Throughput Accounting: Controls (#47)

In this podcast episode, we cover the reasons for controls associated with a bottleneck operation, and where they should be placed. Key points made are:

  • Traditional controls are targeted at avoiding losses, while throughput controls are targeted at increasing revenue.

  • Control the bottleneck by focusing on enhancing utilization.

  • Track the proportion of downtime caused by maintenance (acceptable) and everything else (unacceptable).

  • Should only produce what is planned; no overages allowed.

  • Track scrap occurring downstream from the bottleneck, since this represents wasted bottleneck production time.

  • Track all instances of buffer decline, and what caused each one.

  • Monitor sprint capacity levels upstream from the bottleneck.

  • Track the number of production jobs released into the system.

  • Track the number of days supply on hand of essential raw materials.

Related Courses

Constraint Management
Inventory Management

Throughput Accounting: Financial Analysis (#46)

In this podcast episode, we cover a variety of scenarios that can impact the amount of throughput generated by a bottleneck operation. Key points made are:

  • Analysis scenarios focus on maximizing the dollars of throughput per minute of processing time.

  • Not always good to accept large orders for which the associated throughput per minute of processing time is low, since they tend to crowd out other orders with higher throughput per minute.

  • Can make sense to shift work away from the bottleneck if the cost of doing so is lower than the associated amount of throughput per minute.

  • Can make sense to install a quality assurance station in front of the bottleneck operation, to ensure that low-quality parts are not processed by the bottleneck.

  • Generally want to overstaff the bottleneck to avoid downtime.

  • Generally want to process low-throughput items, as long as there is sufficient excess capacity in the bottleneck to accommodate it.

  • If there is enough capacity for all orders, then the bottleneck is probably somewhere else. When there is excess capacity, it could be useful to lower prices to increase order volume.

Related Courses

Constraint Management
Inventory Management

Throughput Accounting: Capital Budgeting (#45)

In this podcast episode, we cover the flaws in a traditional capital budgeting system, and how to improve the situation by incorporating constraint analysis concepts. Key points made are:

  • The traditional capital budgeting approach is designed to optimize local production rather than the system as a whole, and may be based on cash flow projections that are incorrect. The end result is frequently no change in overall throughput, despite the additional invested funds, resulting in an overall decline in return on investment.

  • Should only make capital investments that have an impact on bottleneck capacity.

  • May be better to invest in several lower-capacity machines rather than one massive device, since a breakdown of just one of these smaller machines allows the others to keep functioning.

  • Focus on buying lower-complexity equipment in order to reduce equipment down-time.

  • Buy more sprint capacity in upstream locations; just buy enough to protect the inventory buffer in front of the bottleneck.

  • Engage in a more detailed analysis when a capital budgeting request does not directly impact the bottleneck.

  • Invest whenever needed, rather than once a year.

  • The analysis of capital requests should be by a process analyst, rather than a financial analyst, since the key point is to review the impact on the bottleneck operation.

  • Revise the capital budgeting application form to focus on throughput impact.

  • The end result of these changes could be an overall decline in the amount of invested funds.

Related Courses

Constraint Management
Inventory Management

Throughput Accounting: Bottleneck Management (#44)

In this podcast, we cover how to spot a bottleneck, as well as how to manage it to maximize throughput. Key points made are:

  • A bottleneck is likely to be where a work backlog is present, such as a production workstation with a pile of inventory in front of it, waiting for processing. Bottleneck equipment tends to break down frequently, since it is constantly in use.

  • A bottleneck could also be designated as such; usually when a process is expensive to operate, so the capacity level is deliberately reduced to lower the associated costs.

  • A bottleneck operation should run at all times. This means overstaffing it, using lots of support staff, and reviewing incoming materials to ensure that they meet quality specifications.

  • It may be useful to raise the wages of employees working in the bottleneck area, to reduce employee turnover. Could also consider cross-training employees, so that more people know how to operate the process. Also, be willing to pay overtime in order to keep the process running.

