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If you're looking for a way to increase accounting department efficiency and cut costs, start by reading this remarkable new hands-on guide and learn how to:
* Reduce transaction-related work and allow employees to focus on profit-increasing activities
* Eliminate redundancy and waste
* Apply the latest technologies to your accounting process
* Reduce costs to the corporation
* Eliminate errors and increase efficiency
These topics and many more are thoroughly discussed so that you may speed up your accounting processes and cut costs at the same time.
(Please note: Exhibits and any other illustrations mentioned in the following text refer to the print edition of this work, and are not reproduced here.)
Before we can dig into the minutia of how to improve each of the various accounting functions, it is first necessary to set up the infrastructure that will ensure that the accounting department will function in a reliable manner. These basic tasks are ignored all too frequently when first setting up an accounting department.
In many instances, accountants are given a pile of work to complete, with no hint as to the priority of each item or how they interrelate. The result is a daily scramble to complete whatever is "hot" on that day. Assignments of accounting staff members are often changed with excessive regularity, so that no one acquires an area of expertise in which he or she can improve skills and overall level of confidence. As a direct result of this unstructured work pattern, the number of transactional errors is extremely high; employees do not have the expertise to "lock in" the procedures and related training that will keep errors from occurring. Once errors are found, staff time must be reallocated to the task of fixing them, which requires large amounts of time. Thus, we enter into a vicious circle of constant daily problems, with the department always struggling to keep up with the work load. The simple organizational techniques outlined in this chapter can resolve many of these problems.
The top priority for any accounting department is forecasting the flow of cash. Without money to pay employees or suppliers, a company will very quickly find itself out of business. All other considerations are secondary to this issue. Accordingly, there should be a weekly cash forecast update, such as the one shown in Exhibit 1.1. This format can vary considerably by type of business, and may be automated in some computerized accounting systems.
The forecast in Exhibit 1.1 starts with a sales forecast for each main customer, showing detailed expectations by week for the first six weeks of the forecast, after which the following three months' worth of forecasted sales are listed in a monthly format. Next is a breakdown of the largest accounts receivable items by expected date of cash receipt, as well as a single line item that describes, in lump sum, all other cash receipts from smaller accounts receivable. The next section lists all expected cash outflows from accounts payable and payroll, with the largest expense categories being individually listed. The bottom of the spreadsheet lists the rolling cash balance at the end of each reporting period.
This forecast should be verified with the sales staff, collections personnel, and purchasing employees to ensure that the numbers are accurate. The main area in which the numbers tend to be inaccurate is in the sales forecast. The payables area is of less concern, since these figures are more directly under the control of management, and can be managed to some extent to fit the requirements of the forecast.
This type of report reveals the time periods when there may be cash difficulties, which enables management to plan for additional financing or other activities that will ensure that the company safely passes through the danger period unscathed. The report is hand-delivered to the proper recipients every week, discussing any key problem areas. Leaving the report on someone's desk to be reviewed alone is an invitation for future trouble, since he or she may not see the prime indicators of a cash shortfall that are so evident to the person who prepared it.
A complete examination of all unexpired legal agreements ranks high on the priority list for anyone reorganizing the accounting department. These may contain any number of requirements for cash expenditures or receipts that should be included in the cash forecast, such as a balloon payment on a copier lease. Another example is a periodic minimum royalty payment, either to or from the company. If not carefully tracked, these issues can result in very unpleasant and sudden crises, as well as missed opportunities to collect additional funds.
Rather than just reviewing legal agreements in a cursory manner, it is better to organize them into a summary-level format, such as the one shown in Exhibit 1.2. This summary should be included in the standard calendar of department activities, so that actions can be scheduled based on the agreements. In Exhibit 1.2, the manager can quickly determine the dates when payments are due, when key contractual dates occur, and with whom the contracts have been written. These are the key factors to be aware of when incorporating legal agreements into the accounting department's activities. Organize the filing system for the legal documents that are referenced in the summary so that anyone who needs to can quickly access the original document. The summary may not be sufficiently clear about a particular legal point. This is in contrast to the more common approach of merging legal documents into other accounting agreements, so that they are both difficult to find and in perpetual danger of being disposed of along with other accounting documents during the annual archiving process. Not only should they be segregated, but they should also be locked in a fireproof safe.
Proper custody and knowledge of the contents of legal agreements is a fundamental requirement for the proper management of an accounting department.
