any goods were incorrectly shipped to customers

  • Prepare a bill of lading for issuance to the accounting department, which triggers the preparation of an invoice

  • Prepare the daily shipping log, which is useful for verifying that all shipments have been invoiced

  • Investigate old open customer orders that have not been shipped, to see if additional sales can be generated from these stray items

  • Verify the accuracy of any labels being attached to shipments going to customers that use an evaluated receipts system, since these labels are triggering payments back to the company

It is best for the shipping department to have a fully integrated system, so that the shipping manager can verify credit approvals, print labels, and prepare billings of lading and shipping logs from the system.

Related Courses

Accounting Controls Guidebook
Accounting Information Systems