  • May offload bottleneck work to a backup operation, even if it is not as efficient. Can also make sense to keep old equipment that would otherwise be sold off, if it can act as a backup to the bottleneck.

  • May also outsource work to reduce the load on the bottleneck.

  • Another option is to install a conveyor from the closest upstream work station to the bottleneck, in order to avoid breaks while the upstream work station piles up its output into a batch for delivery to the bottleneck.

  • Pay for the rush delivery of parts, when doing so will keep the bottleneck operational.

  • Add upstream work capacity, if doing so will build the inventory buffer in front of the bottleneck.

  • Manage the bottleneck intensively, to maximize the amount of time that it is operating.

Related Courses

Constraint Management
Inventory Management

Throughput Accounting: Basics (#43)

In this podcast, we cover the basic concepts of constraint management, including the bottleneck, inventory buffer, sprint capacity, and throughput. Key points made are:

  • This is based on the theory of constraints, where the focus is on bottleneck operations.

  • You need to make your bottleneck’s operations as efficient as possible to maximize its output.

  • General efficiency improvement campaigns do not work; they have to be focused on just the bottleneck.

  • Improving the efficiency of upstream operations only increases the backlog in front of the bottleneck, which increases the investment in inventory.

  • This can be a major concern in the sales department, depending on the process flow within it.

  • There needs to be a buffer in front of the bottleneck, to ensure that the bottleneck is always running. This means that a pile of inventory in front of the bottleneck is a good thing.

  • Only release inventory into the production operation in sufficient quantities to maintain the inventory buffer and maximize the workload at the bottleneck.

  • Having some sprint capacity in upstream operations is needed to rebuild the buffer quickly, in case it is ever depleted. Otherwise, the bottleneck may be short of work.

  • Throughput is the margin remaining after all totally variable costs are subtracted from sales.

  • Focus on maximizing the throughput per minute passing through the bottleneck. This maximizes profits for the business.

Related Courses

Constraint Management
Inventory Management

PDF Invoices (#42)

In this podcast, we cover how to create a PDF invoice, and the advantages of doing so. Key points made are:

  • Many accounting software packages automatically create PDF invoices. If not, buy Adobe’s Acrobat software to do so.

  • Can then send PDF invoices as email attachments, which avoids any mailing delay and so shortens the collection period.

  • Always create a PDF first in your accounting software; otherwise, the system may insist on printing “duplicate” on any subsequent printings of the same invoice, which will then appear on the PDF. You can always print from the initial PDF to get a paper version of an invoice that does not contain the word “duplicate” on it.

Related Courses

Credit and Collections Guidebook
Effective Collections
Lean Accounting

Remote bank deposits (#41)

In this podcast, we cover the process flow associated with using a remote bank deposit system. Key points made are:

  • A remote bank deposit system allows you to extract check information from printed checks and send them to your bank as an electronic deposit.

  • A remote bank deposit scanner can be ordered from your bank, usually for a monthly fee.

  • Once received, download software to the computer to which the scanner is connected.

  • To process a batch of checks, begin by adding up the checks to arrive at a batch total.

  • Put the checks in the input tray on the scanner.

  • The scanner will scan each check at a rate of about one per second, and will kick out any it cannot scan (usually manual checks). The rate of success for typed checks is about 98%, and much lower for manual ones.

  • Once completed, match the scan total to your calculated total, and send the scanning file to the bank.

  • The checks should be shredded after about 15 days.

  • Foreign checks must still be submitted to the bank manually.

  • The scanner requires minimal maintenance, usually just minor cleaning every few months.

  • Tends to reduce check clearing time by about one day.

Related Courses

Accounting Information Systems
Lean Accounting Guidebook
Optimal Accounting for Cash

Biometric Time Clocks (#40)

In this podcast, we discuss the advantages of using biometric time clocks, as well as how they function. Key points made are:

  • Can use any unique feature to associate an individual with entered time.