Accounting staffs often do not know precisely what they are supposed to do. Instead, they are hired, trained briefly in a few key tasks, and then left alone. They do not know if there are any additional tasks that are expected to be completed less frequently (a common problem), nor do they know when tasks are to be completed, or what constitutes a good job. This has several ramifications. First, it is impossible to review the work of such a person when there is no baseline against which to judge; this makes the periodic performance review a time of considerable confusion. Second, key tasks that are performed infrequently tend to be completely ignored, because no one knows who is supposed to do them. Third, it is difficult to determine what an employee has been doing after he or she leaves if there is no record of specific activities. Furthermore, it is difficult to determine the correct pay scale for an individual if no one is completely sure of the boundaries of that person's job. Finally (and perhaps most incredibly), many employees do not know for certain to whom they report. There is no clear listing of a supervisory relationship, so they do not know who to talk to about problems. All of these factors present a strong case in favor of creating a job description for every employee as soon as possible.
An example of a job description is shown in Exhibit 1.3, which lists the following main categories of information:
The job description does not provide a sufficient amount of detail about exactly what level of performance is expected to conduct a performance review. To use the job description in Exhibit 1.3 as an example, item number four is "create costing data collection systems." Does this mean that all possible systems must be created to give the cost accountant a good review, or is some lesser achievement acceptable? If something less is okay, how will this translate into a salary adjustment? If neither the supervisor nor the employee knows the answers to these questions, the performance review can be quite tense; the expectations of both parties to the meeting may be quite far apart, resulting in anger and confusion.
To resolve this problem, it is necessary to precisely define expected performance levels in advance. This information should be developed as soon as the job description is complete, and then be reviewed with the employee in detail to make sure that there is no confusion about the expectations for each item. The description of these performance levels take a considerable effort to develop, and they are the basis for a great deal of ensuing employee activity that is vital to the operation of the department.
One way to write performance level expectations is to list them in terms of low performance, average performance, and exceptional performance. Each of the three categories should be thoroughly described. Exhibit 1.4 contains a review that is based on item 4 in Exhibit 1.3--for the cost accountant to create data collection systems.
Exhibit 1.4 will take a great deal of time to complete if all other job functions are described in a similar manner. Nonetheless, this level of detail is needed to convey to the employee the exact expectations for the job. Since job requirements will change, the manager must review and adjust these written expectations frequently. Each time a change is made, the manager must review the changes with employees.
The performance review format can also be expanded to include the precise amount of pay change that can be expected as a result of meeting each objective. For example, the low performance category in Exhibit 1.4 might have listed alongside it a pay decrease of 1%, with average performance worthy of no change, and a 2% pay increase associated with the exceptional performance level. Using this approach, an employee can tell precisely how much of a pay change will be occurring before a pay review even begins, which takes all of the tension and uncertainty out of the process. However, this approach can result in excessively high or low pay changes if the person preparing the document does not pay enough attention to the difficulty of completing those tasks against which automatic pay changes are listed.
Even with a job description, an employee does not know when tasks are to be completed. It may be necessary to always complete a report on a Monday, so that it is available for a Tuesday meeting, or perhaps one employee has to complete a deliverable so that it can be used as input to some other process by a different employee on the following day. These are issues that have a major impact on the efficiency of the entire department.
A good way to handle the timing of work steps is to schedule them on an individual work calendar that is handed out to each employee. There should be two calendars--one that lists the major tasks to be completed on a monthly basis, and another that itemizes the daily tasks within each month. An example of a monthly calendar is shown in Exhibit 1.5. This calendar itemizes those tasks that are not necessarily repeated constantly, such as government reports that need only be created once a year (such as the VETS-100 report in August that lists the number of employees who are veterans), and which could easily be forgotten if not itemized.
A monthly calendar of activities contains all of the tasks noted on the annual calendar, plus all of the continuing daily activities that are repeated within the department. An example is shown in Exhibit 1.6. Of the two calendars, this one is used much more frequently; it becomes a daily reference for every employee.
Though the concept of the calendar is an extremely simple one, it is highly effective, for it ensures that the accounting staff completes its assigned tasks on time, every time. However, this degree of effectiveness will continue only if the accounting manager constantly updates these calendars so that they remain effective. This typically means that a new calendar should be issued to all accounting employees at the end of every month.
Job descriptions and work calendars tell an employee what to do and when to do it, but they do not contain any details regarding how to perform any tasks. This is not a problem for an employee who has been working in the department for a long time. However, new employees or those who are filling in on unfamiliar tasks on a short-term basis need assistance.
One possibility is to assign an experienced employee the task of providing training to anyone who needs it, but this is a very expensive proposition, and will not work well if there are too few employees who possess a comprehensive knowledge of procedures. A better approach is to document all accounting policies and procedures in a manual that is issued to all members of the department. This codifies all information needed to complete the daily tasks of the department. It can be posted online for ready access by employees, where its text can also be more readily updated.
This manual will take a considerable amount of time to complete, since each person in the department must be carefully interviewed regarding his or her work, which must then be translated into both text and a flowchart that adequately explains what he or she does. Also, this information requires constant updating, since procedures change over time. Despite the time required for these activities, it is highly profitable to have up-to-date policies and procedures manuals available to the accounting staff at all times.