  • Hand geometry can be scanned into the system, which can be subsequently verified in one or two seconds.

  • Fingerprints can be scanned; the hardware is somewhat less expensive.

  • In either case, following verification, the employee can enter his or her time, or access other payroll information.

  • The fingerprint scanner may not work well in a rugged environment, where dirt or grease can obscure fingerprints.

  • Useful for eliminating buddy punching, and there is no need for an employee badge.

Related Courses

Optimal Accounting for Payroll
Payroll Management

Timekeeping by Telephone (#39)

In this podcast, we discuss the benefits of entering time data through employee phones. Key points made are:

  • Time cards, time clocks, and time entry through a website are the traditional time collection methods.

  • A telephone time clock allows employees to enter their time into a central system via any phone, including their cell phones.

  • A telephone time clock works well when employees are engaged in field service, construction, or agricultural activities, or when a business has many locations but few people in each one (which makes the investment in local time clocks too expensive).

  • Basic process is to call an 800 number, enter the employee ID, enter the clock code for the type of activity, and either enter a time stamp, start/stop time, or elapsed time. There is also a provision for answering a series of yes/no questions. The entire process takes 20-30 seconds.

  • Benefits of timekeeping by telephone include the elimination of time cards, no data entry work, immediate data validation, immediate visibility into the hours being worked on projects, and the immediate availability of hours worked for clients that can then be billed to those clients.

  • The underlying time database should be integrated into the company’s payroll processing system.

Related Courses

How to Audit Payroll
Optimal Accounting for Payroll
Payroll Management

Automatic Cash Application (#38)

In this podcast, we discuss the characteristics of an automatic cash application system, and the circumstances under which it works best. Key points made are:

  • There are four steps in the automatic cash application process, which are:

    • 1: Import data from the bank, or customers, or engage in manual data entry. Need to link up payment information from the bank with the invoice detail in the company’s accounting system.

    • 2: Make corrections for keying errors with rules engines; there may be an AI-based learning process incorporated into the system.

    • 3: Manually fix those issues that cannot be automatically corrected by the system; a good result is automatic application of 90% of all payments.

    • 4: Export the cleaned data to your ERP system.

  • Problems could be caused by underlying procedural issues.

  • The success rate usually begins quite low; use the Pareto principle to fix the 20% of problems causing 80% of the problems, which rapidly improves the situation.

  • Automatic cash application is a good solution when the transaction volume is high, or where cash receipts processing is prone to error, or when there are large spikes in cash receipts transaction volume, or when the system can be used to segregate cash receipt duties from other positions in the company.

Related Courses

Accounting Procedures Guidebook
Lean Accounting Guidebook

Forensic Accounting Investigations and Logistics Metrics (#37)

In this podcast, we discuss the nature of forensic accounting investigations, when they are needed, and who may be involved in investigations. In the second part of the podcast, we also discuss logistics metrics. Key points made in regard to forensic accounting investigations are:

  • The forensic accounting investigator is called in which a client suspects that fraud has occurred.

  • The investigator gathers documents, examines them, and reports findings to the client. This work involves looking for anomalies, checking on the existence of suppliers, investigating disbursement spend, reviewing contracts, and so forth.

  • The investigator follows the money in asset misappropriation cases. This includes the examination of records and emails.

  • Nonprofit entities tend to be quite trusting and have few employees, which places them at a higher risk of fraud.

  • The investigator may need to look into conflicts of interest (such as business dealings with friends and family), corruption, and bribery. This may involve reviewing the existence of any payments to government officials.

  • Insurers may pay for the fees of the investigator.

  • May end up talking to the SEC, FBI, and other regulators and law enforcement agencies.

  • Forensic investigation skills may not be present in every Big Four office; tends to be concentrated in offices located in larger population areas.

Key points relating to logistics metrics are:

  • Percentage of certified suppliers; focus is on production suppliers.