All of the groundwork for running an effective accounting department has now been laid--job descriptions, performance criteria, work calendars, and a policies and a procedures manual. However, employees may lack the skills required to use these tools to the fullest degree. There are two types of training that will overcome these issues:
Determining training requirements at this much more basic and individualized level requires time to evaluate the requirements of each employee. It is also difficult to create training programs that are specifically tailored to the needs of each person. There is no solution to the first issue, just a dedication to the ongoing training needs of the staff. The second issue can be remedied through any of the following training options:
Unfortunately, there can be considerable resistance to all of these types of training by employees, who often feel that they do not have enough time available for any type of training. This issue is best dealt with by creating a formal training tracking system that records the hours spent on training, as well as any resulting test scores. These training results can then be incorporated into each employee's ongoing performance reviews. Also, if the accounting manager is responsible for updating each employee's monthly calendar of activities, then this person can add the training sessions to the calendars. Continuing attention to these issues is necessary to ensure that employees become fully trained in all areas of responsibility.
Once all of the preceding issues have been implemented, it is still necessary to ensure that a sufficient number of personnel are available to complete the scheduled number of tasks. There are a wide variety of accounting tasks to be completed throughout the month, and they do not occur in a steady stream--requiring more people on some days than others. There are several ways to predict personnel capacity problems, as well as ways in which to deal with it. However, there are no analytically precise ways to ensure that the exact amount of trained personnel are available as needed--the core of good management, involving a mix of experience, statistics, and guesses to arrive at an approximately correct solution.
One way to predict personnel needs is through statistics. For example, if one person can process 125 invoices in a day, then this number can be extrapolated over a larger number of invoicing clerks to determine how many of these people should be employed. However, this number is most accurate when averaged over a large number of clerks, and much less accurate when used for just a few people. Clerks who work on multiple tasks, as is the case in smaller organizations, are usually less efficient because they switch from task to task, requiring time to get up to maximum capacity in each task. There is some setup time associated with each task--the longer the "production run" (in this instance, the number of invoices created), the smaller the amount of the setup cost on a per-invoice basis. Thus, an accountant who creates only a few invoices at a time must spread the setup cost of doing so across just a few invoices, which makes the per-unit cost more expensive. Consequently, statistics should only be used to determine the amount of labor needed per transaction, with a considerable knowledge of how the transactions are processed within an organization.
Another method for predicting personnel usage is through observation. One can watch, however, this method can make employees uncomfortable, resulting in incorrect conclusions. A better form of observation is to review the work backlog for each position. If work cannot be completed as needed, then this is certainly an indication of capacity overload or underload.
It is also possible to have the employees form their own review group to ascertain the need for more or less employees. Though there is always some reluctance to recommend a cut in their own ranks, such a group can achieve surprisingly accurate estimates of projected capacity.
The final method of capacity problem analysis is the most common--to periodically review a trend line of overtime hours worked. Even if employees are paid on a salaried basis, they can still be asked to complete timesheets that will reveal the amount of overtime worked. If the level of overtime is excessive, then it is probable that more employees are needed. However, by itself, this can be an inaccurate method; employees may simply go home after a certain number of overtime hours are complete, no matter how much work is left--they have nonwork obligations and work may pile up. Hourly employees may take as much advantage of overtime pay as they can, even if the amount of work on hand does not justify it. Also, the recorded time of salaried personnel tends to be quite inaccurate.
All of the preceding methods can be used, preferably in combination, to arrive at some reasonable estimate of future headcount needs. This is a difficult management task and should involve as many different methods of estimation as possible to provide the best input to the decision.
Dealing with capacity-related problems presents a different set of management challenges. There are almost always some areas of the department in which employees appear to be seriously over- or underworked at various times of the month, and perhaps at all times. This can be dealt with in a variety of ways, including:
The steps described in this chapter for setting up the accounting department may seem quite obvious; yet the accounting manager who has gone through these steps and regularly revisits them is a rare one. The main reason why such basic organizational steps are not done is that they require a great deal of time. Those managers who feel that they do not have time for these steps should revisit their own job descriptions; they will find that organizing the department is the primary task of a true manager--other activities are secondary to the activities that will make the accounting department run with the greatest possible degree of efficiency and effectiveness.
TRADITIONAL ACCOUNTING AREAS.
Setting Up the Accounting Department.
Sales and Accounts Receivable.
Electronic Data Interchange.
Internet and Intranet Accounting Applications.
The Quick Close.
Advanced Data Collection and Storage Systems.
Outsourcing the Accounting Department.
Effects of Change on Employees.
Appendix: Summary of Recommendations.