  • On-time inbound delivery percentage; there is a penalty for both early and late deliveries.

  • Raw materials inventory turnover

  • Cost of rush freight services; too high a number indicates excessively low raw materials inventory.

  • Picking accuracy; focus is on parts shortages.

  • Order fill rate; can depend on the number of line items in an order.

  • Percent of products damaged in transit; can help to calculate on a quarterly basis, to smooth out short-term anomalies.

Related Courses

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Fraud Examination
Fraud Schemes

The Universal Payment Identification Code, and Sales Metrics (#36)

In this podcast, we discuss the advantages of using the universal payment identification code (UPIC) for payables transactions, as well as the best sales metrics to use. Key points made in the podcast are:

  • The Clearing House Payments Company does payment clearing; it is an alternative to the Fed.

  • UPIC is a pseudo account number, to which customers can send their ACH payments. The Clearing House Payments Company then looks up the linked account account, and forwards each ACH payment to it.

  • UPIC is portable, so it stays the same when you change bank accounts.

  • UPIC avoids the need to contact customers when the underlying bank account changes.

  • UPIC does not allow the use of ACH debits or demand drafts.

  • Can ask your bank if they offer UPIC.

Key points relating to sales metrics are:

  • Sales per salesperson; use it to measure nonrecurring sales.

  • Customer cancellation percentage; use it to monitor the loss of longer-term customers.

  • Sales productivity; can use it to measure productivity for individual salespeople, or the entire department.

  • Sales effectiveness ratio; want to maximize gross margin per hour of bottleneck time.

  • Quote to close ratio

  • Pull-through ratio; useful when have large initial group of prospects.

  • Days of backlog; only at a gross level, so it may hide constraint issues for individual products.

  • Customer turnover; need to factor in which customers need to be dropped.

Related Courses

Business Ratios Guidebook
Payables Management

Recovery Auditing and Accounting Metrics (#35)

In this podcast, we discuss the reasons why recovery auditing can improve profits, as well as the measurements to use in the accounting department. Key points made in the podcast are:

  • Profit leaks come from the accounts payable and purchasing streams.

  • There tends to be more leakage as headcount declines, since there are fewer people watching transactions.

  • Need staffing overcapacity to plug all profit leaks.

  • Hire a recovery auditor to do the analysis work for you. This will require a specialist in each area to be examined, such as payables, advertising, freight, sales and use taxes, and health care billings.

  • A recovery auditor can bill an hourly rate, or a percentage of the cost savings.

  • The hiring person can look bad if too many mistakes are found by the auditor.

  • The first recovery audit tends to find the most savings, with diminishing returns thereafter. Still makes sense to bring in recovery auditors on a regular basis.

  • Useful for isolating where the problem areas lie within a business.

  • Recovery auditing tends to work better with large to mid-sized companies, but can still make sense when sales are as low as $20 million.

  • A good recovery auditor will provide advice, as well as spot specific instances of waste.

Key points relating to accounting metrics are:

  • Error tracking is essential within the department.

  • Average expense report turnaround time; turnaround time can be delayed when supervisors do not forward expense reports to the payables staff in a timely manner.

  • The total number of transaction errors requiring a payroll adjustment.

  • The proportion of purchase discounts taken; should focus on those discounts that are the most economical to take.

  • Average time to issue invoices; should be as fast as possible.

  • The total payroll transaction fees charged by the payroll supplier.

  • The percentage of dates on which tax filing dates are missed.

  • The time required to produce financial statements.

  • Borrowing base usage; warns when the amount of available debt is getting close to zero.

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Fraud deterrence (#34)

In this episode we discuss the issues relating to fraud deterrence, to keep instances of fraud from ever happening. Key points made in the podcast are:

  • Fraud deterrence involves conditions and procedures analysis to keep fraud from taking place.

  • Could include the use of detection systems to spot fraud before it worsens.

  • The cost of fraud deterrence is a fraction of the cost of the fraud being prevented.

  • It avoids the loss of business reputation by a business, which might otherwise impact its contracts and loans.

  • A robust, bottom-up budget is a good fraud deterrence control.

  • Just the act of reviewing accounts is a deterrent, since employees see that you are looking over their shoulders.

  • The worst frauds tend to go on for an extremely long time, building in size as they get older.

  • It is rare to see an excessive level of control in a business.

  • Focus on all aspects of the business when engaged in fraud deterrence.

  • Conduct an operational review to identify control issues and also increase the efficiency level. Requires lots of interviews.

  • Difficult to do an in-house fraud deterrence review, due to the fear of recrimination.

  • Should do deterrence reviews about every two to three years.

Related Courses

Accounting Controls Guidebook
Fraud Examination
Fraud Schemes

Acquiring a Public Shell Company (#33)

In this episode, we discuss the considerations involved in buying a public shell company. Key points made in the podcast are:

  • A public shell is a public company that has no business activity, and which is no longer filing periodic reports with the Securities and Exchange Commission (SEC).

  • A private company buys a public company in order to go public through a reverse merger transaction; this can be done in as little as three months.

  • A key risk is that the shell may have undocumented liabilities, which the new owner may have to pay.

  • Securities attorneys usually manage a group of shells, which they preserve for sale to others. This involves letting them lie fallow for several years, with no activity, while continuing to have their books audited. It costs about $25,000 per year to operate a shell in this manner.

  • Once a private company buys a shell, it swaps the shares of its own shareholders for those of the shell, and then has to register these shares with the SEC. The shares cannot be sold until they have been registered. A key problem is building trading volume, or it will be quite difficult to sell the shares.

  • The pre-existing shares of the shell are more likely to be sold at this point by their owners, since the share price will likely have increased.

  • The new owner has to issue a Form 8-K to the SEC as soon as the acquisition is completed, which is a time-consuming chore.

  • Estimate $15,000 per month to maintain a public company once the shell purchase has been completed.

Related Courses

Mergers and Acquisitions
Public Company Accounting and Finance

Metrics (ROI) and Accounting Run Charts (#32)

In this episode, we discuss how run charts can be used within an accounting operation, as well as the different types of metrics relating to the return on investment. Key points relating to accounting run charts are:

  • Accounting run charts are used to track transaction volume by activity. They can be assembled with Excel, or through an accounting system custom report.

  • Run charts can be used to justify changes in employee headcount.

  • Run charts can also be used to monitor employee performance, especially when processing volumes per person decline.

  • Run charts can be useful for deciding whether to use temps or hire full-time workers, depending on the transaction pattern observed over time.

  • Run charts can be used to monitor the seasonal elements of transaction volumes.

Key points relating to return on investment metrics are:

Related Courses

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Lean Accounting Guidebook

Metrics: Operating Performance (#31)

In this episode, we discuss the most essential operating performance metrics for a business, with a emphasis on how to discern the performance of an organization’s core operations, how changes in fixed expenses will alter profits, and whether financial reporting fraud may be present. Key points are:

Related Courses

Business Ratios Guidebook

Metrics (Asset Utilization) and New 2007 Accounting Standards (#30)

In this episode, we review upcoming new accounting standards, as well as some of the better metrics relating to asset utilization. Key points discussed concerning new accounting standards are:

Key points relating to the metrics for asset utilization are:

  • Sales per person; can be adjusted by using outsourcing or part-time employees

  • Need to look at asset utilization on an individual basis to see impact on bottleneck operations

  • Repairs to fixed assets ratio; fixed assets are stated at gross, and intangible assets are excluded

  • Accumulated depreciation to fixed assets ratio; increasing trend shows preponderance of old assets; might also still have old assets on the books that have already been dispositioned

  • Breakeven point; useful for understanding maximum possible profitability, as well as the margin of safety; can be used to view the impact of new fixed asset purchases on the breakeven point

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GAAP Guidebook

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.

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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.

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